Mortgages

Modern Method of Auction – What is it? How does it work?

Modern Method of Auction

Purchasing property via auction has become increasingly popular over recent years due to a number of reasons including the speed of the property transaction, easier access to quick finance methods suitable for buying at auction as well as the cost savings possible.

The speed of the transaction is one of the biggest benefits to purchasing property via auction as the transaction can typically be concluded within 28 days, compared with at least a 12-week duration within a traditional estate agent property purchase.

This guide will explore the process of purchasing property at auction, as well as a comparison between traditional auction processes and modern methods and looking at what needs to be prepared in advance of bidding at an auction.

How Does a Traditional Property Auction work?

Traditional methods of purchasing property via auction would typically involve advertisements in printed newspapers, via estate agents either online, via shop windows or newsletters, ahead of a traditional auction.

All types of property can be purchased via these methods including repossessed properties, uninhabitable or unmortgage property, development projects as well as standard residential property.

Often a guide price is suggested by the auctioneer, and the vendor typically will set a reserve price, which is the minimum price they are willing to accept for the sale transaction to take place.

However, should the auction not reach this reserve price, private negotiations may take place after the auction.

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What is the Process for buying at Auction?

The process for purchasing property at auction is undertaken in stages as follows:

  • Pre-auction works – A significant amount of preparation works are completed ahead of the auction including arranging a formal property valuation, completing pre-exchange legal works and preparing marketing details for the auction itself.

Potential buyers would also need to be prepared ahead of the action by having the deposit ready to put down should they win the auction and have the finances in place ahead of any bids at auction.

Depending on the personal financial circumstances of the potential buyer, and the condition of the property, specialist finances may be required to be in place to enable the bidding.

  • Successful bid during the auction – The bidding takes place at auction and the winning bid would enable the prospective purchaser to move forward onto the next stage of the process.
  • Contracts are exchanged the same day as the auction – At this stage, the potential buyer and vendor are committed to the purchase, and therefore the buyer would lose their deposit should they pull out.
  • The potential buyer pays a 10% deposit the same day as the auction – The potential buyer pays the deposit to secure the property on the same day as the auction and therefore needs funding ready.

As mentioned above, the deposit is non-refundable should the buyer decide to pull out of the property transaction unless it can be proven that the vendor has misled the buyer, or a legal matter arises.

  • Completion – The purchase of the property must be completed within 28 days of the auction. Often there are terms and conditions relating to this strict deadline and therefore if they are not met, penalties are due.

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What should be prepared for ahead of a Property Auction?

Potential Buyer Preparations

As mentioned, should the potential buyer’s bid win at the auction, a 10% deposit is payable the same day and therefore access to funds is required.

Should borrowing be needed, the mortgage offer would need to be in place ahead of the auction to ensure that the 28-day deadline to complete the transaction is met.

The process of applying for a standard residential mortgage would often be too time-consuming ahead of an auction and therefore often other methods of finances are sought.

Commonly, bridging loans are utilised for securing properties sold via auction.

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Bridging loans are a method of short term secured finance that can be arranged promptly. Typically, a lender’s decision on a bridging loan application will be received within 24 hours which is an ideal pace for preparing finances quickly ahead of an auction.

A bridging loan enables a property transaction to take place without delay by applying the equity owned within a current property as a deposit towards another property. The result is that the mortgage holder owns multiple properties while further transactions are proceeding.

Depending on the plans of the purchaser there are a number of options either to develop and sell on the property or refinance once a mortgage offer is in place.

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Vendor Preparations

From a vendor’s perspective, there are often legal preparations to undertake before selling property at auction including;

  •  A Memorandum of Sale.
  • Any Special Conditions of Sale.
  • Completing Local Searches.
  • Completing Land Registry Searches.
  • Providing Proof of Title.
  • Providing copies of any leases that affect the property.

Preparing the above documentation can speed up the property transaction however the potential purchaser can choose to commission their own checks as they may not wish to rely on the vendor’s documentation provided.

Potential buyers wishing to undertake their own legal research should do so ahead of the auction as once the contracts are exchanged on the day of the auction, both parties are committed to the transaction no matter if issues are later identified following undertaking further research.

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How does the modern method of auction work?

Traditionally property auctions would take place at an auction house, however, modern property auctions are carried out online.

The process would usually involve a vendor selecting local estate agents to carry out property viewings in order to generate interest. Potential buyers are then invited to submit their bid online.

Similar to a traditional auction, the vendor can set the rules of the auction including setting a reserve price, however, one main difference is that the timeframe for accepting bids would often span 30 days or more, however, this duration can be shorter should the vendor require a quicker sale.

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Should a bid be accepted, the buyer is required to pay a non-refundable reservation fee to secure the transaction.

Such fees are often up to 5% of the property purchase price and are the costs associated with the auction rather than a part payment of the property costs. The reservation fee is only refundable if the failure of the completion is due to the vendor.

The modern method of auctioning not only provides a longer bidding timeframe but the deadlines for completing the transaction are also longer.

A potential buyer within a modern auction would have 56 days to exchange contracts and a further 28 days to complete the transaction, and therefore there is more time to secure finances.

What are the Advantages of the methods of auction?

There are differences between the traditional and modern auctions, however, the advantages would depend on if you are a vendor or potential purchaser. The advantages are summarised below:

Traditional Auction Modern Auction

  • The legal commitment to the property transaction is in place on the day of the auction. The potential buyer has to pay the 10% deposit, providing security to the seller should the transaction fall through.
  • Properties that are in a condition that is deemed un-mortgageable can be sold promptly to cash buyers via a traditional auction.
  • The speed of the property transaction via a traditional auction is often favourable for both parties.
  • There is a longer timeframe for the property transaction to complete within via a modern auction, which enables potential buyers more time to arrange finances.
  • The bidding window is open longer and therefore the vendor may receive a wider range of bids from an array of potential vendors, including those that would not commonly attend a traditional auction house.

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Modern Method of Auction Summary

There are many benefits from purchasing property via auctions, however, research and preparations are required to ensure that the process runs smoothly and that the property is in a condition as expected.

Once a winning bid is received at auction, the buyer is legally committed to the transaction and therefore cannot pull out without losing their deposit.

In addition, in order to undertake the necessary research, a potential buyer would need to settle the costs of a property valuation and legal fees prior to the auction, without certainty that they will win at the auction and therefore there is a level of risk involved.

Therefore a potential buyer should be certain that they are ready to proceed with the purchase before attending the auction.

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