Modern Method of Auction

Modern Method of Auction
Contents

Modern Method of Auction (MMoA) continues to grow as a popular means of buying and selling property.

It represents a legitimate alternative to the super time-sensitive nature of traditional auctions and fast cash house sale options, without the uncertainty that comes with estate agency (“private treaty”) sales.

In this article, we’ll explore exactly what Modern Auction offers – delving into the key differences with estate agency sales and the main pros + cons alongside the processes involved.  We also examine where this sales method sits within the future of the UK property sales industry.

What is Modern Method of Auction?

Modern Method of Auction Definition

The Modern Method of Auction (MMoA) combines the elements of traditional auctions with online technology. Crucially, by extending exchange and completion timeframes after the fall of the hammer, modern auctions open up the sale of properties to a broader range of buyers.

These auctions can be broadly described as a cross between traditional auctions and estate agency sales – with a few key characteristics, namely that:

  • Buyers have a longer period of time to exchange contracts after the hammer (or “gavel”) falls
  • There’s a period of “exclusivity” or an option to purchase
  • The auction events are run online (and not “in the room”)
  • Bidding periods tend to be spread over longer periods
  • Buyers pay a reservation fee to secure the property. This goes to the auctioneer and any estate agency partners and not towards the purchase price.

What is Modern Method of Auction?

Modern Method (Conditional) vs. Traditional (Unconditional) Auctions

Due to the protracted time frame for exchange, modern auctions are also known as being “conditional”. The condition is effectively that the buyer can seek to arrange finance – such as a mortgage – to then exchange and complete on the sale.

This lies in contrast with “unconditional” (or traditional) auctions where, once the gavel falls, the highest bidder is legally bound to pay the money they have offered for the property in its entirety. In these cases, agreements are signed and the deposit (typically 10%) is paid on the same day, with the rest of the funds usually due within 28 days.

For this reason, conditional ways of selling make properties more accessible to bidders who are not cash buyers or using auction bridging finance, for example.

Until the point of exchange, modern auction buyers can still withdraw from the sale. However, in reality, this rarely occurs as buyers would have paid a non-refundable reservation fee of anything up to 5% of the property’s value (sometimes more).

There may also be “abortive” legal fees which can go into the thousands depending on the conveyancer’s charging policy.

Some Key Distinctions of Modern Method Auctions

Even amongst frequent property sellers, confusion remains about how modern method auctions actually work.  It’s therefore worth running through some of the key differences…

Modern Auctions Are Mostly Online

Modern Auctions Are Mostly Online

Modern auctions are usually conducted online (as opposed to “in the room”). Auctioneers operating in this space would often have a platform where advertised properties are displayed.  The listings often include:

  • Photos, floorplan and property description
  • The energy Performance Certificate (EPC)
  • Auctioneer contact details to book viewings
  • A downloadable PDF brochure
  • Modern auction terms + conditions
  • Information on buyers’ fees
  • Buyers guides
  • Pre-auction offer options

Extended Auction Bidding Periods

Extended Auction Bidding Periods

While traditional auctions typically take place at a set date and time, modern method auctions may be spread over days or even weeks.

Most modern auctioneers report, however, that bidding activity tends to spike in the last few hours before the online hammer falls.

Can be Run by Estate Agents

Can be Run by Estate Agents

Modern auctions were initially started by companies such as I Am Sold, Whoobid and Bamboo Auctions. Their principal model was to partner with estate agents with stock that was struggling to sell on the open market.

This means that the agent can still deal with buyer enquiries, organise viewings and undertake other standard processes but ultimately sell the property through the auctioneer’s platform.

Nowadays, many well-established auction houses incorporate modern auctions alongside their traditional counterparts.

Conditional Nature of Sale

Conditional Nature of Sale

With traditional auctions, once the hammer (or “gavel”) falls, the buyer typically pays a 10% deposit and effectively exchanges contracts.

This contrasts with the modern method where, at the auction close, the buyer will pay a non-refundable fee and then have a period of time – typically 28 days – to legally exchange contracts.

Whilst this makes these sales somewhat less secure, in reality, it’s rare for modern auction transactions to collapse.

Reservation Fee

Reservation Fee

The reservation fee is a payment required in a modern auction once the highest (winning) bid has been placed.

