Scott Rea from Andrews Property Group in Hastings has been selling homes via the modern method of auction for around a year. Here’s how it works.
There is a newer way of buying and selling property on the block. It is called the “modern method of auction,” to avoid confusion with its older brother the “traditional method”.
Auctions have long been the preserve of property developers and cash buyers.
But the modern method (also known as conditional auctions), has opened auctions up to residential buyers who may need a mortgage and more support through the process to secure their new home.
Q. Please start by telling me how you explain the modern method to your clients?
SR. We explain it is a new, secure method of sale.
Unfortunately, a lot of TV programmes present auctions as homes that need a heck of a lot of work. But this is inaccurate and can put people off.
We work directly with the UK’s largest auction company, iamsold, to ease the fears and concerns that might come with this method of sale.
The modern method is great for sellers because it will draw in serious buyers and is, in comparison to a private treaty sale, a fast and secure way of selling.
A seller might have a house or an apartment in ultra-modern condition, but it might have been on the market previously and not sold. So, I’d say to a seller, let's try this option for you.
It’s great for buyers too as it offers a fast and hassle free sales process with no risk of being gazumped.
Q. How does the modern method work?
SR. It’s basically eBay but for houses.
A property is marketed online, you go and view it, then you bid on it online.
Once there are enough people “watching” the property online, the auction house sets down a countdown timer. That's when the bids start coming in.
Bidders might just sit there on their desktop computer or on their phone. They could be sat on the bus, just placing a bid on a property.
It’s transparent. It’s the opposite of sealed bids, because you can see what everyone else is bidding. This might drive the price up for the seller, but it also means the buyer knows exactly where they stand and the kind of money others are prepared to pay.
If you're the successful bidder you get a phone call from the agent to say congratulations you've been accepted. They'll have some paperwork for you to fill in and then they'll arrange for the reservation fee to be to be paid and transferred.
It’s as easy as that.
In some cases, a buyer might make an attractive offer pre-auction to secure the property then and there. At which point the offer is relayed to the seller and the home taken off the market.
Q. Are buyers open to the modern method?
SR. Buyers need a lot of education on the process of buying property this way.
As soon as they hear the word auction it can sometimes be a turn off for them.
First-time buyers instantly think that they can't buy via an auction, but once we've had that conversation it eases their mind and we go from there really.
We reassure them that the yes they can purchase at auction with a mortgage.
Q. Can any property be sold this way?
SR. Yes it can. In my personal opinion, it's more attractive for the lower end properties that will attract first-time buyers and landlords building portfolios.
Our agency is based down on the coast in Hastings where property prices aren't as high as in London. Deposits are a little bit lower on a lower price property, and this works well.
For more valuable properties, auctions can be a bit more difficult because not a lot of people have the reservation fee to put down up front on a half a million pound house.
Q. What is the reservation fee?
SR. On the day a buyer’s bid is accepted they have to pay a reservation fee of 4.2% of their bid, or a minimum of £6000, whichever is the bigger number.
It all depends on the price they have bid. Most importantly, the reservation fee comes on top of the amount a buyer will pay. It’s not deducted from the amount bidded.
Q. Do buyers mind paying a reservation fee on top of the purchase price?
SR. Most buyers understand that it's additional. Obviously, there are other things to think about. It can push up things like their stamp duty.
Again it's part of an education process. Some people won’t want to pay it, but nine times out of 10 the property is priced competitively anyway.
It's just part and parcel of educating buyers on the auction process. They simply need to take into account the reservation fee before making a bid.
Q. How long does it take to buy this way?
SR. The purchase needs to complete within 56 days of a bid being accepted by the seller.
But if the buyer needs to secure a mortgage, it’s possible to be flexible with adding on additional time to accommodate lenders.
Q. Are mortgage lenders happy to lend against auction properties?
SR. In our experience, yes they are. We haven't had any buyers whose lenders have said no.
Obviously we're not the ones lending, but so long as the figures all stack up in terms of deposits, the earning power of the buyers and the value of the home, there’s no reason why a bank shouldn’t be able to offer against a home sold at auction.
Q. What are the main advantages of the modern method?
SR. For the seller it’s the fact that it’s a fast and secure sale that is unlikely to fall through.
For the buyer, you know you're not going to get gazumped once you've paid the reservation fee.
Another major advantage for buyers is the auction packs that are provided. Unlike with an ordinary sale where a lot of legal work is done after an offer is made and accepted, with the modern method there's a legal document that's publicly displayed on the property advert.
This means a lot of legal work is done up front.
Any interested buyer will get the legal pack for free. So instead of finding out the nitty gritty weeks down the line, when it could potentially put them off, important legal information is provided before bids come in.
This means a buyer can make an informed decision about going forward with the property and the seller is pretty much guaranteed a quick sale.
Q. Can buyers view properties for sale at auction?
SR. Yes, absolutely. As an estate agency, we do the marketing and show prospective buyers around the property in the normal way.
It’s only once bidding begins that it’s different.
Things are a little bit different now with Covid-19 restrictions in place, so there's a little bit more time being spent with an applicant before they actually view a property in person.
We're also offering virtual tours, so that is taking a bit longer.
Q. How does the online auction process work?
SR. Going online has eliminated the whole, you know, auctions in a hotel lobby, an auctioneer lifting a gavel up in the air. You can do it from the comfort of your own home.
Buyers can wait until the last minute or they can make an offer prior to it going to auction. Each time a bid is made, however, the timeframe is extended, so anyone who is interested has time to make their bid.
Q. Why did you start offering the modern method of auction?
SR. We have a problem down here in Hastings with fall through rates. Modern auctions mean we can offer our clients a more secure sale.
As you probably know, around 30% of sales by private treaty fall through. Whereas for the modern method of auction, only 5% of sales fall through. That is a massive, massive gap.
Q. How much of your stock goes via this method rather than via an ordinary sale?
SR. Around 20 to 30%.
Q. What are the major misconceptions about auctions?
SR. There is a perception that homes sold at auction will need completely updating or potentially have huge structural issues.
Yes this home might be for sale via the modern method of auction, but it's not because it's a terrible property. The seller just wants a quick sale.
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