As the ultimate version of internet shopping, the online commercial property auction has grown in attractiveness in recent times. It also increases temptation to speculate, so what do people need to be aware of before snapping up a bargain?
In these islands we have always seen buildings as solid investments – they are comfortingly tangible compared to shares in a company and the residential buy-to-let market has been the choice of many a smaller investor. However, this type of investment has recently become less attractive with less tax relief available on buy to let mortgage interest payments, additional Land & Buildings Transaction Tax payable and fundamental changes occurring in the form of residential tenancy agreement that must be used in Scotland.
So now is a good time to consider investment in commercial property. Because it's less familiar to many investors it can be a daunting prospect. However rental yields are attractive with returns of 5-6% not uncommon, compared to a typical yield of 2-3% in the residential sector.
Online commercial property auction websites offer the smart investor the ability to capitalise on a diverse portfolio without leaving their armchair. It's tempting to speculate, however it goes without saying this kind of investment is not without risk. The key to success is doing your homework.
Engaging a legal adviser early is a priority. Claims about development opportunities and possible returns will be seductive but your solicitor will establish what information is in the title pack and just as importantly what is not. This will have a direct bearing on the value and risk.
Information on an auctioned property will nearly always be limited, so there's an element of caveat emptor – let the buyer beware. A solicitor will confirm the 'must-haves' and the 'nice-to-haves' in terms of diligence.
The auctioneer's view
Shaun Vigers is a Director at SVA Property Auctions, one of Scotland's leading large scale property auctioneers. Speaking to him recently, he shared this insight for those considering entering this market. He said: ""For many, commercial property presents an attractive opportunity and as traditional occupiers have retreated from the high street there is a lot of fresh product out there.
"In general terms we have three golden rules for people looking to invest in any property, though the first and foremost one – to check out the property in person - can be challenging when dealing with online purchases from a distance. Despite the wonders of technology nothing beats getting a feel for a property so if you can't do that yourself then try to get an independent person to do so in your place.
"The vast majority of auctioneers are extremely professional and hold to high standards. However, the internet is a big place and it's not unheard of for a property to be displayed using an out-of-date image from the web, which may bear little resemblance to its current state or which don't give the full picture.
"The other two rules are simpler – have the legal pack assessed and make sure you have the money."
Warts and all – what exactly are you buying?
The property will be sold "warts and all", meaning it will be subject to any title conditions or existing burdens, statutory notices, inhibitions or even standard securities. VAT could be payable on the purchase price even if it can't be recovered. Occupancy rights may constitute binding leases even if there is nothing in writing. A purchaser expecting vacant possession will not be happy to find out they can't enter the property to do a planned refurbishment.
Find out why the property is being auctioned. A repossession may create urgency to sell and can result in a bargain at auction. Alternatively, the building may need significant structural work or a change of use to make it viable. Such a property would likely be unmortgageable if planning permission has already been turned down.
The buyer needs to have cash available, and not only to pay registration fees with the auction house. At the point of making the successful bid there will be a non-refundable deposit of 10% of the price which for an online auction may be payable prior to the auction taking place, and as risk will also pass to the purchaser at that point, insurance must be organised. The purchaser must stick to a limit decided beforehand, and if funding is involved this must be discussed with the lender before getting carried away with the adrenaline rush of making a winning bid.
If due consideration is given to these factors an online auction can be an exciting way to snap up a bargain. Forewarned is definitely forearmed, but compared to other methods of buying property the process is very quick and transparent, which is attractive to those seeking fast results.
Get in touch
If you would like to speak to Harper Macleod in relation to anything related to this article, or another commercial property issue, we would be delighted to help.