Modern method of auction: pros and cons

Selling a property is stressful. From organising viewings to going back and forth with estate agents, solicitors, and potential buyers, it can be a handful to deal with.

One of the big considerations you have to make is whether to go through an estate agent or to go via a traditional auction. But, these days, there’s also a third option, the modern method of auction.

It’s a fresh take on the traditional auction method and is becoming increasingly popular amongst property buyers and sellers. But why is that?

This article will explain the modern auction method, how it differs from a traditional auction, and its pros and cons to determine if it’s a good fit for you.

What is the modern method of auction?

The modern method of auction is an online auction sale where buyers have 30 days or more to bid on a property, with the highest bidder winning at the end – think of it like eBay, but for homes.

Once the virtual gavel falls, the winning bidder is required to pay a non-refundable reservation fee to hold the property. It’s typically set at 5% of the final sale price and is an additional payment. It should also be noted that the reservation fee is liable to stamp duty.

Instead of attending a traditional property auction house, prospective buyers can bid in the comfort of their homes at any time – as long as the auction is still active. These auction listings are published on popular property portals such as Rightmove and Zoopla, which increases their exposure to hundreds of thousands of buyers.

The modern auction – also called an ‘online’ or ‘conditional’ auction – is a new twist on the traditional auction that lowers the barrier to entry for many buyers. The conveniences offered through the digitalisation of the auction process have made it preferable for both buyers and sellers. But how does it all work?

How does a modern method of auction work?

Homes on sale via the modern method of auction are listed on property portals for 30 days or more. This allows for plenty of time for prospective buyers to decide and bid on a property. Once the auction has ended, the highest bidder will be required to pay a reservation fee of 5% of the purchase price.

From the date the auction ends, the buyer has 28 days to exchange contracts on the home and pay a 10% deposit on the sale price. If the buyer does not exchange contracts or pay the deposit within this time frame, they will lose their 5% reservation fee.

Then, the buyer has a further 28 days to complete the purchase. This is when they must transfer the full funds to the seller. If the purchase is not completed within 28 days, the buyer forfeits their 5% reservation fee and 10% deposit.

The only exception is if the deadlines are missed due to the seller pulling out. In such an event, the deposit and/or reservation fee will be refunded back to the buyer.

This means that the modern auction gives a buyer 56 days to finalise the purchase, compared to only 28 days with traditional property auctions.

What is the traditional method of auction?

The traditional method of auction is held on a given day, where buyers bid for the property in real-time, whether that’s in person or remotely. The highest bidder on the day wins, and they are legally required to purchase the property – as long as the reserve price is met.

Unlike modern online auctions, traditional auctions are much more competitive due to the limited bid time. It also reduces the number of potential buyers since not everyone can attend the live auction.

How does a traditional auction work?

Once the hammer falls, the buyer is legally required to finalise the purchase. They must exchange contracts and pay a 10% deposit on the auction day.

From there, the buyer has 28 days to complete the purchase. If the purchase is not completed within this time frame, they will forfeit their 10% deposit. They will also likely have to pay the auction house and seller penalty fees.

What are the pros of the modern method of auction?

Speed of sale

A major pro of modern auctions is the speed at which you can sell a property. From start to finish, your property can be listed and sold within three to four months – in some cases, it can be as little as two months.

Most online auction houses will take two to three weeks to onboard a property into the auction. From there, the home will typically be listed for 30 days as it takes bids. Once the auction listing has ended, the buyer will complete the purchase within 56 days. If they are a cash buyer or already have a mortgage approved, this can be achieved in as little as 28 days.

Unlike selling via an estate agency, where listings can be active for months with no leads, the modern auction method can result in a speedy sale. It also reduces the chance of gazumping.

More time, flexibility, and convenience

A traditional auction can be an intimidating atmosphere for buyers. Between a loud ringman, highly competitive buyers, and a crunching time limit, it’s easy to find yourself feeling overwhelmed and out of your depth – particularly if it’s your first time.

With the modern method of auction, you have days and weeks to think about a bid and place it in the comfort of your own home at any time. It’s a much more relaxed and flexible approach to bidding, which favours the general public.

Sellers also benefit from this as they can decide exactly when their auction listing goes live and when they’d like the auction to end.

Larger pool of buyers, thus a greater chance of sale

Traditional auctions attract mostly cash buyers due to the time frame in which the purchase must be completed (28 days). Cash buyers only account for roughly 25% of all property purchases.

With a modern auction, the winner has up to 56 days to complete the property purchase. This is plenty of time to arrange funding, such as through a mortgage, which significantly increases the pool of potential buyers for the property.

High probability of completing sale/purchase

The modern method of auction puts time constraints on buyers to exchange contracts, pay the 10% deposit, and finally pay the purchase price. This ensures that they are unable to drag the process out with delays.

Suppose they cannot meet the deadlines set. In that case, they face harsh financial penalties such as losing their reservation fee and 10% deposit. The buyer and the auction house also have a legal agreement to complete the purchase.

All these things combine to make buyers more likely to follow through with the purchase. In comparison, the buyer can withdraw at any time with a conventional property sale since they haven’t made any financial or legal commitments – which is quite common.