As the name suggests, this sum serves to “hold” the property. The buyer then makes the required arrangements prior to the exchange of contracts. This means that the modern auctioneer will mark the property as Sold STC or Under Offer.

In a modern auction, it is possible for issues to arise that prevent the sale from going ahead. Should this be the case, the buyer loses the non-refundable reservation fee and the property is typically remarketed.

Modern Method of Auction vs. Estate Agency Sales

Several questions come up when sellers are choosing between using a modern method auction house versus a traditional or online estate agent.

Below, we highlight some of the key differences…

A Faster SaleA Faster Sale

Selling through an Estate Agent

Even if they can find you a buyer quickly, estate agents can rarely guarantee when a sale will complete.

Selling via Modern Auction

Set deadlines and other controls enable you to know when and how the sale will proceed.

Buyer CommitmentBuyer Commitment

Selling through an Estate Agent

It’s very easy to make an offer on a property via an estate agent, but not actually commit to proceeding.

Selling via Modern Auction

Placing the obligation to pay a reservation fee shows a clear commitment to moving forward.

Sales PricesSales Prices

Selling through an Estate Agent

Whilst there may not be a definitive completion, sellers can optimise the price achieved for their properties.

Selling via Modern Auction

Modern auctions can allow for properties to sell for close to market value without compromising on security of sale.

Fair and True Market ValueFair and True Market Value

Selling through an Estate Agent

Estate agents often price speculatively to win business which can sometimes backfire with a property that struggles to sell.

Selling via Modern Auction

Modern auctioning properties allows buyers to “battle it out” and determine their real market value.

Achieving the Best Possible Sale PriceAchieving the Best Possible Sale Price

Selling through an Estate Agent

Estate agents can sometimes fail to drive the price upwards simply to get the sale over the line and secure their commission.

Selling via Modern AuctionModern auctions have inbuilt mechanisms to create a competitive bidding environment.

CertaintyCertainty

Selling through an Estate Agent

Buyers can withdraw from the sale or drop their offer.

Selling via Modern Auction

Modern auctions stipulate that buyers must move forward with the agreed purchase price or lose their reservation fee.

FeesModern Auction Fees

Selling through an Estate Agent

Sellers will pay estate agency fees of up to 3%.

Selling via Modern Auction

Some (but not all) modern auctioneers place the responsibility of the fees over to the seller.

What Are the Pros and Cons of Modern Method Auctions?

As with anything new, questions naturally arise from both buyers and sellers as to whether moving forward with something like a modern method of auction is worthwhile.

Below, we break down some of the most referred to advantages and disadvantages for both parties involved in the transaction…

Pros of Modern Method of Auctions for SellersPros of Modern Method of Auctions for Sellers

Larger Pool of Prospective Buyers

Almost all modern method auctioneers manage the bidding process online.

It therefore becomes possible for a wider spectrum of retail buyers to get involved – such as those based abroad or unable to travel to auction rooms or in-person events.

Interested parties can bid online at any time of the day or night – and a larger audience often means more buyer competition and a higher eventual selling price.

These days, traditional auctions regularly take place online, but the common exclusion of buyers using conventional finance still renders them more restrictive than many modern auction sales.

High Chance of Selling

As long as the property is priced appropriately (and non-speculatively), most modern auction houses achieve high levels of success.

This is supported by legal mechanisms that minimise the risks of buyers pulling out or playing games.

It’s Relatively Quick

It can take just a few weeks (or potentially even days) to secure an offer via modern auction compared to several weeks or even months using an estate agent.

Your property can be put up for sale literally within hours and there’s no need to wait weeks for the next traditional auction sale.

Longer Lead-Up to the Big Day

An attractive property may lead to rival bidders pushing one another up and up – until the final sale price is higher than was initially anticipated.

Generally, the modern method of auction tends to see a number of weeks pass between the property being listed and the competitive bidding process coming to an end.

This subsequently presents a longer timeframe in which this cumulative increase may take place. This potentially leads to a more lucrative final sale price.

No Sellers Fees

In many cases, there are no auction fees to the seller. Instead, costs are covered by way of a buyer’s fee. This means the seller gets to keep 100% of the sale price of their property.

However, it is worth noting that some auction houses have other structures that split the fees between buyer and seller in an attempt to create more of a “level playing field”

“This was in response to a notable increase in buyer complaints about taking on the extra costs in addition to stamp duty and solicitor fees,” comments James Durr of Property Solvers Auctions.

