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Buying Commercial Property At Auction

Commercial property has been one of the best performing types of asset in recent years despite general uncertainty in the property market. More and more people are buying UK commercial property at auction, either for their own business premises, or as an investment to be leased.

Buying commercial property as an investment isn’t something for the novice or the unwary. The market is primarily made of up professional investors who have the money to spare (which most of us don’t). In most cases commercial property and even bare sites go for more than residential property. You can end up realizing a greater profit, but it can also be far more risky.

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When tracking down the ideal commercial property for your business, you’ll need to do some initial research. Try reading property industry journals such as Estates Gazette that publishes regular surveys of different areas and industry sectors, or contact local businesses and organizations, such as Chambers of Commerce or Business Link to ask advice on where to buy.

The process of buying commercial property at auction is quite different from buying a property through an estate agent. Before you consider it, try to attend a few auctions to get an idea of what the process involves. The biggest and most important difference is that buying at auction is very quick and legally binding, so you must do your homework about the property before the sale. Unlike buying through an estate agent, you cannot change your mind if you later discover something bad about the property. It is your job to find out everything that you can before the auction begins.

Preparing for an Auction

Preparing to buy a commercial property at auction requires careful planning and a bit of financial speculation. Thousands of properties are sold at auction every year for different reasons and some of these are hard to value properties such as churches, halls, or repossessions. Mortgage lenders sell repossessed properties by auction because sales usually go through quickly and are legally binding. This means that lenders can recoup their money fast and buyers can find properties that are being offered below market value. You should find out the reason for the sale of the property you are interested in to help you decide whether you want to spend time and money looking into it in more detail.

If you want to buy a commercial property it is recommended that you contact a property investment sales specialist who should have a thorough understanding of capital markets and commercial properties. Bearing in mind there are many different types of commercial property, it is important to know that the solicitor you choose has experience with the type of premises you are dealing with. An experienced commercial property specialist will generally save you time and legal costs.

There is a wide range of property available for any type of business imaginable – some are purpose built while others have the potential to be converted for business use. It is important to check whether any property you are interested in will need planning permission for its commercial use. shutterstock_45414955Planning permission would not be needed to change the use of an existing business premises within the same class of business e.g. retail, agricultural, manufacturing, etc, and there are instances where the premises may be altered to another class of business without permission. However, if there is any doubt, it is always a good idea to fully investigate the possibilities for use of a building before making any financial commitment to buy it, by talking to a chartered surveyor or to the local planning authority.

Finding a Property and Arranging Finance

Just six auction houses handle the vast majority of commercial property that comes up for auction in the UK. If you want to enter this market, you’ll need to be very rigorous when doing your homework in order to compete against the pros. It is a good idea to register with Future Auctions so that you receive information on new properties in your area as soon as the auctions are announced. This will give you as much time as possible to find out all that you can about the property.

A lot of information about auction properties can be found in the auctioneer’s catalogue, which is available online 2-3 weeks before the auction. The reason for the sale should be indicated here, as well as a guide price and legal particulars. It is worth considering more than one property at the same auction because at this stage you cannot be sure you will be the successful bidder.

Note that guide prices may change right up until the day of sale, properties can be sold before the auction or they can be withdrawn. Make sure that you get a copy of the auction catalogue as soon as possible and register your interest in the property with the auctioneer (there is usually a form to complete) to ensure that you are kept up to date with any developments.

At this stage you should also be aware of your budget. When you consider a property, remember that lots often sell for more than the guide price, and that guide prices can change until the day of the auction. Be realistic about how much money you have to spend and whether the property is right for you. With your budget in mind you should arrange your commercial mortgage finance (if required) and obtain a ‘decision in principle’ from a lender.

Viewing a Property 

The next important thing to do is to arrange to view the property or properties. You will need to contact the auctioneer to arrange to see the properties, either through an individual appointment or at an agreed time with other interested parties. At this point it might be useful to bring an experienced building contractor, surveyor or architect with you to the property. They will help you to spot any potential problems and give you an idea of how much repairs might cost. This might save you paying for a survey on a property that is obviously not suitable or will require expensive renovation. Most experienced professionals will view a property for a small fee.

Consider the area where the property is situated. If you are planning to run a business from here, can you access your clients easily? Consider whether there are similar businesses in the area and whether there is likely to be a market for your business. If you are buying the property to lease to another business, is there a demand for this type of premises in the area? These considerations will help you decide whether the property is the right investment for you.