It’s the future

Many tout modern auctions as the future of the real estate market. Due to the points mentioned above, there is a lower barrier to entry for prospective buyers. It’s also a relatively simple process for sellers, making it much more accessible and easier for all parties involved. This means we could see modern auctions become the primary way property transactions are completed.

What are the cons of the modern method of auction?

Reservation fee is liable for Stamp Duty

The 5% reservation fee charged to buyers is a ‘chargeable consideration’ for a property and land transaction. This means that it is liable for Stamp Duty.

For instance, suppose you buy a modern auction property for £300,000. After factoring in the reservation fee, your Stamp Duty will be calculated on £315,000 (£300,000 + 5% reservation fee). This can significantly increase the amount a buyer pays for their home, making it less financially feasible.

Properties rarely sell for their market value

Most properties sold on modern auctions do not sell for their market value. Instead, they typically go for around 85% to 90% of its worth.

If you’re a buyer, this is excellent news as you can find properties for ‘cheap’. But if you’re a seller, this is a con, as you won’t be maximising your return.

However, it’s important to remember that this reduced sale price is offset by the fast speed of sale and the high probability of completing the transaction. It’s a tradeoff some sellers are willing to make.

Fees can be expensive

There are numerous fees that both the sellers and buyers will face. For instance, the seller will have entry fees, legal pack fees, and estate agent fees. The buyer will have to pay a reservation fee on top of the purchase price, surveying and conveyancing costs, and some legal fees.

The total costs will vary depending on if you’re the seller and buyer and how much the property is worth. Sellers will face roughly the same cost as with a conventional property sale. Still, there are instances where they are considerably higher.

Not as final as traditional auctions

We’ve already mentioned that modern auction properties have a much higher chance of being sold than a normal estate agency sale. However, it’s not as final as with a traditional auction.

Although the financial commitment is heavy, the legal obligation isn’t. As with traditional auctions, purchases in modern auctions are legally binding, but there is a little wiggle room. This presents a problem, particularly when the seller is trying to secure an onward purchase using the funds generated from this sale.

However, this slight chance that the buyer may back out is part of what makes modern auctions more popular than traditional auctions. The idea is that lowering the barrier to entry and allowing buyers to back out in specific scenarios encourages more buyers to participate. This, in turn, increases competition and, hopefully, the sale price for the property.

Overvaluation

How property prices are calculated depends on various factors such as location, the property’s condition, its proximity to local schools, and more. Estate agents take these into account when issuing a recommended sale price.

However, auctioneers sometimes overvalue a property to increase their number of property listings. This is more prevalent with auctioneers that are associated with particular estate agencies.

This can result in properties that do not get bid on, or if they do, they do not meet the sellers’ reserve price. Therefore it’s vital to get a valuation from multiple sources to gauge how much your property is worth before sending it to auction.

What are the costs of selling at auction?

To sell at a modern auction, sellers are typically required to pay auction house entry fees, estate agent fees, and a legal pack. If you remove your listing from an auction, you may also have to pay a withdrawal fee. Let’s look at these in more detail.

Auction house entry fees

Auction house entry fees are paid to the auction team to cover costs for entering the home into the catalogue and any marketing done for the property. In essence, it’s a commission that the auction house charges for using its services.

The entry fee is usually paid upon the sale of the property. However, some auction houses may ask for a flat fee to be paid upfront, regardless of whether the property sells and how much it goes for.

Estate agent fees

Many homes sold in a modern auction are done through estate agents. They help make your listing look attractive and more professional, and they can market your property to potential buyers.

Usually, this will be your local estate agent who can market your property to its relevant buyers. However, you can also go with national estate agents who can help bring in a greater and more diverse pool of buyers.

In any case, you will have to pay estate agency fees for their services. Like auction house entry fees, this is typically commission-based and paid upon the sale of the property. Still, some estate agents may charge a flat fee payable upfront.

Legal pack

The legal pack consists of a property valuation report, floor plans and pictures, an EPC certificate, HM Land Registry documents, fixtures and contents, searches, deeds, terms and conditions, lease details, tenancy agreements, etc.

In a typical estate agency sale, most of this is done by the home buyer at their expense. With a modern auction, the seller bears this task and costs.

The main reason for this is that buyers must be made aware of all details related to the property before they bid. With an estate agency sale, buyers place offers, which are then subject to surveys, checking of legal documents, etc. With modern auctions, bidders are bidding to buy, which has financial and legal consequences.

As you can see, the legal pack is comprehensive and will require the services of a competent solicitor, which may be costly.

Withdrawal fee

Some auction houses may charge you a withdrawal fee if you remove your property listing from an auction. In some cases, this is as high as the commission you’d be liable to pay if the property had sold. In other cases, it’s a flat fee.

In total, with the auction house entry fees, estate agent fees, legal pack, and potential withdrawal fee, you’ll face about the same costs as with a regular property sale through an estate agent.

FAQs

Summary

The modern method of auction is a new twist on traditional auctions. Properties are listed on an online auction for 30 days, allowing buyers to bid from the comfort of their homes. This means that you can sell properties quickly, buyers have more flexibility with how and when they bid, and there is a high probability of completion due to the financial and legal commitments in place.

There are things to consider, though. For example, the various fees sellers and buyers face, properties rarely selling for their market value, and buyers being liable to pay a higher Stamp Duty. Regardless, modern auctions are here to stay, particularly as traditional auctions become less and less common.