Buying property at auction: the legal side

Why auction buying is different

At a traditional auction, the deal becomes legally binding the moment the auctioneer's hammer falls on your bid. There is no time afterwards to check the paperwork, renegotiate or walk away without serious consequences, so your legal and financial homework has to be done before you bid.

Auctions can suit buyers looking for properties that need work, unusual buildings or a quick, certain timetable. They also attract properties with legal or physical problems, which is one reason guide prices (the auctioneer's indication of the expected price) can look attractive. Having a conveyancer review the paperwork in advance helps you understand what you are really bidding for.

Step 1: Get the legal pack early

For each lot (each property for sale), the auctioneer publishes a legal pack, usually online, in the days or weeks before the sale. It typically contains the official copies of the title (the register showing ownership and rights), plans, searches, replies to standard enquiries, any leases or tenancies, and the conditions of sale.

Send the pack to your conveyancer as soon as you are interested, because a proper review takes time and packs are often updated close to the auction. Ask them to report on anything affecting value or use, such as missing rights of access, restrictive covenants (rules in the title limiting what you can do with the land), planning issues, tenants with a right to stay, or a lease too short for a lender.

If the pack has no searches, your conveyancer may suggest ordering them or taking out insurance instead. Remember that the pack is prepared by the seller's side, not for your benefit.

Step 2: Read the special conditions

Auction contracts combine general conditions, which are standard (many auctioneers use a set called the Common Auction Conditions), with special conditions written for the particular lot. The special conditions are where unusual costs and risks tend to sit.

For example, they may require you to pay the seller's legal costs, the cost of searches, arrears of service charge or ground rent, or VAT on the price. They may also set a shorter completion period, limit what the seller tells you, or say the property is sold with tenants in place. A lot with a guide price of £150,000 could cost several thousand pounds more once these extras are added.

Check the addendum too. This is a list of last-minute changes published before or announced at the auction, and it forms part of the contract whether or not you have read it.

Step 3: Arrange finance and a survey before you bid

Because completion (when you pay the balance and get the keys) follows quickly, your money must be ready before you bid. If you are using a mortgage, speak to your broker or lender early: the lender must be happy with the property and its title, and an ordinary mortgage can take weeks to arrange. Some buyers use bridging finance, a short-term loan designed for speed, and refinance later.

If the lender's valuation comes in low, or the lender declines the property, you are still bound to complete. A mortgage offer is not a promise that the money will be released in time. Have a survey done before the auction if you can, and view the property at the times offered.

Step 4: Exchange, deposit and fees on auction day

If your bid wins at a traditional auction, contracts are exchanged at the fall of the hammer. Exchange of contracts is the point where the deal becomes legally binding, so you cannot change your mind afterwards without losing money. You usually sign the contract on the day, or the auctioneer signs on your behalf if you bid online or by phone, and you pay the deposit straight away.

The deposit is commonly 10% of the price, often with a minimum amount set by the auctioneer. On top of the price, many auctioneers charge a buyer's premium or administration fee, which is paid to the auctioneer. For example, on a winning bid of £200,000 you might pay a £20,000 deposit on the day, plus the auctioneer's fee and any costs set out in the special conditions.

Before the day, check how the auctioneer accepts payment, whether you need to register and prove your identity in advance, and the rules for online or phone bids.

Step 5: Completion, usually within 20 working days

Completion is when the rest of the price is paid and you get the keys. After a traditional auction it commonly takes place about 20 working days later, although the conditions can set a shorter or longer period, so check the exact date in the contract.

In that time your conveyancer finishes any checks, deals with your lender, prepares the transfer (the deed that passes ownership to you) and collects the balance of your funds. Stamp Duty Land Tax, or the equivalent tax in Wales, is payable as on any purchase, so include it in your budget.

If you fail to complete on time, the seller can usually charge interest and serve a notice to complete, a formal final deadline. If you still do not complete, the seller can usually keep your deposit, resell the property and claim any loss from you. Tell your conveyancer immediately if anything might delay your funds.

Modern method of auction

Some properties, often marketed by estate agents, are sold by a modern method of auction, sometimes called a conditional auction. Here the winning bid does not create a binding contract straight away. Instead, the winning bidder pays a reservation fee and then has a set period, commonly 28 days, to exchange contracts, and a further period, commonly 28 days, to complete.

The reservation fee is usually paid on top of the price, is often a percentage of it with a minimum amount, and is usually non-refundable if you pull out. Ask whether any of it counts towards the price, whether it affects your stamp duty calculation and what happens if the seller withdraws. The legal pack may also require you to pay some of the seller's costs.

The longer timetable makes a mortgage more realistic than at a traditional auction, but it is still tight, so instruct your conveyancer as soon as your bid is accepted.

Buying before or after the auction

Sellers sometimes accept offers before the auction, and lots that do not sell on the day are often available afterwards. These sales are usually made on the same terms as the auction, with exchange expected quickly once the offer is accepted, so the same preparation applies. If you are offered a deal like this, send your conveyancer the legal pack straight away.

Checklist: before you bid

Work through this list before every auction:

• Have your conveyancer review the full legal pack, including the special conditions and any addendum
• Ask for a written summary of the risks and the extra costs you would take on
• Confirm the deposit, the buyer's premium and any seller's costs you must pay
• Have your deposit ready in a form the auctioneer accepts
• Have your full funding in place, or a lender that has approved the property
• Arrange a survey, or at least view the property
• Set a maximum bid that allows for tax, fees and repairs
• Arrange buildings insurance from exchange if the contract puts the risk on you

Next steps

Get an itemised auction purchase quote and ask the law firm to confirm it can review the legal pack before the auction date; an online quote is not a review of the pack. For commercial lots, see commercial auction purchases. Use the stamp duty calculator to build property tax into your maximum bid.