Modern Method of Auction Houses
02/08/2019
284
7 min read
Many agents and auction houses are now selling properties under what's termed the 'Modern Method of Auction'.
What is a Modern Method of Auction?
Not to be confused with the traditional method of auction, it's often known as a conditional auction, an estate agency auction or even a combi-auction.
In common with a traditional auction an offer is accepted but unlike the former, the successful buyer must place a non-refundable reservation fee to the agents to reserve the property. It's in effect an option to purchase that is created with the agents securing a much higher fee than the usual method of auction.
Another clear difference from the traditional method is that it is the buyer who pays for the agents' fees – these are covered within thhe non-refundable reservation fee - unlike the traditional auction or traditional sale where the Seller pays the agents fees. If the property falls through due to the Vendor, the reservation fee will be refunded to the buyer in full. If the sale falls through due to the buyer, it is non-refundable.
The deposit paid can vary from agent to agent and is usually based on a percentage of the final sale price (subject to a minimum amount). This deposit does not contribute towards the purchase price of the property and 10% of the purchase price will still be required on exchange of contracts and the balance of the purchase price payable on completion. Additionally it is a material part in the calculation of stamp duty liability.
Where it particularly differs as well is that following acceptance of the buyers offer and payment of the reservation fee, the buyer is then given 28 days to exchange – whereas with a traditional auction, once the buyer has handed over their deposit, this is regarded as the point of exchange.
This of course gives a buyer the option to pull out – albeit at large expense – but if they do not, then they have a further 28 days to complete after this point.
Although the modern method of auction is still a fixed timescale this allows longer periods for exchange and completion to accommodate the residential buyer and seller over the traditional method of auction. This allows the buyer more time to arrange finance to complete the exchange and completion if the buyer is reliant upon a mortgage.
This article looks at Modern Method of Auction for Houses and considers:
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Need legal help with your auction purchase or sale?
Whether it's a traditional or a modern method of auction, we can help prepare legal packs, have experienced RICS surveyors visit a property to check for defects and complete the required conveyancing.
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What is the process of selling through the Modern Method of Auction?
What follows is what is typically offered by companies offering Modern Method of Auctions for Houses online:
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Book a valuation
You contact the company you've selected who'll not only carry out a valuation but will discuss and agree an undisclosed reserve price and a starting bid.
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Marketing/advertising creation
The company takes photographs of your property for marketing and advertising, create a floorplan and write a description for your property. The advert will then go to you for approval.
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Preparation of the Auction Pack
The company will buy the following property searches and obtain the following legal information (you'll have to complete and return the property information form and fittings & contents forms they give you!) - often, you'll only be charged for these after a successful sale and not otherwise:
- Title Register
- Title Plan
- Local Search
- Water & Drainage Search
- Property Information Form
- Fixtures and Fittings Form
- Probate, Epitome of Title, Power of Attorney (if required).
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Pre-auction marketing
The company advertises your property on their portal and elsewhere if relevant while the auction pack is being prepared to maximise exposure, potential viewings and interest.
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Auction begins
When the auction pack is ready at a time agreed with you, your property goes ‘live’, meaning bids can be made via the online auction. The company agrees with you how long the auction should run for but this is usually between 14 and 21 days.
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Bidding
All prospective bidders must download the auction pack and accept the terms before bidding. Bids can be viewed and made in real time i.e. at any time of day or night during the agreed bidding period.
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Bidding ends
The auction ends and your property gets sold to the highest bidder (on or above reserve), who must pay their reservation fee to meet the terms of the sale and secure the property.
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Completion
This will take on average between 28 and 56 days. You keep the full price achieved on your property.
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What is the main differences between the Traditional Method of Auction and the Modern Method of Auction?
Traditional Auction | Modern Method Auction | |
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Where and when does it take place? | A physical location at a specified time. The length of the auction will depend on how long buyers bid for. | Online. Buyers can bid anywhere in the world online, 24/7 for the duration of the open auction. Auctions usually run for 14-21 days. |
When does exchange of contracts happen? | Usually immediately | Within 28 days of the lawyers receipt of contracts |
When does completion happen? | Within 28 days | Within 56 days |
Who can bid? | Cash buyers only | You can buy with a mortgage, but you need to have cash for your reservation fee (with easyProperty this is 2.5% plus VAT of the sale price) |
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What are the advantages and disadvantages? Any controversies?
Advantages of Traditional Auction
- Exchange happens on the same day straight after successful bid.
- More chances of being sold.
- Cash buyers and people buying with bridging loans are in a stronger position, not mortgage buyers generally.
- Competitive live bidding.
- More chances of buying 'doer-uppers' at knock-down prices, also from sources such as probate sales, repossessions etc.
Advantages of Modern Method Auction
- More time for checks on the title
- This greater time for checks makes this method more favourable for mortgage lenders to wish to involve themselves
- More time to arrange a mortgage
- No need to visit a physical building to make your bids
- No stress from other human bidders in the same room - less scary!
- Higher reserve prices
In terms of normal estate agency sales, additionally a modern method auction has advantages such as no chipping away at the desired sale price, hugely less fall throughs from buyers (who don't face any penalties if they pull out before exchange in a normal situation).
Finally, the nature of the bidding process takes away any arbitrary undesirable control from an unscrupulous estate agent.
Controversy
Undoubtedly modern method auctions have increased in number in the UK although exactly how much they are increasing is a matter of argument.
Anecdotally the growth in popularity stated in some media reports is down to the greater amount of flexibility in general and that the auctions can embrace the kind of principles which have made eBay so popular. Like eBay, a modern method house auction also allows for a wider variety of payment methods.
There is considerable criticism however because the modern method effectively transfers virtually all of the auction fees over to the buyer rather than the seller and, despite these being non-refundable, in the case of a successful auction where the matter runs to completion, the total price is used in the calculation of any stamp duty tax liable.
Some critics have even summed the modern method auction up as the agent wins, whatever happens: there is undoubtedly some truth in this by the very nature of the operation.
A neutral view, however, is that any new market which introduces new methods and boosts overall sales volumes is to be welcomed, particularly at this point in time in the UK where a seemingly perennially sluggish housing market prevails.
Need legal help with your auction purchase or sale?
Whether it's a traditional or a modern method of auction, we can help prepare legal packs, have experienced RICS surveyors visit a property to check for defects and complete the required conveyancing.
* Experienced Property Lawyers – RICS Surveyors – On all Mortgage Lender Panels
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