The Modern Method of Auction
The number of failing house sales is on the rise, with 30.6% of sales falling through in 2019. 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 normal auction. However, there will be a longer timescale to complete, making it easier for the buyers who need a mortgage to organise suitable finances. The buyer must usually pay a large reservation fee which will be non-refundable once the figurative ‘hammer’ falls. This method of auction is also known as a ‘conditional auction’, and is becoming increasingly popular, particularly in areas where properties are failing to sell, such as the North East, the West Midlands and parts of inner London.
Differences Between Traditional Auctions And The Modern Method of Auction?
Traditional Auctions generally take place at a physical location at a specified time. The length of the auction will depend on how long buyers bid for. Exchange of contract usually happens immediately after the buyer has won the bid and completion will be within 28 days.
With the Modern Method of Auction, buyers can bid from anywhere in the world online, 24/7 for the duration of the open auction, which will usually be for 14-21 days. Exchange of contract happens within 28 days of the lawyers’ receipt of contracts and completion within 56 days.
Why Sell Using The Modern Method Of Auction?
- Speed. If you are looking to sell your property fast this method could be ideal. Exchange and completion take an average of 47 days after the auction has ended. This is much quicker than the estimated 79 days for a property transaction taking place through an estate agent.
- 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 non-refundable reservation fee as a sign of their which is non-refundable. 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 in 2018.
- 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.
- You Save Money On Fees. Generally, sellers will have a lot less costs, as the buyer pays the auction reservation fee. The, the seller usually only pay for conveyancing fees.
The Modern Auction Selling Process –
- 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.
- 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 Auction pages 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 2 to three weeks.
- At the end of the auction period, the winning bidder will then proceed to being the purchaser.
- Completion will then usually take place in 4 to 8 weeks.
If you are considering to sell 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 who we have recently seen) by way of the Modern Method of 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 mean that you should wait until you are successful at auction to speak to your bank or your broker!
Your conveyancing lawyer will of course 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 of course 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.
- 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 crucial you contact us at this stage to arrange a Pre-Auction Title check before you commit to bidding.
- At the end of the auction, and if you are the winning bidder (hurrah!), 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 haven’t already instructed us to check the auction legal pack prior to bidding, you must now do so as soon as possible. Even though there is more time for us to process your purchase transaction with this type of auction purchase than with a traditional transaction, you do not want to risk it.
Many critics comment that the modern method of auction is sometimes difficult to understand. Auction gives estate agents and auction platforms free rein to set the reservation fee and some high-street agents are still getting to grips with how this works. The reservation fee can be anything upwards of 2.5% + VAT with usually a minimum of £5,000 + VAT. The reservation fee must be paid upfront by the winning bidder when the auction finishes.
Buyers are obliged to have this reservation fee ready and waiting, as it can’t be part of any mortgage funds because of the timescale. Further, the fee is non-refundable if the buyer decides to withdraw. Finally, it doesn’t usually form part of the overall price paid as it is an add-on which goes straight to the auctioneers and the estate agent. Additionally, there can sometimes be other costs, such as an extra £180-200 for a Buyers Information Pack.
A further, bigger issue is the split between the auction houses and estate agents. Even if it’s shared equally, agents stand to make more of a profit, particularly on lower-price properties, than they would by selling on a traditional commission basis. Also, there is potentially less work for an estate agent as there is no chain involved.
If you aren’t 100% sure if you will sell and would only sell for a certain price you might be better considering a more traditional sales route. With the Modern Method of Auction, once a successful auction transaction has been concluded and you have a ready willing and able buyer above the reserve, you will be liable for the reservation fee paid if you change your mind about proceeding with the agreement last minute.
If your primary factor for selling your home is price, above speed and security then the Modern Method of Auction is probably not for you. Whilst bidding can drive the sale price up and some auction sales are very profitable for the seller, this is not guaranteed. Buyers may factor in the reservation fee payment into the total purchase price which may result in a lower bid price. You can however set a reserve fee within 10% of your asking price, so your property will never be sold for less than the reserve.
Speak to us on 0800 799 9892 to find out how we can help. 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.