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HOA investigates murky world of online auctions to buy and sell property

It's the new way of selling that offers a quick sale and added security, but at what cost? HOA looks at the modern method of auction.

With the number of failing house sales on the rise, and more than a third (34%) falling through in the last three months, a new type of e-bay style online auction (known in the property world as the modern method of auction) offers an alternative to the nightmare of a property chain.

The modern method of auction allows buyers to bid on a property online and will have a longer completion timescale, giving the buyer time to sort mortgage finance, unlike a traditional auction.

Once the online hammer falls, the buyer must pay a substantial non-refundable reservation fee. Also known as a ‘conditional auction’, it’s beginning to make a significant impact, particularly in areas such as the North East, the West Midlands and parts of inner London where properties are sticking on the market.

The auction management provider IAM Sold says it saw a record-breaking first quarter of the year, with 854 lots sold. This compares with 632 lots for the same period in 2017. Almost half (41%) of buyers were purchasing for their own occupation.

But what safeguards do these buyers and sellers have? And who’s really benefitting here – the consumer or the estate agents and auction houses? HOA has been investigating and can report some potential pitfalls.

How do these auctions work?

Held online rather than in a traditional saleroom, the modern method looks tempting at first sight. Often, properties are priced low to sell, it all happens quickly and both buyer and seller face financial penalties if either pulls out.

The practice has been spearheaded by proptech advances which support interactive auctions. Properties are displayed for sale with an auction ‘timer’, usually set for 30 days. Buyers register and place their bids.

At the end of the auction period, the highest bid wins. To secure the property, a reservation fee is paid immediately. Then the sale has 56 days in which to exchange and complete, allowing purchase with a mortgage if required. This is a much longer timeframe than with a traditional saleroom auction and is billed as one of the plus-points.

Sellers are attracted because it happens with minimal cost to them. Although the sold price achieved at auction will generally be less than on the open market, the outlay is shouldered by the buyer, who may overlook this aspect at the prospect of a bargain.

The pitfalls

So, what’s not to like? Well, the practice is coming under fire because it can be difficult to understand. It allows estate agents and auction platforms free rein to set the reservation fee. Our investigation suggests some high-street agents are still getting to grips with how this works. This must be paid upfront by the winning bidder at the auction’s close by debit or credit card or bank transfer and can be anything upwards of 2.5% + VAT. There is usually a minimum reservation fee of at least £5,000 + VAT.

Buyers are obliged to have this reservation fee ready and waiting; it can’t be part of any mortgage funds because of the time-scale. It’s non-refundable if the buyer decides to withdraw. And it doesn’t usually form part of the overall price paid; it’s an add-on which goes straight to the auctioneers and estate agent.

People who think they’re getting a bargain may find themselves stung to the tune of several thousand pounds when they realise that paying the reservation fee is not like putting a deposit on a holiday. In addition, there may be other costs, such as an extra £180-200 for a Buyers Information Pack.

Mark Hayward, Chief Executive of NAEA (National Association of Estate Agents) Propertymark, told HOA in a statement: “A reservation fee needs to be transparent and while there is no limit, it would need to be ‘reasonable’.”

The big issue is that it’s split between auction house and estate agent. Even if it’s shared equally, agents stand to make more of a profit than they would by selling on a traditional commission basis, particularly on lower-price properties. At HOA we think that many buyers and sellers aren’t aware of this.  Ironically, there is potentially less work for an estate agent as there will be no chain involved.

There are similarities with the unfair ‘sale by tender’ or ‘sale by informal tender’ method we campaigned against. With this, the prospective buyer is required to hand over a ‘finder’s fee’ of up to 2% + VAT. Unlike sellers who can choose who will help them sell their property and can negotiate, buyers are not in a position to negotiate the fee. Yet again, we’re concerned that estate agents are milking buyers for profit.

Let’s look at the maths

For a sole agency, commission-based sales contract, HOA recommends sellers should aim for an estate agent’s fee of no more than 1% + VAT. So on a £100,000 property an agent would make just £1200 including VAT.  They may be able to supplement their income by selling other services such as conveyancing and mortgages and make a referral fee of this, but government is stamping down on this practice by requiring estate agents to be upfront with their fee.

In comparison, there’s a  ground-floor studio apartment for sale by the modern method of auction in Dudley, West Midlands. The starting bid is £48,000. The mandatory reservation fee is 4.2% (incl VAT), but at a minimum of £6,000 (incl VAT). If this property sells for its guide price, the estate and online auction company stand to make a shared commission of 12.5% on the sale.  The property would have to sell at three times more than the guide price for the commission to be 4.2%.

Or what about a two-bedroomed terrace house in Wolverhampton, on the market for £69,500? The reservation fee is also £6,000 (incl VAT), making a shared commission of 8.63% on a guide price sale.

Here are some other examples we found. All figures include VAT.

