What is Modern Method of Auction?
Also known as a ‘conditional’ auction, selling a house via Modern Method of Auction lengthens the amount of time between the close of the auction (exchange of contracts) and completion of the sale.
In most cases, as with traditional auctions, much of the conveyancing process is undertaken before the modern auction bidding starts.
Usually undertaken online, once the virtual hammer has fallen, the winning bidder pays a non-refundable reservation or holding fee. This charge tends to vary between different modern auction service providers.
This provides the buyer with a period of exclusivity, typically 4 weeks (28 days).
Within this time, the modern auction buyer must exchange contracts, on which date a 10% deposit needs to be paid (unless otherwise agreed).
Then, the buyer has a further 28 days to complete on the sale (where the full purchase price is paid).
As with traditional auctions, if completion doesn’t happen after the exchange of contracts, the buyer could lose both the non-refundable and 10% deposit paid. The auction house may also impose financial alongside abortive legal costs.
These processes combined, in most cases, mean that modern method of auction sales are much more secure.
How Does Modern Method of Auction Work?
Modern Method of Auction (or MMoA) is not reinventing the wheel in terms of buying and selling properties.
What it does bring is the ability to ‘lock-in’ buyers. If they were to pull out of the sale after the hammer falls, they will lose the reservation fee.
As a result, home sellers increasingly use this type of service as it’s a great way to overcome the many archaic processes of a ‘normal’ house sale, without compromising on getting a good price.
Many modern method auctioneers partner with estate agents across the country or are agents themselves that have bolted-on MMoA as part of their service.
However, as highlighted below, there are a couple of key differences with an estate agency sale.
As with traditional auctions, much of the legal ‘leg work’ happens before the auction.
This is because buyers commit themselves to the sale when the virtual hammer falls. It makes sense for them to want to know the ins and outs before bidding.
There are also financial obligations to be made once the hammer falls which do not exist with conventional estate agency home sales.
Although it may seem like a lot of hassle, it all serves to make the whole process much more secure.
Sellers can also relax once the bidding is done, safe in the knowledge that there’s very little chance of things falling apart.
Below, we highlight some of the key processes involved with this kind of property sale:
Property Valuation for Modern Auction
Professional auctioneers will use HM Land Registry data and RICS-approved Red Book guidelines to give you an accurate and non-speculative property valuation estimate.This may coincide with an agent from the auction visiting the property to confirm the process and answer any questions you may have.
They will typically look at the condition, size, market conditions amongst a range of micro and macro factors.
Much will also depend on the type of property. For example, the valuation criteria would likely change if it’s tenanted, unhabitable / unmortgageable, has land attached, repossessed, commercial or mixed-use.
Please visit our own house valuation blog post where you can check things for yourself. Feel free to also request one of our bespoke auction valuation reports.
Suggested Guide and Reserve Prices
Based on the above, auctioneer will discuss pricing your property in order to get the best outcome.The reserve price is the minimum figure you would be willing to sell at. If the bidding does not reach this figure, the property will be unsold (and typically put back on the next auction). Buyers at auction do not know the figure.
The guide price is often based on what the property is worth in its current condition (as outlined above). Other auctioneers may suggest a ‘price to entice‘ strategy in order to create a competitive bidding environment which, in turn, will drive the price upwards.
The slight variation with modern method auctions is that auctioneers will typically propose moving forward with slightly higher guides and reserves.
This is because modern method auction buyers are less time-pressed relative to traditional auctions (where the winning buyer must exchange at the end of the bidding process). They have more time to be able to organise finances and can therefore pay more.
Modern Auction Legal Pack
Different to open market sales in England and Wales, sellers instruct a conveyancer to prepare a series of legal documents (see below).Although this is not compulsory, we would strongly recommend having a legal pack in place before listing.
It ultimately provides more transparency and minimises the risk of buyers ‘low balling’ on your property (or worse, not bidding at all).
Photography, Floorplans + EPC
As with an estate agency sale, the modern method auctioneers will organise this for you.Check out our 101 tips on how to sell your home quickly where we go into the various steps you can take to present your property in the best way.
Auction Listing + Marketing
This is where modern auctions are miles better. With many traditional auctions, you often end up waiting for the next slot. Equally, every property that’s marketed is on an equal pegging to the other – i.e. there’s no risk of your property being buried in an auction catalogue.
As a bare minimum, the auctioneer should market your property on Rightmove, Zoopla and Prime Location (see where Property Solvers advertise here). The modern auctioneer should also have a strong presence on social media platforms like Twitter, Instagram, Facebook and LinkedIn.
RICS Survey
As with the legal pack, some sellers choose to get their own survey against the property.It’s not compulsory but can be a good way to keep things transparent with buyers and can result in more confident bidding.
Viewings and Open Days
The modern auctioneer will either request a set of keys, install a secure key box or organise convenient times to conduct viewings.More frequently, the auctioneer will host open mornings or afternoons. With multiple viewers attending, it’s a great way to create a ‘buzz’ around your property – especially when buyers clearly see that there’s competition.
