The Modern Method of Auction
The number of failing house sales is on the rise, with 30.6% of sales falling through each year. This has led to people seeking an alternative to being caught in a property chain: a new type of online auction, known in the property world as the Modern Method of Auction.
The modern method of auction allows buyers to bid on a property online, as in a traditional auction. However, there will be longer timescale for completion, making it easier for the buyers who need a mortgage to organise suitable finances. As part of the process, the buyer must pay a substantial reservation fee which is non-refundable once the figurative ‘hammer’ falls. This method of auction is also known as a ‘conditional auction’ and is becoming increasingly popular across the whole of England and Wales. This modern method of auction makes purchasing an auction property more accessible for those reliant on finance for their purchase, meaning people can buy an auction house with a mortgage.
Differences between Traditional Auctions and the Modern Method of Auction?
Traditional auctions generally take place at a specified time. This can also be known as ‘unconditional auctions’. They may be held in a physical location therefore you will be buying at auction house, in the true sense of the word. More recently we have seen an increase in a new style of auction, an online house auction. Whilst this method appears more convenient in that you can bid from the comfort of your own home, these auction’s still come with all the strict completion terms of a traditional auction. Exchange of contract usually happens immediately after the buyer has won the bid and completion will be within 14-28 days, although in some cases it can be up to 6 weeks.
With the Modern Method of Auction, buyers bid online like with an online house auction. Once a bid is accepted, the seller and buyer enter an exclusive reservation period. The buyer will pay a reservation fee which is often a percentage of the purchase price. Exchange of contract happens within 28 days of the conveyancer’s receipt of contracts and completion is within 40-56 days. It is important to note that the reservation fee is non-refundable if you withdraw from the purchase, or do not meet the timeframes. The reservation fee is also in addition to the purchase price.
Why sell using this method of Auction?
- You Get More Security. If you know you need to move properties, you get more security through the Modern Method of Auction as there is a much lower abortive rate post auction compared to the open market. The buyer pays a substantial non-refundable reservation fee. Statistically, only around 5% of property sales fall through at auction compared to the previously mentioned 30.6% of sales through estate agents falling through.
- Fixed Viewings. When selling on the open market, if you are lucky, you will get lots of viewings in a short period of time and receive an acceptable offer quickly. However, there is no guarantee that this will happen and a house could be on the open market for some time with sporadic views and a drawn out price negotiation. With auction sales, the time for viewings before an auction is limited. Often auctioneers or estate agents will hold fixed viewing days meaning there is less inconvenience to you as the seller.
- You Maximise Interest. You can set the starting price at a rate that will attract most attention from potential buyers, but also set a reserve to stop it from selling too low! Competitive bidding can drive the sale price up. It is important to remember to set your reserve price to ensure you can redeem any mortgage on auction property
- You Can Save Money On Fees. When selling at auction, you have more flexibility on fees you need to pay to the auctioneer and conveyancer. The reason being is as part of the contract for sale, you can pass your costs onto the buyer. Auctioneers will often have their own fees which the buyer will pay and so you need to be mindful of alienating buyers if the costs are too great once any auction costs are added to your own costs. Another tactic to make your property more attractive to buyers is if you cover your own costs.
The Selling Process – How does auctioning a house work?
- You must first contact an auctioneer or estate agent offering this type of auction sale. They will usually offer a free initial valuation and walk you through the process of setting a reserve price and starting bid. Examples of such auctioneers include I am Sold auction and SDL auctions.
- The agent will then commence the marketing process
- Whilst the agent carries out these formalities, you must then instruct a conveyancer who must prepare an auction title information pack, ready for inspection by potential bidders. You can find more details of what an auction information pack usually contain by visiting our property auctions page on this website.
- Once the legal pack has been prepared and supplied to the selling agent, they will then agree a date with you for when the auction will go live, together with your instructions on how long you wish for it to run. Typically, this is around two to three weeks.
- At the end of the auction period, the winning bidder will instruct their conveyancer to begin formalities
- Exchange and Completion will then usually take place in 4 to 8 weeks, depending on the specific auction terms.
If you are considering selling your property, our conveyancer’s can help in preparing the buyers information pack and subsequently the conveyancing formalities thereafter. Similarly, if you are looking to buy a property using this method, our conveyancer’s can also assist you with your pre-auction title checks which is a must before you commit to bidding on the property.