No Gazundering

In an estate agency sale, there is always the risk of “gazundering”. This is when the buyer drastically drops their offer at the last moment.

The controls within modern auctions prevent this from being possible.

No Negotiation

As part of the Modern Method of Auction – and, indeed, any auction, the buyer pays what is offered as the winning bid.

It’s therefore impossible for a prospective buyer to make a “lowball offer” or reduce their bid after the auction ends. They also cannot request anything else be “thrown into” the deal.

Attractive for Investors

Property portfolio sellers can also dispose of stock in a more streamlined manner via the Modern Method of Auction. It’s certainly possible to achieve a gross sales price reasonably close to market value without compromising too heavily on the security of sale.

Cons of Modern Method of Auctions for SellersCons of Modern Method of Auctions for Sellers

Not As Fast or Secure as Traditional Auctions and Fast Cash Sales

Although modern auctions offer a more efficient way of disposing of property that shortens completion times relative to estate agency sales, the extended period for exchange may be an insufficient amount of time for some sellers.

It’s also worth noting that buyers, albeit rarely, can withdraw from the sale with lower financial losses and negative legal repercussions relative to traditional auctions.

Security Issues

Poorly managed (and often unregulated) modern auctioneers have been known to lose deposits and reservation fees.

Here, it’s a case of checking the auctioneer’s reputation and registration to the relevant auction trade bodies (such as PropertyMark’s Client Protection Scheme).

Unserious Buyers

Although the number of potential bidders increases, sellers may find that the number of “tyre kickers” and nosey property viewers increases.

Good auctioneers and estate agents should, however, be able to weed out the ones that are often easily recognisable as time wasters.

Viewings and Open Day Disruption

Related to the above, sellers will still have to put up with multiple viewings and open days.  This is not the case with quick cash sales where only 1 or 2 viewings are required at most.

Estate Agency Bottlenecks

Badly organised estate agents can often cause unnecessary delays and other issues – often due to not having experience in the auction space.

For this reason, it’s often recommended working with an agency with an established track record and proven expertise.

Over Valuations

It’s a well known fact that estate agents and auctioneers tend to “over egg” estimated guide and reserve prices to win business over their competitors.

Sellers should keep abreast of local market conditions, using data sources such as HM Land Registry (rather than estate agents and modern auctioneer’s sometimes ill-informed opinions).

Achievable Price is Often Lower

Unless it’s a particularly “hot” market, sellers usually have to be willing to accept between 85% and 90% of the property’s market value.

Pros of Modern Method of Auctions for BuyersPros of Modern Method of Auctions for Buyers

Greater Flexibility

Buyers who are restricted by work or personal schedules, mobility issues or travel requirements will naturally prefer to bid in online auctions.

What’s more, modern auctions allow for more flexibility to vary the completion date (in agreement with the seller).

Mortgage Buyers More Welcome

Due to their unconditional nature, it is very difficult for mortgage buyers to be successful in traditional auctions.

With modern auctions, the longer timeframe to exchange contracts means that securing mortgage finance is a much more feasible option.

As a result, buyers can avoid the often high bridging loan fees.

Reduced Liability

Although there is a risk of losing the reservation and legal fees, the buyer is not legally required to take ownership of the property and pay the total purchase price before exchange of contracts.

A Reasonably Guaranteed Sale

Once a property sells at modern auction, you can be fairly confident that the seller will complete (drop out rates are low).

It Helps to Establish a Fair Property Price

Selling by auction helps establish a property’s “true” value. This is likely to be increasingly important during tricky times of the market, when some people feel property prices might stagnate.

Reduced Likelihood of a Sale Falling Through

Because of the restrictions and financial penalties stipulated in modern auction contracts, a sale falling through at auction is far less of a threat than is the case when selling via an estate agent.

While the precise likelihood varies depending on whether the method of auction is “modern” or “traditional”, it is still significantly reduced.

Potential for Prospective Buyers to Make Savings

Many modern auction buyers end up paying a purchase price that is well below market value. Of course, this depends on the condition of the property, any legal covenants to which it might be subject, its location, type alongside a range of other factors.

Faster than Estate Agency Sales

Modern auctions are a great way to acquire properties as part of buyers’ or investors’ portfolio expansionary plans.

Buying this way majorly minimises the risk of getting gazumped.

