Think your winning bid is all you’ll have to pay at auction? Think again, says David Sandeman. Get prepared with this guide to the fees, taxes and extra legal liabilities you are likely to encounter
Is the “hammer price” all you pay when yours is the winning bid on a property at auction? The short answer is ‘no’.
You may be liable for a number of different fees and costs when purchasing a property at auction. Therefore, when you are carrying out due diligence on a property, it is important to find out the extent to which additional fees and costs will be payable over and above the hammer price. These could add significantly to the total cost of the project – in some extreme cases, well in excess of 10%.
What’s more, most, if not all, of these fees will fall outside what a lender will assist with, and will have to be funded from other means. For example, let’s say you have a line of funding that will supply 75% of the hammer price, and you purchase a lot for £200,000. In addition, there is a total of £15,000 in acquisition costs such as stamp duty, buyer’s premium and contributions to vendor costs. The total cost of acquisition would be £215,000, but the lender will only lend 75% of the hammer price of £200,000, and not 75% of the total costs of £215,000. You will need to fund 100% of these additional costs.
So what are the potential additional costs? Let’s examine each one in turn.
SDLT (stamp duty)
This is a duty payable to HMRC, subject to the sale price being above certain thresholds, whenever a property is sold. The amount payable depends on four main factors.
■ Both residential and commercial have a threshold under which no stamp duty may be payable.
■ Is the property residential or commercial? Different rates apply and, in general, commercial stamp duty is smaller.
■ Is the purchaser a person or a non-natural entity? Different rates apply.
■ If the purchaser is a person and they have an interest in a property, they will be required to pay a surcharge of 3% on top of the standard rate.
Generally, the higher the price, the greater the percentage payable on the total value.
SDLT is a complex calculation. You should either use an online calculator (HMRC has a good one) or ask a solicitor or accountant to advise you based on your personal circumstances.
The liability can be significant. For example, an individual buying a house for £750,000 to rent out and who already owns his own home will pay £50,000 in SDLT (6.6% of the purchase price).
Buyer’s administration fees
Most auctioneers charge a “buyer’s administration fee” that is payable by the purchaser on exchange of contracts as a payment separate to the deposit, which is also payable at that time. The fees, which are a fixed amount and not a percentage of the hammer price, are always included in the auctioneer’s guide to buying at auction, which you should read carefully. I have seen fee levels range from £195 to £850 including VAT, though some auctioneers charge even more (or less). In addition, some auctioneers have a price threshold below which a reduced buyers administration fee is payable.
Buyer’s premium
The vast majority of auctioneers charge the vendor a catalogue entry fee and a percentage commission on the final sale price, and do not charge the purchaser a buyer’s premium (a percentage of the hammer price) as well. However, a growing trend is for the auctioneer to accept entries for sale by auction on the basis that the seller will not be charged anything by the auctioneer, and the auctioneer will look to the successful purchaser to pay a percentage premium as a fee.
Again, this will be clearly set out in the catalogue and you must make yourself aware of the potential liability you will have if you are the successful purchaser. The percentage ranges from 1% to 3.5% (plus VAT) and some are subject to a minimum fee as well. For lower-value properties, this can have a significant effect on what you pay. For example, one firm has a minimum fee of £5,000 plus VAT, which equates to £6,000, and this would be payable even if the hammer price of the property was only £30,000. In this instance, the cost of the property would increase by 20%.
Special conditions of sale
The special conditions of sale are additional conditions of sale that form part of the contract for the sale of the lot and are drafted by the vendor’s solicitor. It is vital that you read and understand these because they may contain onerous clauses that you will be bound by whether or not you have read them. In addition, they sometimes appear in the legal pack towards the end of the pre-auction cycle.
I should stress, though, that significant charges for the vendor as part of the special conditions are the exception rather than the norm. Be aware that some solicitors will draft a clause with, say, “2%” in it as “two percent”, making it more difficult to spot when skim-reading the special conditions.
The type of additional liability you might well find in the “specials” are:
■ Contribution to vendor’s legal fees, which could be a fixed fee (sometimes several thousand), though a figure nearer 2% is far more common.
■ Cost of local authority search fees, which could be in the region of £300.
■ Overage clause – if you were looking to buy a site or piece of land, the vendor’s solicitors could insert a clause stating that if you were to get planning permission for the land after completion, you would then have to pay the vendor a percentage of the uplift in value as a result of the planning permission. You would need to budget for this eventuality.
David Sandeman is managing director of Essential Information Group
Please note that the above article is for information purposes only and you are strongly recommended to seek professional advice to ascertain the exact breakdown of additional costs.
This article appears in the summer 2017 edition of EG’s Property Auction Buyers’ Guide. Available in newsagents from 20 May or register here for free digital access