One-bedroom flat, Scunthorpe, North Lincolnshire
Starting bid £35,000
Reservation fee 4.2% or minimum £6,000. Buyer Information Pack (£200)
Achievable commission 17.1%
View this property
Two-bedroom terrace house, Barnsley, South Yorkshire
Starting bid £40,000
Reservation fee 4.2 % or minimum £6,000. Buyer Information Pack (£200)
Achievable commission 15%
The property details suggest it’s ideally suited for the first-time buyer yet there is no tenure information (whether leasehold or freehold). Estate agents are required to provide this information as a minimum.
View this property
Three-bedroom apartment, Brixton, South London
Starting bid £349,500
Reservation fee – 2.4% – minimum  £9,000, £180 towards cost of legal pack
Achievable commission 2.6%
View this property
Three/four-bedroom detached house, Kidderminster, Worcestershire
Starting bid £220,000
Reservation fee – £6,000 minimum, 4.2%. £180 towards legal pack
Achievable commission 2.7%
View this property
One-bedroom apartment, Derwent Valley, Newcastle-Upon-Tyne
Starting bid £54,000
Reservation fee 4.2% or minimum of £6,000. Buyer Information Pact (£200)
Achievable commission 11.1%
View this property
One-bedroom flat, North London, London
Starting bid £230,000
Apparently in this case, the fees are paid by the seller, but this is not clear. The buyer must abide by the conditions set out in the reservation form but the buyer is encouraged to place a bid without seeing the reservation form and what they are legally committing to.
View this property

If a property is in need of significant repair, in a less-than-popular area or generally proving difficult to offload, the modern method of auction offers a quick way to secure a sale for the seller.

At HOA, we are concerned that desperate sellers could be taken advantage of by unscrupulous estate agents who push them to auction.

Because the buyer pays upfront fees they will factor this cost into their bid. So the seller might end up with lower offers than via the traditional route, even with costs to the estate agent factored in.

And what if the sale falls through? Although auction companies say that they financially verify buyers, they are not required to provide proof of funds at the reservation stage.

If the worst happens, the next prospective buyer, knowing what the seller was prepared to accept at auction, won’t be inclined to offer anything higher. So the seller loses out twice; firstly on the eventual sale price achieved and secondly because they may end up paying either commission or a fixed fee to the selling agent after all.

The seller must also pay for the auction pack, which includes the title plan and register or evidence of title, local authority searches, water and drainage search, property information questionnaire and a fixtures and fittings list. With Fine & Country, for example, an estate agency which sells at auction through IAM Sold, the seller must pay £150 for an auction pack and when the property has sold, there is a further £120 administration charge.

Commenting on the trend, Paula Higgins, Chief Executive of Homeowners Alliance, says: “It is good to have new ways to help homeowners buy and sell their properties. However, we are concerned that estate agents and online platforms are using the modern auction method to pull the wool over homeowners’ eyes and get commission up to 10 times what they would charge selling the traditional way.   There is nothing wrong in principle with the modern auction, but it needs better regulating to ensure it works for the benefit of homebuyers and sellers rather than against them.”

Jamie Cooke, managing director of IAM Sold, adds: “Whilst auction is not for everyone, it does help people who want to get sold and moved quickly. We have less than a 5% fall-through rate and our average completion time from sale is 44 days, significantly less than the current 16 weeks it takes through private treaty.”

Thinking of going down the on-line auction route? Check out our consumer guide on buying and selling with online property platforms.

Have you bought or sold using the modern method of auction? We’d be interested to hear your views and experiences. Please get in touch at hello@hoa.org.uk. 


Leave a comment (16)* Required

  1. Philip Hawkeswood

    Hello,
    I enjoyed your article and totally agree with you!
    I have experience in buying and selling property over the years and I’m now 60 yrs of age and I’m looking for a cheap property to live in at around £170,000 as I need to clear my mortgage and the only way to do this is to buy a cheap property as I only have about £170,000 to buy another property. so I will have to move much further out in order to afford a property without a mortgage. Everytime I see a cheaper property on the Internet, it is being sold through the Modern Method of auction and this method is a way for the estate agents and auctioneers to make a lot of money out of the buyer and charging unessasary fees is a disgrace! What happened to the old days when you only had to pay 1 or 1.5% commission to an estate agent. Years ago if a house was up for sale at say £120,000 you would probably agree an offer of about £5,000 lower and the sale was usually agreed. These days when you see property for sale the asking price sometimes has about a £30,000 margin. So for
    example how can you have a property on the market between say £200,000 and £230,000. The margins are to great and this is something else that the government should clamp down on! The government urgently needs to step in and stop these money making schemes. There is also another point I would like to make. When an estate agent lists a leasehold property for sale on the Internet, they don’t always give you the length of the remainding lease. Estate agents should be regulated more and they should ensure that the length of the remainding lease must be stated.
    On many occasions when I’ve telephoned the agent to ask them, their reply to me is that they will have to find out. How can any buyer even think seriously about putting in an offer on a property without the right information in print to see in the first instance. The lease details is one of the first things you need to know! Estate agents must be more transparent with the information on their properties when advertising them for sale. I find it an absolute waste of my time when I see a nice property and I call the agent and they then tell me its only a 40 year lease for example. At the end of the day they have wasted my time and theirs by not listing such important information in the first place. It’s about time that agents and auctioneers are controlled by the government to help the property buyer get a fair and affordable service. It is the first time buyer and those that have to down size in order to be able to live that are paying the penalties! I am interested in being an advocate of what you believe in and your cause. Your article hit the nail on the head. Please let me know how we together can stop these agents and auctioneers making money in this disgraceful way!
    The government needs to abolish modern methods of auction!
    kind regards,
    Phil