Chain-Free Transactions

What’s more, with no chain involved, there is no likelihood of problems further up that chain slowing things down – or causing a sale to fall through entirely.

Cons of Modern Method of Auctions for BuyersCons of Modern Method of Auctions for Buyers

Additional Stamp Duty Liability

Buyers are often unaware that, when it comes to stamp duty calculations, any auction fees paid are effectively included in the purchase price.  Say, for example, a property is purchased for £300,000 with a 5% (£15,000) auction buyers fee, stamp duty will be calculated on the gross figure of £315,000.

Burden of Taking on Seller Fees

Many modern auctioneers use the 0% fee tagline to attract sellers often forgetting that buyers become reluctant to effectively take on fees that can sometimes reach tens of thousands of pounds.

This has arguably become the biggest off-putting factors that many investors and buyers have regarding modern auctions.

Conveyancers Do Not Take Modern Auctions Seriously

Many conveyancing solicitors feel that modern auction transactions can be treated in the same way as estate agency sales and are not as legally watertight relative to their traditional counterparts.

The result can be slower processing times that can stretch out further than is necessary.

More Challenging to Trade Properties

For professional property traders, modern auctions limit the ability to dispose of stock in a sufficiently timely manner.  Many prefer to sell via unconditional (typically 28 day) auctions despite achieving lower margins.

Sellers Could Withdraw from the Sale

Whilst fairly rare in occurrence, sellers can theoretically still pull out of the sale even after the hammer has fallen (prior to exchange of contracts).

However, more auctioneers are including penalty clauses into their sales contracts to control this risk somewhat.

Note that, should this situation transpire, the buyer’s reservation fee will usually be returned in its entirety.

The Modern Auction Process

Below we’ll break down the essential steps of the modern auction process, many of which overlap with those of unconditional sales…

Seller Expresses Interest

Seller Expresses Interest

Sellers will either contact the auctioneer directly or discuss this option with their estate agency, particularly if the property has not been gaining enough traction on the open market.

Property Valuation

Property Valuation for Modern Method of Auction

Decent agents / auctioneers will start by looking at what the current market valuation using recent comparable sold prices via HM Land Registry and Royal Institute of Chartered Surveyors (RICS) Red Book standards.

The valuation process will also take into account the size, condition and specific location of the property whilst also factoring both micro (local market) and macro (wider economic) factors.

Property Viewing

Property Viewing

Although not entirely necessary, some auctioneers visit the property to confirm the valuation and run through the process.

This may coincide with the auctioneer’s representative taking photos + measurements for the floorplan and producing the Energy Performance Certificate (EPC).  Some sellers also request for a professional RICS survey say, for example, if the property sale is going through probate.

Agree on Reserve and Guide Prices

Agree on Reserve and Guide Prices

Simply put, a reserve price is the minimum amount a seller is willing to accept at auction. If bids do not reach this amount, the property is withdrawn and does not sell. This is an unofficial and unpublicised amount agreed between the seller and the auction company.

Reserve prices tend to be calculated based on factors such as market value and potential.

The guide prices are the values that are usually displayed openly on the auctioneer’s listings and other marketing material.

Confirmation of Modern Auction Sellers Fees

Confirmation of Modern Auction Sellers Fees

Much here will depend on the modern auctioneer’s own policy.

Some will explicitly state that the buyer will incur a fee and there will be absolutely no charges on the seller’s part.  Others may have some kind of set-up fee or commission split between both parties.

AML / Ownership Checks + Modern Auction Sales Agreement

AML and Ownership Checks + Modern Auction Sales Agreement

The auctioneer will need to undertake ownership checks via the HM Land Registry and request identification (typically in the form of photo ID + proof of address).

Most auction sales agreements / contracts are sent out using e-signature software such as DocuSign or Adobe Sign.

Legal Pack Created Prior to Sale

Legal Pack Created Prior to Sale

It’s highly recommended that the seller should instruct a specialist solicitor to create an auction legal pack.

This collection of documents is intended to contain information such as the Land Registry title register / plan, conveyancing searches, Energy Performance Certificate (EPC), any information relating to legal covenants, tenancies, leasehold management pack (where applicable), Law Society forms any other vital legal forms and the terms and conditions of sale.

Solicitors may also draft Special Conditions of Sale which buyers should read carefully to avoid any unexpected financial or legal implications after the fall of the hammer.

