Buying a house at auction can be a nerve-wracking experience.
You can find some excellent deals and change your life in just one day!
However, you shouldn’t jump into it without fully understanding the process.
Part of this is understanding whether or not you need to use cash to make a purchase.
How does buying a house at auction work?
When a house is listed at auction, this is usually made public about one month before the auction date.
This gives you time to view the house and get a survey done.
On auction day, you can bid for what you’re willing to pay. This must be above the ‘reserve price’ at which bidding begins.
If you are the highest bidder, you must make a deposit on the day. This is usually 10% of the selling price.
The deposit is typically paid by electronic bank transfer or by writing a check.
It’s extremely rare to do this in cash since the value of properties is much higher.
You will exchange contracts on the auction day, too. This makes the sale binding.
You then have around 28 days to pay the remainder of the money. Once again, this is usually done by either bank transfer or writing a cheque.
If you back out after auction day, you won’t get your deposit back. This is because you’ve signed the contract exchange.
You may also be liable for further damages.
Can you use a mortgage to buy a house at auction?
Yes, this is possible. You’ll need to apply for a mortgage in the same way as for a ‘typical’ house transaction.
But this only applies if a lender is willing to give a mortgage on it, i.e. it’s in reasonable condition.
In other cases, a bridging loan is a more common financing method. This is received from a bank and can be used for similar purposes.
It’s often done when the property is bought in a company name.
Commercial mortgages could be used, too, although only when the bank is willing to lend on the specific house.
Do I need cash to buy a house at auction?
You need all the funds in your account within 28 days of the auction day. This is how long you have to send everything over.
The funding must come through even if you use a mortgage to complete the sale.
In this sense, you don’t need ‘cash’ (i.e. everything up-front) because you can rely on external sources to complete.
On auction day itself, all you need is the deposit. You’ll then sign the contracts.
But you should have arranged the means of getting all remaining monies into your account within one month.
Do I need on auction day?
No. You’ll transfer the deposit on auction day. This can be done via bank transfer or cheque.
Cash is scarce due to the high value of your buying property. And it may trigger extra money laundering checks.
What happens if I fail to gather the funds to buy a house?
You won’t get your deposit back. You can also be sued for damages by the seller. You should get legal representation.
It’s the same as breaking any other exchange of contracts on a property sale.
You should thus only offer on an auction house if you can afford it within 28 days.
