How Does Modern Method of Auction Work?

Auctions have been conducted in more or less the same way for thousands of years, and they are certainly a tried and tested means of buying and selling property.

However, recently – and certainly within the last decade – there has been a notable diversification of auction methods.

In particular, the popularity of the traditional approach, otherwise known as an “unconditional” auction, is now being contested due to the rise of a new system.

But is this modern method of auction good for both buyers and sellers? How does a “conditional” approach compare with the more established method?

In this article, we take a look at what makes the two styles different, exploring the hallmarks of both, discussing their individual benefits and drawbacks and looking into the costs inherent in each.

How Do Vendors Sell Property via Traditional Auction?

Up until the 90s, when bidding at a property auction, a buyer would always be required to attend the auction house in person – or at least to call in and place a telephone bid or instruct the auction team regarding a “proxy” bid.

This approach is still very common and remains popular among both buyers and sellers.

The Traditional Process

As part of the traditional or “unconditional” system, auction buyers and sellers are required to attend the auction house in person at a particular date and time prior to the commencement of bidding.

Buyers must register first, providing identification and proof of funds, before they are permitted to place a bid.

Offers are informed by a “guide price”; an amount agreed between the vendor and the auctioneer in order to attract bids and to give a clear indication of the property’s estimated market value.

The guide price may be presented as a range – with a minimum and maximum suggested offer – or as a set amount.

There is also a “reserve price”, which is not revealed to the public. Again, this amount is agreed between the vendor and auction house. It represents the lowest acceptable bid for which the property’s owner will agree to sell.

Once the highest bid has been placed and accepted, neither the buyer nor the seller can drop out of the process. As soon as the “gavel falls”, the highest bid is considered part of a legally binding contract as long as it meets or exceeds the reserve price.

At a traditional auction, the buyer is required to pay a 10% deposit as soon as their bid is accepted. They then have a set period of time – usually 28 days – to complete the purchase.

Traditional Auction Pros and Cons

There are upsides and downsides to buying and selling property via the traditional method of auction. We’ll explore them here:

Pros of Traditional Auction

Speed

A sale via auction usually takes around 60 days from listing the property with the auction house to exchanging contracts. This is far quicker than a typical sale via estate agents.

Easier Planning

When a property is put up for auction, there will be a set date arranged on which bidding is to take place. This is usually around 30 days in the future – but may be more or less depending on the preferences of the seller.

This allows all parties involved to gain a fairly clear idea of what the length of the overall process will be – and thereby enables them to make firmer arrangements.

No Fall-Throughs

As mentioned, once the final bid is accepted at a traditional auction, the buyer and seller enter into a legally binding contract. This means that the buyer will be held financially liable for the promised amount even if the transaction fails in any way.

A 10% deposit is also paid on the day of the auction to secure this contract.

Cons of Traditional Auction

Inflexible

Generally, bidding at a traditional property auction takes place on a certain day, at a certain time.

While this is a positive factor for some parties – the seller, for example, as they will be able to say with reasonable certainty that they can pinpoint the date on which they will be able to find a buyer for their property – it can be very restrictive for others.

Yes, telephone, email and proxy bidding are both possible in traditional auction, but there is still a lack of flexibility that may be challenging to some potential bidders. As a result, sellers may miss the opportunity to present property to a wide enough “audience” to achieve a high price.

Of course, the fact that there is no “cooling off period” and that the highest bidder automatically enters into a legally binding contract on the same day as placing their offer can also be discouraging to some potential buyers due to the inherent inflexibility it engenders.

Financially Restrictive

As bidders at a traditional auction are expected to be able to enter into a legally binding contract and pay a 10% deposit on the day – then come up with the remaining funds within the month – many auction houses will not entertain bids from potential buyers who are reliant on a mortgage.

There are some that allow this approach, but it can be difficult to provide sufficient proof of funds. Documentation of this kind is usually requested upon registration, and an offer in principle or any other signifier of initial approval for finance is rarely acceptable.