Photos, Floorplan, EPC and Description

Photos, Floorplan, EPC and Description

As with any auction or private treaty sale, the instructed agent will need to obtain professional photography alongside a floorplan.

Where necessary, an EPC will also need to be produced.  Note that these certificates expire every 10 years and a new one may be required.

The agent will then be able to draw up a property description which will contain all the relevant details alongside information on how the modern auction will be conducted, fees, full contact information etc.

Property Listing

Property Listing

Modern auctioneers will advertise on the prominent portals that get the most amount of traffic. These include RightmoveZoopla, On the Market and Prime Location.

Established firms will also have a recognisable brand, an investor / long-term clients database and other independent channels to attract suitable buyers.

Enquiries, Viewings and Open Days

Enquiries, Viewings and Open Days

The auctioneer will then deal with questions and queries that come through from prospective buyers.

Individual viewings and open invites for multiple viewers to visit the property can then be arranged right up to the close of the auction. Note that, in some cases, viewing is not possible prior to purchase.

Buyer Identification and Registration

Buyer Identification and Registration

All reputable auction companies need to see formal identification from all parties involved before being allowed. This is a legal requirement aimed at preventing money laundering and other fraudulent activity.

Bidders will also have to provide details of the conveyancing solicitors acting on their behalf.

Shadow or “Holding” Payment

Shadow or "Holding" Payment

Following registration, the auctioneer will typically ask the bidder to provide their credit card details.

Should he/she or the corporate entity win the auction, the reservation fee can then be taken automatically.

Auction Bidding Opens

Auction Bidding Opens

All auctions pit prospective buyers against one another to make offers.

Similar to eBay, modern auction buyers can bid anytime. This period can range from a day to even a few weeks. Generally, however, most of the bidding activity occurs in the last few hours of the auction.

The auctioneer should then drive prices upwards incrementally and communicate with bidders during the process.

Auction Winner Confirmed

Auction Winner Confirmed

The auctioneer announces the winning bidder once the “gavel” falls. This means that the property is sold subject to various legal processes being completed.

The highest bidder wins, and the property is considered sold and taken off the market. At this juncture, the auction buyer’s fees will be taken

Property Unsold?

Property Unsold?

Should the property not reach the reserve price, the auctioneer will typically contact the bidders to see what kind of offers they would like to make.

It’s entirely at the discretion of the seller to move forward (or not) with what will often be a lower offer price.  Should the seller proceed, the transaction can still proceed under modern auction conditions.

Most modern auctioneers will also be readily willing to relist and further promote the property free of charge.  They may also look into changing strategies to attract more buyers. However, in most cases, reducing the guide and reserve prices is the best way forward.

28 Days to Exchange

28 Days to Exchange

Assuming the property has a winning bidder, the auction house draws up and circulates a reservation agreement and Memorandum of Sale amongst the respective conveyancers. This documentation will clearly state the dates of exchange and completion (payment of the final sale price).

During this period, the buyer will need to organise cash, deposit and mortgage finances to be able to complete in time.

28 Days to Complete

28 Days to Complete

One of the benefits of modern auctions is that the auctioneer undertakes a lot of the hard work before the bidding and exchange of contracts. Completion is then essentially a legal formality.

Note that a buyer’s failure to meet the completion date can often result in associated penalties as stipulated in the auctioneer’s terms and conditions.

Is the Modern Method of Auction The Best Way Forward for Property Sellers?

Weighing up on going ahead with using a modern auction house often depends on how urgently you need to sell. In most cases, how much you are willing to sacrifice the end sales price is also an important consideration.

If time is of the essence, traditional auctions and fast cash sales through private buyers may make more sense.

Here, you’ll be dealing with serious (often 100% cash) buyers who are willing to take the risk of bypassing the rather illiquid nature of property sales in return for a discount. The property investment industry often refers to this as as buying “below market value”.

If, however, you want to optimise the price – selling via private treaty (i.e. an estate agent) is typically the best option.  However, it’s important to understand the risks such down valuations, sale fall throughs, legal hurdles to name a few.

Why Opt for the Modern Method of Auction?

Somewhere in between, you have the relatively new concept of modern auctions where sellers can benefit from a greater flexibility and security without compromising too heavily on price.

Whilst many – particularly in the legal industry – question certain aspects of selling, modern auctions look set to stay as a potential means to push property sales through what can often be a frustratingly inert market.