  2. Tomasz

    DANGER! Doing business with IAM Sold will cost you time, money and nerves!

    They were one of the least professional and most expensive firms I have ever dealt with. I wonder if they secretly want transactions to fall through to cash in reservation fees and recycle the properties over and over again.

    – auction reservation fee was a whopping £6,000

    – took 293 days to buy a house through them

    – they will not let you pull out and have your reservation fee refunded even if the seller through her tardiness delays the sale by over 0.5 year

    – they accept documents from the seller, which later get rejected by her own solicitor due to containing some weird drawings around her signature

    – very negligent in their chasing of the seller

    – they lie in an email sent to you after the Reservation Period expired that if the seller pulls out, then your £6,000 will be refunded, but when it comes close to that they say they wouldn’t refund you

    – they will require you to change your lender if it simply asks that the seller has her identity verified by her solicitor in person (if you don’t change your lender, they say the seller will resign and you can say goodbye to your £6000)

    – suspiciously keen to try to break down your transaction after giving you a deadline to change your lender while the estate agent is attempting to contact them with your updated cash offer

    – often unavailable to talk and regularly breaking their 2-day reply policy, but they dare to say they are critical of you if you cannot reply immediately – their idea of a £6,000 service probably…

    – they repetitively make false promises they will call you back or write to you by end of day, but that never happens

    – the sales progressor assigned to you can change 3 times throughout your transaction

    – if the sales progressor gets sick, there is no one covering for them, you are on your own

  3. Patrick

    Is the principle of Conditional (“Modern”) auctions wrong ?
    I don’t think so.
    But the idea of a 4.2% non-refundfable Buyer’s fee is a total rip-off.

    A high fee also creates a “moral hazard”, in that the Auction House gets to keep the fee regardless of whether the Sale completes …..
    …so no incentive to help the conveyancing process.

    I’m a potential Seller and I would consider a Conditional Auction – as long as the Buyer was less exposed….
    ….AND the total fee was comparable to a normal commission.
    (Surely an Auction is easier for the Agent ??)

  4. Olga

    I have sent an email to you on hoa@org.uk
    I have a massive problem with I am sold they totally missold a property to
    Me , it was unmortgageable n they didn’t list that should of been cash purchase , they not interested n won’t help
    Me! I need help

  5. Tom

    On top of all these financial problems if you read their t&c’s they’re able to place bids on the owners behalf up to the reservation fees.. aka fake bids. I’ve watched a house for 2-3 months and keep seeing random bids being added and removed and the timer reset or adding a few days. Please tell me if this is even legal.. seems like deception while selling to me

  6. Lucy Runciman

    We were persuaded by the agent to use modern auction, but have only had a few bids £30,000 lower than the reserved price, due to the high £12,000 reservation fee. This was not made clear to us at the start. A waste of 60 days of contract & then yet another 21 days notice, also not made clear.

  7. Janice

    Hi
    I would never buy at house auctions, the auctioneers rip people off all the time, you never really get a bargain!
    The whole process is a complete rip off for sellers and buyers, fees and rules should be under investigation, but it does’nt happen they get away w it’s all the time,

  8. Kathleen Clarke

    I am the successful bidder of a property. This is over 8 weeks ago! I paid £6,300 immediately. Hoping to get the house within 56 days. I am on to the auction company nearly every day. I have the cash ready but due to a problem with the register that wasn’t brought to my attention and should have been resolved before it went to on line auction. I am no further along with getting the house but out of pocket £6,300

  9. Kizzy

    I just bought a property through the modern method. I think the fees are very expensive. All in all I had to pay £6,000 fees plus over £700 added to my bid for ‘aportionments’. I wasn’t prepared for tgat. The solicitor fee for conveyancing was over £2,000.
    The team at the company were great on the whole but the in-house solicitor was not as efficient as a previous family solicitor that I couldn’t have due to the firm not carrying out conveyancing for auctions.

