Buying Business Property at Auction: Things Worth Thinking About

Pubs, shops, offices, industrial units, hotels and care homes regularly sell at property auctions, often at keen prices. For a business owner who wants to stop renting and own the premises they trade from, an auction can be the quickest route to the keys.

It is also the least forgiving. At a traditional auction, the fall of the hammer is exchange of contracts. You are legally bound, you pay a deposit that day, and you must complete on the date in the contract, usually around 28 days later. Miss it and you can lose your deposit. These are the questions worth asking before you bid.

1. Which kind of auction is it?

Timescales vary between auction houses and lots. Always check the special conditions of sale for the actual completion date.

2. Before you bid

• —Have you read the legal pack with your solicitor? It contains the title, searches, leases and special conditions. Problems found after the hammer are yours.
• —Have you surveyed the building? Arrange a survey before the sale. Commercial buildings can hide expensive roof, structure, asbestos and services issues.
• —Will it suit your business? Check planning use class, licences (a premises licence for a pub, registration for a care home), parking, access and any restrictive covenants.
• —Is it vacant or tenanted? If someone occupies part of it, read the leases closely.
• —What does the guide price mean? Guide prices can be well below the final price. Base your limit on value, not the guide.

3. The costs beyond the price

• —Auctioneer's buyer's fee. Many auction houses charge a fixed buyer's fee on the day.
• —Seller's costs. Special conditions sometimes require the buyer to pay the seller's legal or search costs.
• —VAT. If the seller has opted to tax the building, 20% VAT may be added to the price, unless the sale qualifies as a transfer of a going concern.
• —Stamp duty. Non-residential Stamp Duty Land Tax applies in England and Northern Ireland, with LBTT in Scotland and LTT in Wales.
• —Finance costs. Lender arrangement fees, valuation and legal fees all come on top.

An illustrative example for freehold trading premises in England, bought by a company at a traditional auction, with no VAT on the price:

If VAT were charged on the price, a further £80,000 would be due at completion. Check the figures for your lot with your solicitor and accountant.

4. The money

• —Is your finance approved before you bid? A lender needs time to value the property and review the legal pack. Within a 28-day deadline, there is no time to start from scratch.
• —What if the valuation comes in low? A lender lends against its own valuation, not your winning bid. Any shortfall has to come from you.
• —Where is the deposit coming from? The deposit on the day usually comes from your own funds.
• —Is bridging finance the answer? Short-term bridging loans are often used to complete within the auction deadline, then repaid with a longer-term commercial mortgage.
• —Bought it with cash? You may be able to release capital from premises bought at auction in the last six months, subject to lender approval.

5. After the hammer

• —Insure it from exchange. At a traditional auction, the building is usually your risk from the fall of the hammer.
• —Instruct your solicitor straight away. The completion clock is already running.
• —Plan the handover. Utilities, business rates, licences and any refurbishment should be lined up for completion day.

Buying the business too?

If you are buying a trading business as a going concern, with its customers, staff and goodwill, rather than an empty building, iLendi Capital arranges the finance for that. See Buying a Freehold Business: Things Worth Thinking About and The Costs of Buying a Freehold Business.

Finance arranged before auction day

Our sister brand, Hammer Ready, arranges finance for business property bought at auction, from pubs, hotels and care homes to shops, offices and industrial units you trade from. It can help you get pre-approved before you bid, fund a lot you have just won before the completion deadline, or release capital from premises you bought outright in the last six months.

Hammer Ready works with limited companies, partnerships, LLPs, sole traders and PLCs, on amounts from £26,000 to £100 million. There is no broker fee, and all finance is subject to status and lender approval.