Ideally, the buyer will have the money “to hand” before they are permitted to bid.

Potentially Costly

If you are a buyer, you will need to have everything in place before the date of the auction – or your bid will not be accepted. This means that you will need to have:

• Arranged a survey on the property in which you are interested
• Instructed a conveyancing specialist
• Budgeted for any required improvements
• Prepared to pay a 10% deposit immediately

Even after all of this, there is no assurance that your bid will win – which could mean a lot of money down the drain.

For sellers, too, the costs involved in selling at auction are often higher than typical estate agency fees, and while you can set a reserve price, there’s no guarantee that you will make as much for your property as you might have hoped – or that it will even sell at all.

With the rise of internet auctions and the fact that buyers relying on mortgage and other finance are now strongly in the majority, an alternative method is quickly growing in popularity. In the next section, we’ll explore the “modern method of auction”.

What is Modern Method of Auction in the UK?

We’ve explored the traditional style of auction – which, until recently, was by far the most commonly used. Now let’s look into what is called the “modern method of auction” – or “conditional” auction.

Many of these auctions are conducted online. Commonly, properties are listed for sale on a modern method of auction website around 30 days before bidding is due to close.

Potential buyers can usually place bids electronically right from the moment the listing goes live until the countdown ends.

Once the winning bidder is announced, they are required to pay a reservation fee of around 5% of the property’s value. This secures the property for a set period of time – usually around 28 days – while the buyer makes the required arrangements.

These may include instructing a solicitor, being approved for a mortgage, arranging a survey or any other actions that would usually need to be undertaken in advance when buying via the traditional method of auction.

Once the initial 28 days have passed, it is time to exchange contracts and pay a 10% deposit. After this, the buyer is then granted an additional period – commonly another 28 days – in which to complete.

The modern method of auction is also often referred to as a “conditional auction” due to the fact that placing the highest bid – and having it accepted – does not automatically place the buyer in a legally binding contract.

While the 5% reservation fee is non-refundable, it is still possible for a buyer to drop out if they are unable to secure the funds they require, or if surveys or solicitors’ checks uncover issues that they are unable or unwilling to rectify.

Modern Method of Auction Pros and Cons

Things naturally progress and improve over time through trial and error – and, according to many modern method of auction reviews – this new approach is a welcome revision of an older system.

However, your stance on conditional auction is likely to depend on your position within a transaction; whether you are approaching the matter as a bidder or a vendor. Here, we look at some of the upsides and downsides of selling and buying property at auction the “modern” way.

Pros of the Modern Method of Auction

Greater Accessibility

Far from being an “advanced” property auction method that takes a highly technical – and therefore exclusive – approach, the modern method of auction usually makes it far easier for a wider range of individuals to get involved.

As the process is usually handled online over an extended period of time, bidders will be able to make an offer whatever the other demands on their time or their access requirements.

Bids are usually accepted over a thirty day period when a property is sold via the modern method of auction, and may be made at any time of day or night.

Less Financially Restrictive

Thanks to the implementation of the 5% reservation fee system, the modern method of auction is generally more flexible for buyers who do not have the cash immediately to hand and therefore must rely on a mortgage or other financial assistance.

It also means that the risk to the buyer is lower, as they are not immediately tied into an official contract and therefore cannot be sued for the full amount due on the property if they are unable to access the funds required.

This means that more people than ever are able to consider buying at auction without the fear of running into legal or financial trouble.

Potential for Higher Offers

The period during which bids may be placed is far longer via the modern method of auction than via the traditional system.

There is also the potential for a lot’s information to be viewed – and to attract bids – by greater numbers of people, thanks to the highly accessible online platforms on which they are displayed and actively promoted.

On the whole, this tends to mean that it is far more likely for a property’s price to be pushed up by the sheer volume of bids being made. This means that almost any property is more likely to find a buyer – and to sell for a higher price – than would be the case via traditional auction.

Cons of the Modern Method of Auction

Longer Waiting Periods

Due to the extended period – of usually around 30 days – during which bids are accepted via the modern method of auction, buyers will need to wait for longer to know whether their offer has been successful.

