Property auctions are growing in popularity among people looking to buy properties. They offer lots of security, a fast track to completion and the opportunity to nab a bargain on a property. The ‘modern method of auction’ is not a new thing; it has actually existed for years. But it has become increasingly popular because it has extra benefits for buyers to take advantage of.
In this guide, we will compare and contrast a traditional property auction vs the modern method of auction. As always, if you have any questions, contact the team at Think Plutus and we will help.
How do traditional property auctions work?
You can find properties for sale by auction by looking in local magazines and newspapers, through estate agents and directing browsing auction house websites. The types of property available can include:
- Repossessed properties
- Unmortgageable/uninhabitable properties
- Projects for development
- Standard residential homes
- Refurbishment projects
Typically, a guide or starting price is given, and the vendor may set a reserve price as a minimum that they are able to accept. If this reserve price is not reached during the auction, the sale will not go ahead. However, there may be an opportunity for interested parties to negotiate with the seller after the auction, particularly in cases where the highest bid came in close to the reserve price.
Process of buying a property at auction
- The deposit and suitable finance must be confirmed before the auction.
- A valuation or survey must be done before the auction.
- Legal work must be pre-exchanged prior to the auction.
Contracts exchanged on the day of the auction
- At this point, you are committed to the purchase.
- If you choose to pull out, your deposit will be lost, as well as any other costs incurred.
Deposit of 10% required on the same day as the auction
The deposit is non-refundable unless the vendor has misled the buyer in any way, or if certain legal issue come up.
28-day time limit for completion
- The purchase must be fully completed within 28 days after the auction.
- Failure to complete in time could result in heavy penalties.
How do you prepare for a traditional property auction?
If you win the bidding, you are required to pay a 10% deposit and exchange contracts on the same day. This means you need to be ready to proceed with a purchase on the day of the auction, even though you are not guaranteed to win the property.
If you are relying on a mortgage to pay for the property you are targeting, this must be agreed before the day of the auction. If you are a cash buyer, you need to have the money readily available for the day.
There are other types of finance you can use to purchase the property initially. This can give you time to arrange a mortgage without incurring penalties if you go over the 28-day limit. One example is a bridging loan, which is a short-term funding option that you can use to make the purchase on auction day. You will then repay this loan by ‘refinancing when you manage to secure a mortgage.
Nowadays, it is common practice for the vendor’s solicitors to put together a legal pack that potential bidders can peruse before the auction happens. This usually includes:
- A memorandum of sale
- Special conditions
- Local searches
- The Land Registry search
- A copy of the lease (where relevant)
- Proof of title
This is enough for some, but you may wish to have your own checks carried out to be absolutely certain before making the purchase. If you choose to take this step, you must ensure all checks are completed before the auction, because if any issues are detected after the contracts are exchanged then you cannot pull out of the purchase. The only exception to this would be if the defects identified are a result of misrepresentation from the vendor, or if any legal issues arise that couldn’t be identified before the contracts are exchanged.
If you decide to pull out of the purchase for any reason other than those specified, the vendor has the right to keep the deposit and resell the property. If reselling results in them getting a lower price, they are also entitled to claim the shortfall from you.
What are the advantages of traditional property auctions?
Speed of sale
This is beneficial to vendors in particular. Once a winning bid is placed, the sale must be completed within 28 days. This is considerably faster than selling through a Private Treaty.
Legal commitment to purchase
Sellers of properties at traditional auctions get another significant advantage in the fact that buyers must pay a 10% deposit and exchange contracts on the day of the auction. This commits them legally to the purchase, and they forfeit their deposit if they pull out. The seller gets a great deal of security from this.
Buy unmortgageable properties
The audience of cash buyers at traditional auctions is often large, owing to the 28-day time limit on completing the purchase, which is not long enough to arrange a residential mortgage. Often, properties that are assessed as not suitable for standard residential mortgages are sold to cash buyers, or buyers with pre-approved bridging finance at auction. It’s important to note unmortgageable properties can be sold via the modern method of auction, but sellers get more security when they choose to sell through a traditional auction.
