There are changes to the way we view a property, for example, with virtual viewings still preferred by many vendors and promoted by estate agents; a reduction in the number of lenders; changes to lending criteria, including capped loan to value rates (LTVs) which means that bigger deposits are needed and – good news – the stamp duty holiday and, for sellers, high demand and rising prices. But these are not the only changes – there is a definite move towards property auctions, but not in the traditional way where people gather in a room and bid against each other to buy property. The pandemic has led to a rise in the modern method of auction.
What is the modern method of auction?
Whilst it is called the ‘modern method’, it is not actually that new and has been around for the last couple of decades – but this method of buying and selling property is increasing in popularity, perhaps in the first instance, because you don’t have to actually attend an auction room.
People have become more digitally savvy during the COVID-19 pandemic and online buying and selling has increased hugely. That is exactly what the modern method of auction is – a method of buying property by bidding online for it – rather like buying something on ebay!
The modern auction is managed by an estate agent, who puts the property up for sale on behalf of the seller – usually on the estate agent’s website. The estate agent works with the seller to set criteria such as:
- the minimum bid value (reserve)
- how the property should be listed
- the amount of time the auction will last (usually 30 days)
Interested parties are encouraged to view the property – probably virtually – and bid. Everyone bidding can see what the highest bid is and bid against each other. The highest bidder at the auction end time wins (as long as the bid meets the reserve price set).
What are the differences between the modern method of auction and the traditional auction?
With the modern method, there is no need to attend a physical auction – but of course you won’t get the “buzz” that many auction buyers say they particularly like about the traditional auction.
- Both types of auction offer quick sales, but the selling period is longer using the modern method, giving those interested more time to view the property and more time to bid, which can often lead to a higher selling price. Modern auctions are usually set at 30 days (but they can be longer). However, in a traditional auction, property is often only marketed for around three weeks before the auction goes ahead and buyers have a lot to do in that time, such as view the property, check the legal pack, get the 10% deposit ready, and – if they need a mortgage – get their finances in order.
- Prices are often higher in modern auctions. This can be because the longer selling period gives time for more people to take part but can be due to the fact that traditional auctions are often aimed at cash sales, which are usually lower priced. For this reason, traditional auctions can be the best place to sell property that has fallen into disrepair or needs renovation.
- Traditional auctions are best if you are looking for a really quick sale, where there is vacant possession for example. Neither type of auction is likely to be of benefit to a seller who is in an upward chain – who might actually find themselves homeless if the chain above doesn’t move as quickly as their sale.
- With a modern auction, contracts are not exchanged when the auction is over, as they are at a traditional auction.The winning bidder at a traditional auction must exchange contracts immediately, committing themselves to buy the property, and must pay a 10% deposit there and then. In a modern auction, the winning bidder has 28 days in which to exchange contracts, giving more time to gather information, and then a further 28 days to completion.
What are the costs related to the modern method of auction?
One of the disadvantages of the modern auction is the cost. Agent fees are paid by the buyer and not the seller. The winning bidder must pay a non-refundable reservation fee of upwards of 2.5% (usually around 5%) to the agent to reserve the property. This is not a deposit, so it does not contribute to the purchase price. It is a fee that is paid to the agent, and so must be added to the bid made to win the property. Also, whatever percentage is paid as the fee is added to the price paid for the property when calculating the relevant stamp duty. The fee can only be refunded if the sale does not go ahead due to the fault of the seller.
A deposit of 10% is then required when contracts are exchanged 28 days later. A buyer can pull out of the sale within those 28 days, but they will lose the agent fee that they have paid.
How can Graysons help with a modern auction?
Graysons’ property experts have helped clients who have purchased property via traditional and modern auctions. We can expedite checking of the legal pack (if there is one) or arrange the necessary searches, check mortgage details and contracts and arrange completion.
Contact us now if you are planning to buy at auction, whether it is using the modern or traditional method, and speak to one of our experts. You can also find out more about buying and selling property on our web pages.
Author: Caroline Murray, partner and head of the property team.