The grim reaper of the housing market is stalking the land, with the "r" word looming large for increasing numbers of homeowners. We may be technically in a recession, but "repossession" is also rearing its ugly head with increasing frequency.
There were 18,900 properties taken into possession by mortgage lenders in the first half of the year, and the Council of Mortgage Lenders predicts that this figure will rise to 45,000 by the end of the year – a 50 per cent increase on last year's figure. The annual total is likely to climb for the next couple of years as unemployment tightens its grip. The Government last week sought to reassure homeowners that pressure will be brought to bear on those lenders attempting to rush mortgage defaulters into repossession. Yvette Cooper, Chief Secretary to the Treasury, said: "We need to make sure we help those who might be hardest hit in the tougher times ahead, ensuring repossession is the last resort, not the first."
The Civil Justice Council has drawn up new rules, which require lenders to examine all other alternatives with homeowners before they start repossession action. This may be of some comfort but, in fact, in order to comply with the Financial Services Authority requirements, lenders are already supposed to use repossession as a last resort. So the potential impact of the new rules is debatable.
While repossession is a miserable experience for those who lose their houses, there are potential beneficiaries: property buyers. Savvy purchasers can often pick up bargains at auction – sometimes tens of thousands of pounds below their market value. According to EI Group, which has gathered data on UK auctions for many years, around 17 per cent of repossessed properties typically end up in the auction room, with most of the rest being sold through the traditional estate agent route.
Currently, 25 per cent of residential properties offered at auction are repossessions, but EI group managing director David Sandeman believes that proportion is set to rise dramatically. "Bankers and asset managers are realising that there is little point putting repossessed properties in an estate agent's window because the appetite to buy on the open market has reduced so hugely, so they will increasingly be looking to off-load through the auction houses."
There has already been a sharp increase in the number of repossessed homes up for grabs. EI Group reports that between October 2006 and September 2007 there were 3,790 of these offered at auction, while between October 2007 and this September, that figure had shot up to 6,489. As the numbers continue to rise, there will be even more choice for bargain hunters.
Pros and cons
The obvious advantage of buying at auction is the opportunity to secure a property at an advantageous price. But there are other benefits, too.
Melanie Bien, director of independent mortgage broker Savills Private Finance, says: "The greatest advantage of buying at auction is the certainty. If your bid is successful, you exchange contracts on the day of the sale, effectively committing you to the purchase and completion within 28 days so both buyer and seller know exactly where they stand. The price can't be changed and completion can't be delayed."
Such certainty is particularly attractive in the current climate, when changing personal circumstances and the lack of availability of mortgage funding mean that more deals are being called off during the traditional three-month period that it takes to buy a property.
The downside of buying at auction is that you have to be extremely well-prepared. "You must carry out all your due diligence first and have your finance in place," says Sandeman. "You need to have paid a solicitor to look at the legal documentation and had a survey carried out, because as soon as the hammer falls, you exchange contracts and pay a 10 per cent deposit there and then. There is no going back."
Bien also points out that the tight time frame can be a disadvantage. "Once you have put down the 10 per cent deposit, you must pay the remainder within 28 days. If you fail to do so, you can lose your deposit. It is important to have a chat with a lender before the auction to get an agreement in principle: this will ensure you know in theory how much you can borrow so you don't get carried away at auction and bid more than you can afford."
It also ensures that the beginning of the application process is in place: once you have made your successful bid, you can get back in touch with the lender and complete the application. Of course, assuming you don't get carried away and go over your budget, you can simply be outbid by another buyer. In which case you lose the hundreds of pounds you have paid the valuer and solicitor.
"If you lose out on a couple of lots at, say, £300 or £400 a time, you could find that what you have paid out in fees wipes out any saving you have made on the property price," says Ray Boulger, at mortgage broker John Charcol. "But it is vital you do have the title checked by a solicitor and the condition of the property confirmed by a valuer, otherwise you could end up buying a pig in a poke."
Paula John is editor of 'Your Mortgage' magazine