Selling property at auction
Auctions can provide a quick sale for property that might struggle to sell through conventional methods, but how do they work and what do you need to know? Kirsty Burnham, head of property at Movewise, explains.
Download their full auctions guide here.
On average, around 20,000 residential properties are sold at auction in the UK each year: only about 1 in 50 sales. Auctions remain a mystery to many people. For sellers, the perception is often that auctions are a “last resort” to offload property, and result in a poor selling price. Buyers, meanwhile, are only likely to consider auction if they have done their homework carefully and have cash in hand, and a healthy appetite for risk.
So how do they work, and are they a good option?
How property auctions work
When you think of an auction, you probably picture a packed auction room with bids flying in. This is the traditional auction model – although these days, the auction room is more likely to be virtual. Bids are only accepted during the auction itself, and when no more bids are forthcoming, the hammer falls. If the bidding has reached the reserve price (the minimum the seller is prepared to accept, which is kept secret), the winning bidder pays a deposit, usually 10%. The auctioneer’s fee (typically 2-3%) is paid by the seller.
Recently a new type of auction has become popular. The "modern method" is more akin to an eBay auction: properties are often advertised by local estate agents and appear on property portals, and bids are open for a longer period (typically 3-4 weeks). Unlike eBay, however, there is not a firm cut-off point. If bids are still coming in at the scheduled closing time, the auction can be extended, to prevent eBay-style “sniping”. Assuming the reserve is met, the winning bidder pays a reservation fee (typically 4-5%), on top of the agreed purchase price. The seller does not pay commission.
Traditional auctions are usually "unconditional", which means when the hammer falls,the buyer is legally committed to buy the property. Contracts are exchanged immediately and both parties are bound to proceed with the sale; if either party pulls out, they will be in breach of contract. The exact terms vary between auction houses but generally the deal must be completed within 28 days.
Modern method auctions are generally "conditional". This means that at the fall of the hammer, the buyer acquires a period of exclusivity to buy the property. However, unlike an unconditional auction, contracts are not exchanged at this point and there is no legal obligation to proceed. Generally, this exclusivity period will last for 28 days, by which time contracts must be exchanged, and completion must take place within a further 28 days (56 days in total from the date of the auction).
Pros and cons of auctions
Selling at auction exposes a property to a different audience from selling through an estate agent, which has its advantages and disadvantages:
Advantages
Speed. This is the biggest plus point, especially with traditional auctions. You know that the buyer is committed, and the sale will complete within a reasonable time. The timescale for modern method auctions is longer, but there is still a sizable financial incentive for the buyer to complete on time.
High sales rate. More than three-quarters of homes that come up for auction sell. This represents a very good chance of success when you consider that estate agents on average only tend to sell between 50% and 65% of homes on their books – and doubly so when you consider that many properties that come to auction may have some type of problem.
Disadvantages
Fewer buyers. Most buyers use an estate agent and won’t be looking at auctions. Those that do tend to be a particular type of buyer – typically investors, buying with cash.
More expensive. Whereas estate agent fees are typically less than 1.5%, commission taken at auction is often around 2.5%. Sellers also have to pay an entry fee, which is usually several hundred pounds. In the modern method, although it is the buyer who pays the fee (typically 4-5%) that does not form part of the purchase price so they will generally offer a lower bid.
Lower selling price. With a smaller pool of buyers, the majority of whom may be investors looking for bargains, it makes sense that prices paid at auction will be lower than those on the open market. However, this is not always the case, and it can be down to luck as to whether a bidding war breaks out.
How do prices compare?
While it is generally accepted that the trade-off for achieving a faster sale at auction is a lower selling price, we wanted to find out if this is true, and if so, by how much. To do this, in 2022 Movewise carried out independent research using auction data.
We took a sample of properties across the UK that sold at auction, then compared the prices achieved with the estimated value for that individual street or postcode area on Zoopla. We also compared open-market sales of properties in the same street or adjacent similar streets.
On average we found that property at auction fetched about 20% less than that sold on the open market. While it is impossible to isolate the auction effect from the condition of the house or other problems, this does suggest that auction buyers are looking to pick up properties at a significant discount.
When does it make sense to use auction?
Given that auctions cost more and deliver a lower price, why do sellers use them? In the simplest terms, there are two main reasons:
- The property is not suited to selling through an estate agent
- The seller’s situation is not suited to selling through an estate agent
Perhaps the biggest reason a property would be suited to auction is because it is unmortgageable. This could be, for instance, because it is of non-standard construction, is in serious disrepair, is in an area prone to flooding, has a short lease or is subject to legal disputes.
Other types of property especially suited to auction include development plots, mixed-use buildings (such as a shop with a flat above), and investment properties, since auctions tend to attract investment buyers.
What about the seller's situation? Perhaps they need to secure a sale quickly – for example because of a change in personal circumstances, a need to release cash urgently or to avoid foreclosure. In this case, speed and simplicity takes precedence over necessarily obtaining the best possible price. However, we would still advise exploring all options before deciding to use an auction.
How Movewise can help
Movewise specialises in finding the best route to sell any property – whether that is through a traditional estate agent, by marketing directly to investors, or by selling at auction. Get in touch on 020 3409 4350 or [email protected] and our expert advisors will be happy to discuss these options with you. Or tell us how we can help here.
