Don’t Get Hammered Buying at an Auction

Doing up property is a turn-on for millions of TV viewers, but are those profits when buying at an auction as much as programmes like Homes Under The Hammer would have us believe? Day after day, the BBC taps into a seemingly endless conveyer belt of property developers who never seem to fail to pile on the pounds by buying cheap at auction, refurbing and selling for a much higher price within a few months. 

For a start, there is no mention of the fees and costs added to the purchase price.

How much does buying at auction cost?

More than you think is the quick response. Most developers will already have cash or a line of funding before the hammer goes down. If you have a lender, the standard advance is 75% of the hammer price, which is the winning bid amount. 

While you're patting yourself on the back for making the winning bid, the financiers are forming an orderly queue. For a £200,000 lot, the buying costs add up to £15,000 plus your legal and surveyor fees. That makes the total purchase price £215,000, but the lender will only advance £150,000, so you must stump up the extra £65,000 in cash from your funds. So, what are these costs?

Stamp Duty

Stamp duty – officially termed Stamp Duty Land Tax in England - is levied on the purchase price by HM Revenue & Customs. Look up Land and Buildings Transaction Tax in Scotland, while in Wales, Land Transaction Tax applies. 

As a landlord or developer, you pay a 3% surcharge on stamp duty under ‘additional property’ rules. If you are buying a new home to replace your current one, the additional rate does not apply, but if you buy to rent out or flip, you pay the extra charge. The additional rate starts at purchases valued at £40,000 and the stamp duty holiday does not apply to buy to let or development properties. 

See an article on SDLT rates.

Buyer’s administration fees

This is the fee you pay the auctioneer for purchasing. The cost will be in the small print on the auction website or in the buyer’s guide for the auction. What you pay can vary from a couple of hundred pounds to a thousand or two. The fee is generally fixed and not a percentage of the hammer price.

Buyer’s premium

Some buyers are charged this premium if the auctioneer has done a ‘no-fees’ deal with the seller. Instead of the seller paying commission as a percentage of the hammer price, the cost is shifted to the buyer.

Special auction sale conditions

Check the legal pack you can get before the auction day and let your lawyer read the special conditions of sale. These can include all sorts of costs, like a contribution towards the seller’s legal fees, paying the buyer’s premium, local authority search fees and property marketing costs. The real sting in the tail is an ‘uplift fee’, which guarantees the seller a percentage of any increase in value you gain from obtaining planning permission after buying the lot.

Other buying costs

Don’t forget to factor in conveyancing costs and any surveyor fees to give total buying costs. If you have borrowed to buy, you also need to consider the repayment costs and other running costs, like utilities, until you generate an income from rent or selling.

Investor or trader?

Your status as a buyer determines any tax you might pay on the sale of the property after refurbishment. Investors pay capital gains tax, while traders pay income or corporation tax if they buy through a company. For an investor, tax is paid on any profit calculated as the difference between the sale and buying costs less some expenses. 

These expenses include stamp duty, legal fees on the purchase and sale, auction fees and the costs of any improvements made to the property. For a trader, income tax is charged on the building business's profits each year. Companies pay corporation tax on profits regardless of if the property was held as an investment or bought to develop and sell.

Hammered or not?

While many developers and investors profit from property bought at auction, buying cheap is not always the saving. The margin must be enough to cover the fees, refurb costs and tax on profits, plus enough to pay the running costs during the refurb period. Simply adding the purchase price and refurb costs together and deducting them from the sale price is likely to give a false positive indication of profits.

Homes under the hammer auction FAQ

Where do I find property for auction?

Many firms operate property auctions, with thousands of homes going under the hammer every year. Rightmove or Zoopla should identify auction property, and Rightmove has an auction search filter in the main search bar. In the advanced search section, Zoopla has a box to check to search auction homes.

How do I know if I am a trader or investor?

Investors tend to buy a property to rent out in the long-term, while traders buy to sell as quickly as possible. It is possible to sell a buy to let rapidly if a buyer makes an offer; you cannot refuse or hold and rent if you are a trader who cannot sell. The circumstances dictate your tax status; you don’t choose because going one route may end in paying less tax than the other.

Where do I find a lender to buy at auction?

Most mainstream lenders are not set up to meet auction deadlines for buying property, so smaller niche lenders provide the service. The buy-to-let finance service on our website may be able to help. Also, try the Association of Short Term Lenders (ASTL), an independent trade body for the sector.

Is buying at an auction cheaper than an estate agent?

Generally, property can be cheaper at auction rather than buying through an estate agent, but there is probably a reason for the discount. Read the legal pack carefully and visit the property to see if any issues may arise over the state of the home or ownership of the title.