The Modern Auction for Buyers –
Although property auctions have been traditionally a lucrative source of properties for seasoned Buy-to-Let Property investors, who were often cash rich, a door has been opened for a wide spectrum of property buyers including First Time Buyers and those buying with a mortgage by way of the Modern Method of Auction. With our specialist conveyancing solicitors, we can guide you through how to buy a house at an auction?
Primarily, this is due to more relaxed time expectations from reservation, set by the auctioneers in comparison to Traditional Property Auctions. As we have explained earlier in this article, it is common to see properties sold under Modern Method of Auction requiring completion, anywhere between 28-56 days in contrast to 14-28 days with traditional auctions.
Further, you will actually not be exchanging contracts immediately when the auction ends. What you are in fact doing is reserving it. You will be required to pay a reservation fee which is non-refundable, immediately on the virtual gavel falling. You will now have a set period of time to arrange a suitable mortgage to enable your purchase to complete. This does not, however, mean that you should wait until you are successful at auction to speak to your bank or your broker!
Your conveyancing lawyer will explain in detail, any other conditions specific to your purchase in greater detail once you instruct us.
So, where do I start?
- The First Step is to find a Property. There are various channels for you to find properties, however the most common places to find a property are the UK’s major property portals; namely Rightmove, Zoopla and OntheMarket. You can also so directly to the websites of some of the popular modern auctions such as SDL and I am Sold auctions. Remember to check the I am sold reviews and those for your chosen auction to see the experiences of others. This is especially important when it is your first time buying at auction.
- The next step is not that uncommon from any property purchase; viewing the property. Dependent on how much interest the property listing has generated, in certain cases, please do expect block viewings. Noting the recent changes in the Property Space, following recent events such as Covid-19, more and more auctioneers are also now offering virtual viewing which may be an alternative.
- Once you have found your property, you must then register to bid through the relevant auctioneer’s website. The auctioneer will usually collect your personal and credit card information in preparation for the auction. You will now be granted access to the property’s legal documents or more commonly known as the Auction Pack for inspection. It is important to consider arranging a pre-auction title check before you commit to bidding. Our specialist team of experienced conveyancers can help with this.
- At the end of the auction, and if you are the winning bidder, the auctioneer’s portal will now collect your reservation fee and request you to sign your reservation agreement. You will now have until the end of the reservation period to complete the purchase.
If you would like to discuss our pre-auction title checks and what they cover, please contact a member of our team on 0800 799 9892 or firstname.lastname@example.org, you can also read more in our article on pre-auction pack reviews
So overall, is Buying and Selling at Auction for you?
Online auctions, whether traditional or modern method, are becoming a lot more popular especially in light of the ease and convenience ‘being online’ gives people. In previous years, many critics have commented that the modern method of auction is sometimes difficult to understand, however as they are becoming more commonplace, this method of buying and selling homes is becoming more popular amongst homebuyers.
The longer completion timescales give buyers using finance more opportunities to purchase a property at auction including first time buyers who are taking advantage of the Help to Buy ISA and Lifetime ISA schemes.
If choosing to buy at auction, you need to give thought to the additional costs. More and more frequently, we are seeing that these are based on a percentage of the purchase price, with a set minimum amount. This can prove quite costly, especially with higher ticket properties.
Although the modern method of auction gives great flexibility to arrange finance, there is a reservation fee to pay which is non-refundable and can be quite substantial. This can make it a costly exercise if you decide not to proceed with the purchase or cannot arrange suitable finance in time. You also need to bear in mind that the reservation fee needs to be paid on acceptance of your winning bid or shortly after, so you need to have this available. If the reservation fee is a percentage of the purchase price, you need to be mindful of what this will be depending on what your final bid is. This fee is also an additional fee and does not form part of the purchase price. It is worth noting that different auction houses have different fee scales, so it is worth picking your auction house wisely.
Overall purchasing at auction, either via a traditional route or modern method can be a good investment. It is important to take your time and do your research.
Speak to us on 0800 799 9892 to find out how we can help with your next auction purchase. We also suggest you read our article on why it is important to have an auction legal pack review prior to your auction.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.