Sellers will need to wait even longer for completion, as on top of the 30 day bidding period, there will typically be a 28 day waiting period while the buyer finalizes their arrangements, then an additional 28 day buffer prior to completion.

While this is still generally quicker than an estate agency sale, it is significantly longer than a transaction undertaken via the traditional method of auction.

Greater Levels of Competition

While sellers are likely to benefit from higher numbers of bidders vying for their property, the same cannot be said for potential buyers.

The longer a property is displayed online, and the more drawn-out the period of time during which bids are accepted, the harder it is going to be to beat the top offer.

This may result in bidders being “priced out”, and could lead to the falsely manufactured inflation of prices within certain lots.

Riskier for the Seller

Part of the appeal of the traditional method of auction was the fact that once the highest bid was accepted, the property was sold.

However, with greater flexibility, and with fewer legal implications holding the buyer responsible for completing the transaction, the risk to the seller is similar to that inherent in an estate agency sale.

While the modern method of auction may see a buyer lose out on their 5% reservation fee – and their deposit if they have reached that stage – there is still the chance that things won’t work out, and that the seller will still be left with a property to dispose of at the end of the auction.

Potential for Buyer / Seller Fraud

There are arguments for and against fraud being a bigger potential issue in conditional auction than in the traditional method, as it is really up to individual auction houses to impose suitable checks on both buyers and sellers.

As such, it could be argued that incidents of false identification documents and doctored proof of ownership or funds being presented to – and accepted by – a careless individual at a “live” auction house are just as likely as unscrupulous individuals managing to get them accepted by the administrators or automated systems of a website.

However, the fact remains that “modern method” auctioneers tend to accept bids solely online – making them more accessible worldwide and therefore more exposed to fraud and hacking than those working via the traditional method.

Traditional and Modern Method of Auction Fees

Both buyers and sellers are required to pay fees at auction – whether conditional or unconditional.

Here is what you can expect to pay when engaging with each type:

Traditional Auction Fees

This varies between auction houses. However, usually, the seller pays a commission to the auctioneer. The amount often equates to around 2% of the sale price.

The buyer is commonly charged an administration fee, which may range from £195 to £1,200 including VAT depending on the specific arrangement.

As mentioned above, the buyer will also need to pay a deposit – usually of 10% – once they are declared the winning bidder.

There may be additional charges applied depending on the stipulations of the specific auction house, so it’s always worth checking with the auctioneer before confirming.

Modern Method Auction Fees

In a conditional auction, there will often be an up front “auction entry fee” payable by the seller, which may reach £1,000 in some cases.

There are additional “auction house fees” besides, to cover administrative costs. These may be payable by the buyer or the seller, or – if the auctioneer uses a “hybrid” approach – divided between the two.

Again, these fees vary significantly between auctioneers.

Further to this, buyers will be required to pay a reservation fee – as mentioned earlier – which usually equates to around 5% of the final purchase price. Further down the line, they will also need to pay a 10% deposit.

Both

Certain charges are payable when using either method of auction.

There will be legal fees on both sides to cover the conveyancing process and the creation of the sellers’ “legal pack”, both in the modern method and traditional auctions.

If the property is being taken to auction by an estate agent on behalf of the seller, there will also be agency fees to pay – the extent of which will be determined by the property sales specialists chosen.

Finally, in either type of auction, stamp duty will be charged to the seller as applicable.

Any Questions?

There are a great many benefits to choosing the modern method of auction, but there are also a number of drawbacks. However, the same can be said for traditional auction.

If you are interested in taking your house to auction – or if you require any advice on selling property in a different way – contact our team today.

We will be more than happy to assist you, and to provide you with a free, no obligation valuation and cash offer, so that you’ll know precisely how much your property is worth before you make the move to sell it.

Whether you’re planning an auction sale or for an organisation that will sell your house fast for cash with no legal or estate agency fees charged, don’t hesitate to get in touch with the specialists at Springbok Properties.