Modern Auction Bidder Registration
Before allowing the potential buyers to bid, the modern method auctioneer will undertake a series of processes:This typically includes:
- Email / mobile number verification;
- Identification checks (passport / drivers licence + proof of residential address);
- Acceptance of auction terms and conditions (usually aligned with the RICS Common Auction Conditions);
- Extra checks if the bidder is from overseas or deemed ‘politically exposed’;
- Bidder security (involves placing a hold on a debit or credit card for the reservation fee).
Modern Method of Auction Bidding
Bidding periods can vary from a few days to a few hours (and even less).Other modern method auctioneers run ‘Zoom-style’ live events that attempt to broadly replicate traditional auctions – i.e. a filmed auctioneer calls for bids from a rostrum.
Typically, interested buyers bid in line with pre-determined increment levels using the bid increase (+) and decrease (–) buttons on the auctioneer’s platform. Once the amount is set, there is usually a ‘Place Bid’ button. The bidders will also be notified as to when the auction is drawing to a close.
On many platforms, it’s also possible to proxy bid. Similar to eBay, this is essentially where the bidders set a maximum amount and the system will automatically bid on their behalf. Note that this will only happen if other bidders drive the price upwards.
Please see our own auction test listing for an example.
Modern Auction Close + Payment of Non-Refundable Reservation Fee
The fall of the electronic happens at the specified time and the winning bidder has an exclusive ‘right to exchange contracts’ within the prescribed timeframe. This is usually set at 28 days (20 business days).It’s during this period that the buyer may book a survey and secure mortgage finance.
At this point, the auctioneer also takes payment for the non-refundable buyer’s fee and draw up the Sales Memorandum. The seller cannot sell to another buyer during this period.
Note that this reservation fee does not go towards the total purchase price. Also, the buyer can only get a refund of the reservation fee if the seller deliberately scuppers the sale.
Exchange of Contracts
At the end of this period, contracts will be exchanged.Unless otherwise agreed, the buyer will pay a 10% deposit into the conveyancer’s client account.
Completion
The buyer then has a further 28 days between exchange and completion.Failure to do so could potentially mean loss of the entire deposit paid to the conveyancer plus more severe abortive costs. It’s for this reason that very few sales fall through by this stage.
It’s worth noting that some auctioneers (including Property Solvers auction service) offer both the modern and traditional method.
The latter being a more time-pressured sale where buyers effectively exchange contacts when the virtual hammer falls. At this juncture, they must typically pay 10% of the purchase price and have 28 days to complete.
What if the Modern Auction Buyer Does Not Pay the Reservation Fee?
This is unlikely to happen as, in most cases, the modern method auctioneer will register the bidder’s credit or debit card and place a hold on funds without charging. This is also known as a ‘payment shadow’.
Once the virtual hammer falls, the winning bidder’s card will be automatically debited. The losing bidders will have their payments released.
Note that if the property sale falls through due to the vendor’s inaction, the buyer can claim back the reservation fee in full.
If the reverse happens (i.e. the buyer fails to move things forward adequately), the fee will not be refunded.
…And if Exchange of Contracts Doesn’t Happen After a Modern Auction?
If the buyer does not exchange contracts after 28 days of the auction’s close, the non-refundable deposit will be lost. The buyer is also likely to incur abortive legal fees.
It will be at the seller’s discretion as to whether to provide extra time. The seller is well within his/her rights to put the property back on the auction market and/or approach previous bidders.
What About Pre and Post Modern Auction Offers?
Pre-auction offers are entirely possible and can sometimes make sense if the seller is happy with the price. The sale can then proceed under auction conditions to provide the same level of security.
If the property doesn’t sell, most modern auctioneers extend the timeframe. Buyers can still make offers which, if acceptable to the seller, can also move forward under modern auction conditions.
Modern Method of Auction Pros and Cons
Since its emergence, as with anything that attempts to alter the status quo, Modern Method of Auction has received its fair share of criticism.
Below we point out the main arguments for and against selling your house in this way:
Pros of Using Modern Method of Auction to Sell
- It’s a quicker and easier way to sell your house relative to using an estate agency. Once the online hammer has fallen, the chances of the sale falling apart are very slim;
- With more time given to buyers to complete the sale, the chances of getting the full market value of the property are higher. Here at Property Solvers, we generally achieve between 90 and 100% for our clients;
- You can list your property immediately rather than having to wait for the next ‘slot’ with a traditional auction house. Sellers can often wait for 2 to 3 months before the auction event (followed by another 28-56 days for the sale to complete);
- As everything is online, you’re likely to attract both domestic and international buyers in a way that’s not possible with traditional auctions;
- You can still open up your property to pre-auction offers (and sell under guaranteed auction conditions);
- Online auctions are becoming the status quo in a post-coronavirus world;
- Flexible and convenient – as the seller, you can decide when to market the property and when the auction should close;
- Buyers can easily participate from the comfort of home or using their devices. This makes the whole process simple and less intimidating;
- Although property is clearly a ‘high-ticket’ purchase, with more people accustomed to paying for goods and services online, it’s natural that auctions would follow suit;
- Buyers are under pressure to perform and have little opportunity to play games or delay things. If they do, there’s a risk that they will lose both the reservation fee and, quite possibly, the deposit paid at exchange.
