Since buying property at auction has been brought into the popular domain, it means there are also increasing numbers of people making offers and purchasing properties without doing all the due diligence required – resulting in properties turning out to be not quite the bargain the initial figures suggested.

Some properties make more than one appearance at auction. Often that is because a property that has made a poor rental proposition has been put up for auction in the hope that someone bidding does not do their due diligence.

The buyer may not live in or know the area, so if they have not carried out any research they can easily find themselves with a property that was “cheap” for a reason.

For example, the level of crime in the area might be such that the property suffers regular damage and is difficult to let, with months of voids between tenancies. In this case, the buyer may put the property back into auction again to offload their mistake and try to recoup their money.

It is very easy for landlords to get caught out and offer more than a property is actually worth if they do not understand the detail of the legals, financing options or condition issues with the property.

A flat that seems incredibly cheap might be bought – and then it is found out there is a clause in the lease that does not permit the property to be rented privately, or the lease is so short it is not possible to secure finance.

It is also easy for landlords who are buying at auction outside their own area to overestimate the rental value of the property, not realising there are problems with the street or the property’s background, which mean that “average” rents are not achievable.

So before an offer is made, it is essential to talk to local agents that know the area well to check the rental valuation and make sure that figures and anticipated profits are realistic. An agent can also give their professional opinion on the potential of the property as a buy-to-let, or reasons why the property might not be a good purchase.

Before considering buying at auction, it is also important to understand that the quoted “guide price” for a lot is only an indication about where the reserve is currently set, and not necessarily what the auctioneer expects it to sell for on the day.

David Sandeman, managing director of the Essential Information Group, says: “Before spending and potentially wasting money on legals and surveys, it is imperative to ascertain how much a property is likely to sell for to ensure it is going to be within your budget. Past sale prices of similar properties, which you can access online, will assist you with this.”

The pros of buying at auction

1. It is quick, so those with cash can afford to buy now, purchase within a month and potentially be letting the property out as soon as completion is achieved
2. Bargains can be secured if research is done carefully, especially if properties are bought that are currently not mortgageable for cash, as they tend to be heavily discounted. As long as they can be made mortgageable, by sorting out subsidence or repairing fire damage etc, that should instantly add to the capital value, boosting returns
3. Landlords are potentially competing against fewer bidders than if the property were on the open market, especially if the property requires a cash purchaser

And the cons

1. The due diligence required before making a bid can be expensive, as legal work and surveys are required. This means spending potentially thousands of pounds without any guarantee of securing the property
2. Time and money need to be spent checking out several properties in the hope of securing just one on auction day
3. If home buyers or amateur investors are bidding, bids can quickly rise above a value where a good buy-to-let return can be made
4. Financing properties bought at auction is very different to buying on the sales market. A 10pc deposit is required on the day. There is not wide access to mortgage finance, which (if required) has to be in place before the auction itself

Overall, while there are undoubtedly bargains to be had, anyone thinking of entering the buy-to-let market via auction needs to be much better prepared than those buying through local agents.

Safer buy-to-let investment

Whether you are thinking of investing or are already a landlord, the Telegraph, on behalf of Direct Line, has created useful information on the ever-changing buy-to-let market. 

Direct Line landlord insurance is five-star-rated by Defaqto (Defaqto is an independent researcher of financial products) and has more than 250,000 landlord customers. It has been crowned What Mortgage Landlord Insurance Provider of the Year for four consecutive years. 

For more information visit directlineforbusiness.co.uk.

www.telegraph.co.uk/