Buying property at auction has become an increasingly popular option for property investors in recent years, with many able to pick up some absolute bargains.
With the explosion of the UK property market in recent years property investment has become absolutely red-hot once again and many like attending auctions in order to look for great property investments that they may then be able to either sell on or keep to let as a buy-to-let property,
Even throughout the pandemic, UK property held remarkably well and even flourished, with many areas in the UK in 2020 seeing price rises of 8% or more. Property developers, investors and landlords are now flocking to the market to expose themselves even more to a sector that has been incredibly lucrative recently.
Most predict that UK property will see even further success in the years to come, with a distinct lack of supply and almost parallel surge in demand meaning that rents, prices, and yields are all heading steeply upwards.
Before the pandemic, but certainly now more prevalent, is a modern method of auction. These are different to traditional property auctions, and we’ve put together a guide here to explain the modern method of auction for you, as opposed to traditional.
What is a modern method of auction?
As opposed to a traditional auction, the modern method of auction broadly takes place online, or in digital spaces.
What usually happens is an estate agent is appointed on behalf of the seller, who then arrange viewings for potential buyers either in person or online. Any potential or interested buyers will then be encouraged to place a bid on the property in the form of an online bid.
The property seller can set certain rules for the sale of the property, such as a reserve price, a start date and also, they can set the duration of the auction. In most circumstances the auction will take around 30 days, but this can be quicker if the seller is looking for a quick sale of the property, but this will be made clear by the auctioneer and the estate agent.
When a bid is made and is subsequently successful the buyer will be notified that they’ve been successful and required to pay a non-refundable reservation fee, often around 5% of the sale price. This is usually used to cover any costs incurred by the auctioneer and won’t, generally, be taken off the total outstanding price of the property.
If you’re liable for stamp duty on the purchase of the property, you should be aware that the 5% fee will also be included in this calculation too, so should be budgeted for.
One of the main advantages of the modern method of auction is that the buyer has more time to complete the payment and arrange any finance or funding in between. Rather than the standard 28 days provided in a traditional auction, the modern method allows 56 days which is 28 days to exchange contracts and a further 28 days to complete the purchase of the property.
What is a traditional method of auction?
Traditional method of auction is the main method of auction used in most examples and differs to the modern method, or a modern auction.
A traditional property auction will involve an auction house publishing a catalogue of lots, or properties, around a month in advance with a guide price of what the seller may think the property is worth. This is different to the reserve price, which is the minimum the seller would be willing to accept.
Once a date is arranged for the auction, potential buyers are encouraged to come along or attend online on the day of auction and bid for the property. At the end of the bidding process, usually the highest bid is the winner of the auction and are then committed to exchange their contracts on the same day.
They then have 28 days to complete the purchase of the property as the buyer, and this means they generally have less time to arrange finance for their property, whether that’s a mortgage or, as is often the case, bridging finance to cover the time limited buying period before arranging long term finance later on.
Examples of modern method of auction
To give you an idea of what the modern method, or modern auction process may look like, here’s a quick example.
A client approaches an estate agent interested in a property that they’ve seen for sale via the modern method of auction, or via modern auction, as it may be called.
A viewing is arranged online for the client to view the property and informed that the guide price is £100,000. The client is interested and places a bid of £105,000. After 15 days the auction ends, and the client is informed they’re successful and have won the auction.
Upon the completion of the auction, the client is required to pay a reservation fee of £5250, which isn’t taken off the price of the property due. After paying this fee, the client then arranges for a mortgage on the property, and exchanges contracts after 28 days.
The mortgage is approved, and the funds are released via solicitors and the price of the property, plus stamp duty, is paid 56 days after the completion of the auction.
Modern method of auction pros and cons
Of course, as with any type of property sale, there are pros and cons to the process. We’re always honest with clients about these, about the risks and about the requirements, so you can be confident that we’re able to provide you with the advice you need to make a decision.
Pros of the modern method
Legal commitment to purchase – For buyers, there is more flexibility in the fact that there is no legal commitment to purchase until the 28 days has passed and they are required to exchange contracts, effectively entering into a legal contract to complete the purchase. Not that, as a buyer, you’re intending to pull out, as you’ll have paid a 5% fee that’s non-refundable, but if the worst happens and something goes wrong then you’re not open to legal action.
More time for buyers – In contrast to traditional auctions, buyers have much more time to arrange their finance and complete the purchase of an auction property. In traditional auctions the buyer is required to exchange contracts on the day and complete payment within 28 days. In the modern method, you’re given 56 days to complete the process.
More flexible for bidders – Rather than having to be in a specific place at a specific time, bidders can enter the process from anywhere and can get involved at any point along the 30 day modern auction. This allows more time and more flexibility for buyers who may be considering purchasing the property.
Cons of a modern auction
Reservation fee – Whilst in context this is perhaps preferable to the commitments of exchanging contracts on the day with a traditional auction, the reservation fee can still represent a significant cost on to the total price. The fact it’s also non-refundable and simply covers the auctioneers costs and doesn’t come off the sale price of the property is also something of a disadvantage
Legal commitments – From a seller perspective, they may be reticent to choose the modern style of auction is that whilst the buyer will certainly have a financial interest, they’re not under a legal obligation to complete the sale until 28 days have passed and they’re due to exchange contracts.
Buying property at auction is likely to always remain popular, because more often than not the types of property that are sold at auction will require some work to be done, meaning they can’t be sold on the open market.
Further to that, many of the lots at a property auction are repossessions from banks or finance companies, meaning they’re more likely to take a hit on their return so long as they can acquire some of the liquidity back from the asset. Banks and finance companies don’t like having assets on their books that aren’t providing a return and would much rather have the liquid cash back on the books to lend back out instead.
In the interest of the buyer, they’re getting property that is often sold significantly below the market rate that it could sell for with a bit of work done to it, hence why property developers so often buy through this method. If you’re experienced and can do the required works within a set budget then you can make a tidy profit.
Ultimately, both the traditional, and the modern, types of auction have their benefits and draw backs. In post-pandemic times it’s quite likely that online focused auctions will become much more popular in the long run, and so it’s probably worth getting used to them as time goes on.
As a brokers, we’re well versed in both these methods of auction and are able to provide a range of products that can help you if you’re looking to invest in property this way, so it’s well worth picking up the phone and speaking to a broker if you’re interested.