The television show Homes Under the Hammer has led to traditional property auctions growing in popularity. But did you know that there is another way? It happens online and is called the modern method of property auction.
The process first appeared around 20 years ago and is aimed at people seeking a quick property sale, but whose circumstances do not suit a traditional auction room. The technique is also a useful tool when there is an unsteady property market.
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What is a modern property auction?
Essentially, the modern method of auction is a hybrid system which combines the speed of an auction, with the marketing skills of your local estate agent. The sale process is handled by one company, known as the “modern auctioneer”.
And it covers a full range of property transactions – including buying and selling land, investment property and freehold and leasehold houses and flats.
The process is often referred to as as an estate agency auction, conditional auction, or a combi-auction.
How does it work?
The first step is to agree terms with a respected local estate agent who will act as the auctioneer. This will involve agreeing the terms for the auction, including a reserve price and timetable (the reserve price is the vendor’s lowest acceptable price and the figure below which the auctioneer can’t sell).
The process then proceeds like a traditional sale as the estate agent will market the property, arrange viewings and encourage potential buyers to make an offer. However, the main difference is that any interested parties must make a formal online bid for the property.
How does a modern property auction differ from a normal property sale?
When an offer is accepted during a traditional property sale, the estate agent will stop all marketing activity and viewings. The property will be “sold subject to contract” and control of the sale moves into the hands of the buyer. If they choose to lower their offer or end the sale, the whole process must start again.
With modern auctions, all interested parties submit an offer and compete against each other until the auction ends. This leaves the vendor in control as they can accept the highest price, without relying on a single buyer.
Click here to find out more about the differences in conveyancing in traditional property auctions.
What are the advantages of a modern method of auction?
The main advantage is that the sale is controlled by the seller, rather than the buyer or the estate agent. Much like a public auction, the process is open and transparent so cannot be manipulated through secret conversations between the buyer and agent.
If a buyer wishes to secure the property, they simply need to make the highest bid.
With the modern method, the influence of estate agents is also greatly reduced. During a traditional sale, it can feel like your property is at the bottom of the pile as agents focus on higher value properties which command a higher commission.
If a sale falls through, agents might put forward a lower bid from a friendly investor, rather than restarting the marketing process. The modern method of auction ensures that the property is sold quickly and at a fairer price.
Some people also prefer the modern process as it takes place without the stress of being stuck in the same room as other people bidding against you – and of course you don’t need to travel to a physical sale room.
Does your property need to be chain free?
The modern method of auction is ideal for sellers with no upward chain. This means they do not have to ensure the purchase of their new property coincides with the auction of their current home, which can lead to problems if there are delays. This is why most auction lots tend to be vacant properties such as buy-to-lets.
How long does a typical online auction last?
The auctioneer will invite interested parties to view the property, either as individual appointments or at open house days. They will then invite people to make an online bid for the property during the auction, which generally lasts for a month, but can be as short as a fortnight. Bidders will be able to see the current highest price on the website, so the process is fair and transparent.
As you can see, when compared to traditional property auctions, online auctions of these type allow for longer periods for exchange and completion – which sometimes make easier for the residential vendor and purchaser over the traditional auction process.
What happens at the end of a a modern property auction?
The conveyancing process is different too. Unlike a traditional auction, the end of a modern auction is not treated as an exchange of contracts. If you are the highest bidder, you will be expected to pay a reservation fee which can be a lot of money, depending on the value of the property.
Once the auction ends, buyers have 28 days to exchange contracts and could potentially pull out of the sale. There is no legal obligation for the buyer to go through with the purchase.
If the property does not make its reserve price or there are not enough bidders, the auctioneer can decide to move the property into a traditional auction.
Is my reservation fee refundable?
The reservation fee can be as much as 5% of the purchase price and means you will secure the property and the estate agent will take the property off the market. Always do your research so you understand the fee structure before making a bid.
The fee is not deducted from the purchase price and is non-refundable, even if you decide to pull out of the purchase before exchanging contracts. The fee will only be returned to the buyer if the failure of the sale is caused by the vendor.
Please be aware that the reservation fee needs to be included in the amount of stamp duty payable.
Is the modern method of auction right for me?
Whether you are a buy to let property investor, or are looking to buy your dream home, decision to choose a modern method of auction over a traditional auction sale will ultimately depend upon your personal circumstances and your individual property.
For example, if you are selling a property which will be difficult to finance with a mortgage, then a traditional auction is still the best route. These sales attract investors and cash buyers, and they result in a more certain outcome.
Within a few weeks the auction catalogue and legal pack is available online, while interested parties can attend open house viewings. On the auction day itself, the buyers like the certainty of acquiring the property the moment the hammer goes down.
You could argue that the same applies to properties requiring modernisation and probate properties. Both these situations usually need to be settled quickly and investors will not be deterred by the condition of the property.
The modern method of auction takes longer, so suits people who are not in a rush. This also allows more time to market the property, hopefully meaning more bidders and a higher reserve and sale price. Buyers will have time to arrange mortgages by doing the necessary surveys and legal paperwork, and as a result there is usually less need for bridging finance.
If your property has been approved by mortgage lenders and is in good condition, targeting cash buyers could mean you receive a much lower price.
Many buyers will be put off by the prospect of attending an auction with hard-nosed investors. With a modern method of auction they will still have the safety net of estate agent, who can help potential buyers through the bidding process.
NB make sure you take particular care if you are considering bidding for any repossessed property. That’s simply because the mortgage company, there will be selling the property, are going to have comparatively little knowledge of the property. So watch out in particular for any possible title defects or structural problems.
Click here to read more about Repossession Conveyancing
Whether you’re taking part in a traditional auction or a modern property auction and regardless of whether you’re looking for your first simple buy to let, or you’re looking to add to a much bigger portfolio, we can help. And we are one of just three law firms nationwide formally approved by Progressive Property – the country’s leading property education business
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