  10. nick chapman

    My property was for sale with online agent YOPA when a potential buyer registered with YOPA and viewed the house in March. He didn’t have the funds yet and made no offer. In April I was approached by GOTO online auctions and I agreed to a 90 day MMA auction period. During this period the buyer who had viewed in March made an offer via YOPA which I ignored as GOTO had sole selling rights, the offer was below the reserve price and I knew he didn’t have the funds to buy within the auction timeframe. After the 90 day auction period ended, he made another offer through YOPA which I accepted. He is now being hounded by GOTO for a “buyers fee” of £6300 despite the fact that GOTO did not introduce him, he made no auction bid and his offer was not accepted during the auction period. GOTO bungled the entire auction process from the start (they used the “register of title” and the “title plan” from a completely different property in the auction documents!) to the end. They are a disgraceful company…!

  11. Abdul Chaudhrey

    I recently made a bid for a flat in Dudley. Its a mess. Taking advantage of my inexperience, the con merchants at under the hammer forced through high powered exaggerated misrepresentation to bid higher. I have obtained mortgage but the lessor of the flat is not known. It was a limited company which has dissolved and the bank won’t release the funds unless the lessor is known!
    The con merchants at under the hammer are telling me that I have no choice but to buy it. I am ready to proceed provided they give me information about the lessor! Its a mess. I have to take the matter to court and hope for justice in court.
    Avoid the crooks at under the hammer like a plague.

  12. Andy

    I have paid my reservation fee to Iamsold of £6000 plus the £200 for the legal pack. I went to get a mortgage and find out the mortgage company will not give me a mortgage on the condition of the house. The report states there is r”ising damp, penetrating damp, replacement of flat leaking roof and slate roof coverings, checking of supports where chimney masonry/walls removed, checking of damp and uneven floors, testing of electrics amongst other works.” However all Iamsold are trying to do is force me into the purchase but taking out a loan to be able to pay for works BEFORE I purchase the house!! That is not going to happen. In their documentation they allow 56 days from draft contract to exchange of contracts which is to “allow the purchaser to obtain a mortgage of required”. However, they have already been paid their reservation fee so it looks like I will making a loss of £6200.

  13. Gayle

    We are currently at auction with iamsold. We were misled with what happens to the reservation fee. We were led to believe part went to the agent , part went to the auction house and the rest went to us the seller ,as part of the sale price. At 4.2 % of offers over £490k this is a substantial amount. We have now found out that we get non of it so the purchaser of our property has to pay £20,000 plus to the auction for the pleasure of buying our property. Of course this is having a negative effect on prospective buyers, in fact we are having to turn offers down that if we were selling in the normal fashion with an estate agent we could have sold weeks ago. We are also concerned that if someone pulls out after paying the fee who gets paid ? It appears only the agents not us for the inconvenience . We are devistated at the way we are losing sales and of course our new home. My advice is don’t do it through the modern auction method unless you have money to burn. We are pensioners and fell foul to an agent who talked the talk and who now will walk with our hard earned money.

  14. Geoff

    Excellent article! I am an Estate agent and I think the modern method is quite disgusting.My job is to achieve the best possible price for the seller but that will not happen by the modern method because all the buyer does is to knock the £6,000 off the figure they are going to offer. ie If I was buying this way and say thought the price should be say £80,000 I would only bid £74,000 to allow the rip off £6,000.The seller is the looser.I can’t understand why this is going on.

  15. Garry Scothorn

    For the last couple of years I have been stating that this so called modern auction method should be outlawed by the government.
    Being in Yorkshire I regularly see properties sold for say Forty/ Fifty thousand pounds under this method.
    Sellers are induced into putting a low reserve on their property, to secure a five thousand pound commission for the agents.
    As your tables above show, agents are receiving up to 17 to 20 % commission as against a normal fee of 1 to 1 1/2 percent.
    These agents should be made by law to inform the seller that not only will the property sell at auction for less than its market value, but a further added six thousand pounds below market
    value as people like myself will set a auction price value less a further six thousand pound.
    Example
    Property with a normal market value of sixty thousand sells under modern auction method for
    fifty thousand. A loss of ten thousand pound to the seller.
    Had I been the purchaser of this example property through a normal estate agent I may have offered up to fifty six thousand, the same cost to me as through the modern auction method.
    Had the seller sold through a normal agent at say 1 1/2 percent commission he would have paid £750 plus vat =£900
    By selling this example property through modern auction method the seller is getting £5,100
    less for his property.
    Have a look at the auction results of I am sold and you will see that local agents can have as many as ten to fifteen properties going through the same auction
    Ten to fifteen properties at three thousand pounds each is not bad money bearing in mind that the local agent is rarely showing the property as it is done online.
    The government should put a stop to this rip off method and stop these rip off auctioneers from profiteering.
    G Scothorn

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