Potential disadvantages with traditional auctions
Costs can add up
With no guarantee that there will be a successful bid, buyers must pay to arrange valuations and preliminary legal work to be able to make the exchange of contracts on auction day. This is helpful in eliminating people who are not serious buyers, but it can be a substantial waste of money if you end up being outbid.
The successful bidder must pay a 10% deposit on the day of the auction, so that money must be readily available for if you place the winning bid. In most cases, this deposit will not be refunded if the sale doesn’t go ahead.
No option to pull out
Once your bid is accepted, you are legally bound to complete the purchase – you cannot back out. Before you bid at auction, you must be 100% certain that you wish to purchase the property in question.
Many properties that go to auction are deemed unsuitable for mortgage lending. If you plan to purchase a property, fix it up, then sell or refinance it, you must account for the cost of those renovations when bidding. It can be easy to get carried away at the auction when competition is high, and you could end up overpaying and finding yourself unable to cover the build costs.
How does the modern method of auction work?
The big difference with the modern method is that auctions are carried out online.
The vendor appoints estate agents to arrange viewings that generate interest in the property and entice prospective buyers to make an offer. Interested buyers must submit their offer online, much the same as a bid at a traditional auction. The seller can set the rules for the auction with the assistance of the auctioneer. This includes:
- Setting a start date for the auction
- Choosing the duration of the auction
- Setting a reserve price
These online property auctions typically last for 30 days or more, but they can be shorter in cases where the vendor needs to sell quickly.
When the successful bid is placed, the buyer must pay a non-refundable ‘reservation fee’. This must be transferred on the day of the auction to secure the property, and it can be anything up to 5% of the full purchase price. This fee is designated to cover the auctioneer’s cost and will not be taken out of the property’s overall purchase price. Instead, it is added on top. When stamp duty is calculated, this fee will be included in the calculations, so the stamp duty you pay will be on a purchase price up to 5% higher than the amount of your winning bid.
Auctions carried out in this way give the buyer a realistic time frame to source funding for the completion of the purchase. Traditional auctions set a time limit of just 28 days, but a modern auction places the limit at 56 days. This is 28 days from the auction day to the exchange of contracts, and another 28 days to fully complete the purchase.
This system gives the buyer more time to arrange funding if they are dependent on a mortgage. Contracts don’t have to be exchanged on the same day, so some of the pressure is taken off.
The reservation fee can be refunded, but only in the event that the sale falls through due to some fault on the part of the vendor. If the buyer decides to pull out before contracts are exchanged, they forfeit the reservation fee and the vendor can go ahead and resell the property.
What are the advantages of the modern method of auction?
More flexibility for bidders
Due to the online nature of modern auctions, they offer more flexibility for bidders. The bidders can place their bids without having to be in a certain place at a certain time, which is an attractive prospect.
More time for the buyer
The modern method of auction gives buyers 56 days, rather than the 28 days given by a traditional auction, to complete the purchase. This time frame is more realistic for any buyer who needs to obtain a standard mortgage to buy the property. With this in mind, the modern method opens up property auctions to more potential buyers, rather than attracting mostly people who are paying in cash.
Potential disadvantages with the modern method of auction
The buyer can pull out
While this offers a greater degree of freedom for buyers, it takes away some of the security for the vendor. Buyers are given 28 days to exchange contracts and must only pay a fee on auction day, so they could still change their mind about the purchase after the auction is complete. Buyers will have a financial interest but are not legally bound to complete the purchase.
Buyers who purchase a property through the modern auction method must pay a reservation fee to secure the property. This fee can be up to 5% of the purchase price. This fee is charged on top of the purchase price and it is non-refundable, even if you decide to pull out of the purchase before the exchange of contracts. The only way it can be refunded is if the sale falls through due to some fault on the part of the vendor.
In addition to paying this already significant charge, it will also figure in the calculation of your stamp duty liability, meaning that will be higher as well.
Speak with a mortgage adviser
If you have any questions about buying a property at auction or wish to discuss financing options, contact the team at Think Plutus today.