Cons of Using Modern Method of Auction to Sell
- Although some operators pass the fees on to buyers, the costs of using a modern auctioneer are higher relative to an estate agency sale. This is largely because of the extra work required (see below);
- With such large sums of money being transferred, there are some concerns over online security. These are often unwarranted as most transfers of money will be undertaken through conveyancers (in the same way as traditional auctions);
- As a seller, you’ll still have to allow people to view your property. Although many auctioneers minimise the level of disruption by running open days (with multiple viewings), it may be better to use a We Buy Any House service if you’re after a completely private sale;
- Although the speed of sale is much quicker than using an estate agency, you still may have to wait some time for the sale to complete (relative to traditional auctions and quick sale companies). We would urge you to work with a modern auctioneer that will not delay in listing your property;
- There are a number of modern method auctioneers that only market properties on their own portals. Even though such exposure is welcome, always make sure your property will appear on Rightmove, Zoopla and Prime Location as a minimum;
- Some modern auction clients criticise the hidden fees only mentioned in the small print. Reputable modern auctioneers, however, are completely transparent;
- Some modern auctioneers – particularly those associated with estate agencies – can sometimes over-estimate the value of properties to win business. This places a risk on sellers if auction bidding does not meet the reserve price;
- In house repossession scenarios, there may not be enough time for the sale to complete. Again, selling fast for cash can often be a better solution here.
Modern Method of Auction Sales Fees
Much of your decision to use a modern method of auction will come down to what it’s going to cost you.
It may be tempting to use an online estate agency that may entice you with lower fees.
It’s important to remember, however, that online estate agencies mostly specialise in listing properties rather than providing everything that it takes to get a great outcome from the sale.
This is indeed reflected in the fact that many high street agents end up using modern auctions to sell their properties.
But Are Modern Method of Auction Fees Worth It?
Unless you use an auctioneer that only charges the buyer, you may have noticed that using a modern auction is more costly than an estate agency sale.
Whilst questions remain as to whether such fees are warranted, there are a number of reasons as to why paying a little more can make sense…
Legal Contracts Are Drafted + Conveyancing Work Undertaken Before Selling Your House at Modern Auction
The security offered through a modern auction sale is backed by much of the legal work being completed prior to the auction.
Modern Auctions Require More Work Compared to a Standard Estate Agency Sale (With Shorter Timeframes for Viewings, Handling Prospective Buyer Enquiries and Preparation)
The auctioneer often has to double down on the amount of work required and liaise with conveyancers to ensure the legal pack is prepared correctly.
Modern Online Auctions Need a Responsive Sales Team to Manage the Sale Property
Auctioneers need to handle the sales process much more attentively. For example, buyer enquiries must be handled quickly – especially given the time-sensitive nature of this type of sale.
Potential Buyers Are Checked Prior to the Competitive Bidding Process
Every potential buyer must be fully vetted before the auction. This consists of identification, anti-money laundering (AML) and proof of fund checks. This is for security purposes and means that not just anyone can jump into the auction and bid.
Checks Are Similar to Traditional Property Auctions
Modern auctioneers have extra legal and financial responsibilities when it comes to running a secure online platform. For example, having cyber-security and anti-fraud software in place is a must. Ultimately, therefore, the seller is in a much more secure position
Marketing Modern Auction Properties Can Often Cost More
Subscriptions to portals to advertise properties are not cheap – particularly with services like Rightmove, Zoopla and Prime Location. The platforms that run modern auctions are often expensive to run.
With the auction bidding process being quite ‘hands-on’, the auction house will need to make sure there are no hiccups (and respond to any enquiries from both the buyer and seller).
Post-Sale Processes Are Fully Handled by the Modern Auction House (Ranging from Taking the Deposit on Exchange Through to Completion)
Once the auction is concluded, the modern auctioneer must draft a sales memorandum and circulate it amongst the conveyancers. They will also need to make sure that everything moves in the right direction to meet the correct deadlines.
Modern Method of Auction Fee Structures
The fee structure will vary according to the auction house service you use:
Buyer Pays
Some auctioneers charge the buyer a fee only. This is sometimes called the ‘reservation fee’. Although this may seem like an excellent deal for the seller, what often happens is that buyers will factor this cost into their purchase price.
If a property is priced incorrectly, there is a risk that buyers will steer clear of placing bids after looking at their net costs.
As mentioned above, buyers will also have to pay stamp duty on the net purchase price – i.e. the cost of the property plus the reservation fee. At anything between 4-5%, the extra expense may have an off-putting effect.
Seller Pays
Inherited from the traditional estate agency model, the vendor will pay the fee and buyers will only have to pay for the property itself, legal costs and stamp duty (based on the property price).
Most modern method property auctioneers avoid using this fee structure. More often than not, it means there’s no financial commitment on the part of the buyer.
Buyer and Seller Pays
The buyer and the seller are charged individual fees. The buyer usually pays at the close of the auction and the seller pays upon completion.
We find this creates an even playing field and believe this fee structure will be the predominant way of working for many modern auctioneers moving forward.