At this stage you must get the legal pack from the vendor’s solicitor and ask your solicitor to look through the special conditions of sale, title deeds, leases, office copy entries etc. Your solicitor will also arrange to do the usual property searches, checking that there has been planning permission for any building work and whether planning permission has been granted anywhere nearby which may affect you later on. Make sure that you have read and understood all the information provided by the catalogue and the legal pack. Ask your solicitor or surveyor if you are unsure. The sale of a property is binding, so make sure you know what you are buying in advance.

You’ll also need your solicitor to check how the property can be used. What are the overall plans for the area? How can you access the site? Are the nearby roads good? Is the property retail or commercial? (At times that can affect a property’s price.) What is the market value? What can you expect in the way of rents and tenants? Thinking about all of this in advance can be the difference between profit and loss.

If you decide that you are still interested in the property after viewing it, and the catalogue description matches what’s on offer, now is the time to arrange for a property survey. The extent of the survey is up to you, but if the property is older than 75 years and/ or it has recently been modified, it would be best to arrange for a full survey, even though this will be costly.

Putting in an Advance Offer

If you really want to buy the property it is possible to put in an offer via the auctioneer before the auction date. In this case it is essential to have your finances in place, as you must move quickly. You should put your offer in writing to the auctioneer, who will liaise with the vendor. If the vendor accepts your offer, contracts will be exchanged immediately and you will have to pay a 10% deposit, paying the remaining 90% within 20 working days. Be aware that if you haven’t paid in full by the day of the auction, the vendor may not withdraw the property and you could lose your deposit to the vendor and the property to the highest bidder.

The Auction

By the time of the auction you should have a lot of information about the property, including a valuation (if a commercial mortgage is required). Before you go to the auction, check that the property is still available. It may have been sold beforehand or the vendor may have withdrawn it. If the sale is going ahead, you can either attend the auction in person, make bids on the telephone or online, bid by proxy up to a limit agreed in advance with the auctioneer, or send your solicitor or surveyor to the auction to bid for you.

Remember to stick to your budget. In the heat of the moment you could get carried away and could bid more than you can afford. If you are going to the auction in person, arrive early. Once you arrive, or in advance, complete a registration form and make sure you have brought relevant ID documents, proof of address and a cheque or banker’s draft to cover the deposit on the property.

Make sure that you know the lot number of the property you want to buy, and are familiar with all the information in the catalogue. Get a copy of the addendum sheet, which will include last minute changes to the catalogue information, including guide prices, withdrawn lots or prior sales. If you are the successful bidder, the addendum sheet forms part of the contract of sale.

Bidding

The auction will generally proceed with lots in the order they are listed in the catalogue. The auctioneer will announce each lot and the lot number should be shown on a screen. Make sure you are clear which lot you are bidding for, and sit somewhere where the auctioneer can clearly see you.

Avoid making the first bid, as the auctioneer will lower the starting price if no one starts the bidding. When bidding, make clear movements, such as raising your hand or nodding your head. The auctioneer may not see smaller movements, and has the final say on whether to accept bids. The bids will go up in increments and you must stop bidding if the asking price is above your budget. Whether or not you can afford it, you are legally bound to the sale once you make a successful bid. The auctioneer will offer the bid to the room twice before bringing down his gavel to indicate a sale. Once the gavel has been sounded, the sale is over.

The chances are that you won’t win the first couple of times you bid on a property, which will leave you out of pocket for the solicitor and the surveyor. But that’s just part of the game and with time you should be able to buy a suitable property.

If the property you are interested in does not meet its reserve price, you can contact the vendor or auctioneer after the auction and register your highest bid to see whether you can still come to an arrangement. An advantage of auctions is that it is a level playing field and you can see who is interested and how much they are willing to pay for the property. Being willing to offer a little more for the right property might make you an attractive buyer.

Successful Bids

If you are successful, a member of the auction house staff will approach you to complete the paperwork. The 10% deposit is due immediately, and the remaining 90% is due within 20 working days. You will be asked to provide ID and your solicitor’s contact details and you will sign the contract of sale. Your part of the contract will then be passed to your solicitor and the auctioneer will retain the vendor’s part to pass to the vendor’s solicitor. Assuming your funds are in place, the sale will be completed within a month.

However, if your funding falls through, you will lose your deposit (plus any solicitor’s and survey fees etc), so try to make as certain as you can that your finances are in place before the auction.

Assuming it all goes well, you will be the proud owner of a new commercial property much more quickly (and perhaps for less money) than when buying through an estate agent.

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