The Modern Method of Auction
The modern method of auction is not actually very modern, it’s been in existence for about 20 years but has only recently become popular. It might be better described as a hybrid auction, an estate agency auction, or combi-auction. The modern method combines the speed and certainty of an auction sale along with the marketing effort of a good local estate agent.
Last updated by Mark Grantham on 27th June 2018
KEY POINT: With a conventional estate agency sale, when an offer is accepted the estate agent will stop actively marketing the property; viewings are stopped and the property is marked as “sold subject to contract”. All of a sudden, control of the sale is passed from the seller to the one and only selected buyer. If the buyer decides to reduce their offer or walk away from the sale, the entire process has to begin again, the sale is back to square one.
Modern auction is different; ALL prospective buyers can make an offer and bid against each other, which means the seller achieves the best possible price and isn’t at the mercy of just one buyer. It’s a very simple solution to the inefficient, out-of-date sales system we have in England & Wales!
Along with the help of the auctioneer, the seller sets the rules for the auction; agreeing a reserve price (minimum allowable sale price), start date and the duration of the auction – typically 30 days or more, but can be less if the seller needs a very quick sale.
The modern method combines the services of an auctioneer and a local estate agent.
1. No chipping away at the sale price. Rather than the buyer being able to reduce their offer (typically after the survey or the day before exchange), with the modern method the buyer is only allowed to INCREASE their offer, so the sale benefits from competitive bidding – just like a traditional auction sale.
2. No fall throughs. With a normal estate agency sale, the buyer can withdraw their offer and back out of the sale for any reason (or no reason at all), or the buyer can continually postpone exchange of contracts. But with the modern method the buyer is committed to exchange contracts at the timescale specified by the seller.
Removing any unhelpful influence from an estate agent is also helpful when competing against other property sellers. In simplistic terms, estate agents are sales people and the properties they sell are stock – sometimes that stock expires. Estate agents are more likely to prioritise a property if they know the seller is on the verge of serving notice to them, so rather than risk losing their commission they will favour that property over others, putting your property on the back-burner. The modern method takes away that control and each property is sold on its own merits – not juggled around by the estate agent.
On the whole estate agents do a great job when it comes to encouraging prospective buyers to make an offer and help progress sales. But if you’ve ever had the feeling your estate agent’s not pulling their weight or that prospective buyers might be going astray, then taking the work out of their hands might help. With the modern method, buyers don’t submit their offer to the estate agent but place their bid online, once again taking further control away from the estate agent.
Advantages of the traditional method of auction
1. Legal exchange of contracts. In a traditional live property auction the sale is unconditional. The buyer puts down a 10% deposit and exchanges contracts on auction day – meaning the buyer is legally committed to proceed to completion of purchase (it’s assumed the buyer has read the auction legal pack and satisfied themselves of all enquiries) so there’s no backing out for buyer or seller. The modern method works differently; the buyer doesn’t legally exchange contracts but puts down a non-refundable deposit (typically 5% or more of the purchase price) meaning the buyer is financially committed, but not legally committed to purchase the property. Contracts are exchanged 28 days after the auction has ended and we’re advised by modern method auctioneers that 99% of sales go through to exchange and completion.
2. Properties not suitable for mortgage lending. On the whole “cash buyer only” properties are best sold at traditional auction, mainly because traditional auction attracts an audience of cash buyers. That’s not to say “cash buyer only” properties cannot be sold using the modern method of auction or even through an estate agency sale, but if you want a high degree of certainty over your sale a traditional public auction always wins. We always recommend that properties in need of modernisation, particularly probate properties are sold at auction (either traditional or modern method) rather than a normal estate agency sale, this article about why to avoid selling a poor condition property with an estate agent explains why.
3. Traditional auction marketing is unique to any other method of sale, its speed and intensity cannot be compared to any other type of property marketing. Within the space of 3 weeks the auction catalogue is printed, the legal pack is available to prospective buyers, open house viewings are conducted and the anticipation of auction day counts down. For residential properties in particular, buyers often become emotionally involved in their prospective purchase, having invested time researching and planning what they can do with the property. Buyers like the guarantee and immediacy of purchase – they know that if they really want the property all they have to do is outbid the competition and it’s theirs – and there’s no risk of the seller backing out.
And the real difference of traditional public auction versus any other type of sale is of course auction day. There may be dozens of bidders in the auction room, on the phone or having already placed their proxy bid.
4. Competitive live bidding is the key differentiator of traditional auction. The competitive bidding environment cannot be replicated by any other method of sale. Unless you’ve bought at auction yourself, you will never know what that sense of excitement is like! The heat of the moment often takes prospective buyers away from their senses – rational thinking takes a short break. Bidders physically being in the room together, in the flesh, seems to do strange things! And if you add to the mix that some bidders might have travelled long distances, not wanting to go home empty handed, the competition can end up producing sale prices way beyond expectations.
Advantages of the modern method of auction
1. Time makes a big difference. With traditional public auction prospective buyers have as little as 3 weeks to prepare for their purchase. From the moment the auction catalogue goes live, prospective buyers have to view the property, check through the auction legal pack with their solicitor, arrange their finances and be satisfied they’re making the right decision to bid for the property on auction day.
All those parts of the buying process take time and buyers at a traditional auction don’t have time to arrange a mortgage for their purchase. If you’ve ever applied for a mortgage you will know it can be a long drawn out affair. And understandably so. Mortgage lenders want to be sure the property represents suitable security so will carry out lots of checks, legal enquiries and a survey before they approve lending. And that’s the reason why most auction buyers will be cash buyers, or they may be relying on a bridging loan – which is quick to obtain but very costly. Some buyers will go on to arrange a mortgage after the auction, but that’s a risk – the mortgage company might not prepared to lend.
By restricting the audience of prospective buyers to cash buyers only, property sellers miss out the many people who would buy if they had the money i.e. mortgage buyers. And this can affect the sale price by 10% or more. The modern method however gives prospective buyers some extra time and flexibility to arrange a mortgage, so the audience of buyers is wider and the final sale price is higher.
2. Properties in fair or good condition are typically better suited to the modern method because buyers will have extra time to arrange mortgage lending, as explained above. If your property is suitable for mortgage lending but you’re marketing your property to “cash buyers only” you risk underselling at traditional public auction.
3. A more approachable method of sale. How many people do you know that have bought a property at a traditional public auction? Probably not many! Traditional auction can seem quite scary and intimidating to some buyers – everything is done very quickly and there’s no one to help buyers through the process, and that limits the audience of buyers. The modern method is different; there’s an estate agent involved in the sale to reassure prospective buyers, to “hold their hand” and relieve any doubts. With the modern method of auction, the audience of buyers is more or less the same as with a normal estate agency sale.
4. Higher reserve price. Buyers at modern auction have a bit more time to organise their finances, so the sale is not just relying on cash buyers. And the audience of buyers at modern auction include owner-occupiers (buying the property to live in) who are not looking for a profit margin, but a home. As such modern method auctioneers are able to offer higher reserve prices compared to traditional auction.
We often receive enquiries from property owners interested in selling at auction because they want a quick sale but find the reserve price offered by traditional public auction is too low – typically around 15% below market value. So if the benefits of a traditional auction sale don’t work in their favour, the “modern method” is the next best thing because reserve prices tend to be higher.
Whilst this isn’t the same legal exchange of contracts as traditional auction sale it’s the next best thing – and considerably more effective at securing a sale compared to a normal estate agency method of sale.
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