Commercial property auctions: what you need to be aware of

Properties that come to auction

In truth, any kind of property can be sold through the auction method. Of course, you would be advised to understand what the valuation of the property is, carried out by a qualified surveyor, so that you know, with the guidance of the chosen auction house, where to pitch the auction estimate (and, more importantly, the reserve of its price to protect you from selling it at too low an amount).

This information will provide the potential buyers with sufficient material to set a budget, based on what they think they can eventually claw back as profit.

However, from a residential standpoint, the typical type of properties sold at auction are those that will not get a mortgage (e.g. there are no water utilities or sewage removal facilities within it) or are unmodernised (the older the better in this case) or have significant structural issues (another point that would be unlikely to receive a mortgage). Or, in the extreme case, where a property is so poor that it needs to be razed to the ground and rebuilt - this may also be a boon to the prospective builder or developer, who would be able to submit planning permission to construct more than one home on the plot.

From the point of view of commercial properties, where the building is not being leased but bought, buying and selling at auction is by far the most common method. The types of property that typically come to auction include multi-use, investments, buildings for the hospitality sector, and development opportunities for a variety of buildings such as closed banks, churches and so on, which can be in prime locations with naturally high footfall.

Differences between commercial and residential auctions

Aside from the obvious type of property intended for commercial or residential use, it is the financial benefits that can generate a superior yield from leases and rents, as well as the type of tenant that might take up the allotted spaces.

The purchaser of a commercial or retail property will likely be the eventual landlord, who will probably hire the services of builders and shopfitters to convert the purchased property into something that provides the greatest yield, while a residential purchase is more likely to be the builder or developer themselves. Similarly, they are unlikely to take space for their commercial dealings in the property once it is ready, which could otherwise be used to increase the rents.

Ultimately, the chief difference is likely to be how the buyer of the property plans to make their money on the finished product, which drives the decision at auction.

Commercial changes and market pressures

With the reported downturn in property prices, coupled with increased mortgage and loan rates as the Bank of England's monthly current increase in the base rate, more people are turning to auctions because of the speed at which they occur and the confidence that, once a final bid has been accepted by the auctioneer, the process is just a month away from completion.

From a purchasing point of view, they are often cheaper than going through the usual agencies, with the average being around 10% to 15% less.

As with any property transaction, it is important to understand what is happening and how to manage it. Preparing for a standard purchase or sale has a number of differences with those achieved at an auction.

Preparation for buying at a property auction

Propertymark has produced a good article on the main aspects of preparation for buying at an auction, and it comes down to a simple list:

1. Do your research - look around for auctioneers in the area you want to buy and get on their mailing list. Check online with various estate agents and auction houses to see if they have any properties that might be of interest to you.
2. Build on your research - if the BBC's Homes Under the Hammer has taught its viewers anything it is that it's unwise to buy something blind based solely on the auction or estate agent description. You should arrange a (guided) tour of the property and be prepared to ask any difficult questions that might be concerning you.
3. Get the legal pack - every property in the auction must have a legal pack prepared by the seller, usually well in advance of the auction day, and it is incumbent on you to familiarise yourself with the details as it will potentially highlight any issues that might help your decision to move forward with the auction or not. The legal pack is usually valid for a period of six months.
4. Be prepared - auctions move faster than standard purchase processes, so you'll need to have everything in place quickly, including the finance for the legal fees, auction fees and the purchase amount - bear in mind that some properties will be unmortgageable, so, before you commit, ensure you have the money to fund the project. 

On the day, too, you are likely to need to pay a 10% deposit (this varies according to the auction house, so ascertain this before attending) - and you'll need two forms of identification (check with the auctioneers whether both have to be photo id or not).

Whether you are buying or selling a property, bear in mind that, as soon as the auctioneer's gavel goes down on your bid, you and the seller are legally obliged to complete the process of the purchase and sale. The completion of the transfer of remaining monies is usually within a four weeks or less of the auction date. 

Conveyancing for commercial and residential properties

You've committed to your purchase or sale, and now you need to get to the end of the process quickly to complete. You can do this by appointing your conveyancing solicitor as soon as possible. 

Some people may decide to perform the conveyancing tasks themselves, but, unless you have significant reserves of time, patience and understanding of what needs to be done, you won't be saving any money and it's probably best left to the professionals.

There will be the standard processes that any conveyancer will go through with searches and other legal artefacts and conversing with your opposite number's conveyancer to tie up the multiple loose ends connected with any property ultimately with the goal of transferring legal ownership.

While commercial conveyancing is similar to that experienced with a residential property in the transfer of the legal title, the difference comes with the planned or existing business operations, particularly with respect to properties with sitting or future tenants leasing part or all of the building. This makes it a much more complex sequence of tasks for the conveyancer. As such commercial conveyancing is likely to be extensive in its execution and, therefore, more complex and lengthy.

It is always a good idea to involve a conveyancing solicitor as early in the process as possible so that they may advise you on the intricacies of leases, their creation or transfer, and managing current tenants.

The conveyancing solicitor's duties for the commercial property buyer include:

• Identify the legal owner of the property and confirm that the nominated seller is legally in a position to do so
• Order commercial property searches to ascertain details and potential issues that might affect the property or its environs
• Negotiate the contract with the seller's solicitor
• Enquire further details that might arise from the receipt of Commercial Property Standard Enquiries (CPSEs - see below)
• Ensure all finance is in place and deal with any lender involved in the transaction
• Exchange contracts with the seller's solicitor, transfer the funds on completion day and arrange for keys to be collected
• Pay any outstanding Stamp Duty Land Tax to HMRC within 14 days
• Register the property's new owner with the Land Registry

On the other side of the transaction, the conveyancer for the seller of the commercial property is responsible for the following:

• Ask the seller to complete pre-contract forms known as CPSEs
• Draw up the sale contract and let the buyer's conveyancing solicitor know what is included in the sale, including fixtures and fittings
• Negotiate the completion date with the buyer's solicitor
• Approve the Transfer Deed from the buyer's solicitor
• Agree on the exchange of contracts and arrange for keys to be collected
• Pay off any outstanding mortgage once the sale is complete, deduce their fees and transfer the remaining funds to the seller

Conveyancing for commercial auction properties

Because of the speed at which the process moves - the gavel's gone down on your bid, so that's it; you are legally obliged to complete payment and title transfer - it is essential that the buyer (and even the seller) do all the necessary homework they can to get all the information sorted out as early as possible. 

The auctioneers will publish a catalogue of those properties being sold well in advance of the auction day, giving prospective buyers a chance to seek out everything they need to know.

Although you don't legally need to have a solicitor, and there is no prescribed time to appoint a solicitor to look into the legal aspects, it is wise to bring a qualified conveyancer on board as soon as you begin looking at the property, so they can advise. It is also a wise decision to bring a Chartered Surveyor on board to check the property out before you go too far.

All of this may seem overwhelming and costly, so you'll want to ensure you have a quality commercial auction conveyancing service at a low and affordable price.