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Found a house you like but it's sold using Modern Methods of Auction? Then beware. The modern auction pitfalls for buyers are extensive. Here are the top 10 pitfalls you'll need to dodge.
Properties being sold via the Modern Method of Auction are increasingly common. These online property auctions, also known as “conditional auctions”, are similar to eBay – as a buyer you have a fixed period of time to make your bid and the highest bidder at the end of the auction ‘wins’.
Sellers choose to use the modern method of auctions because it means they don’t need to pay estate agent fees and the sale is in theory less likely to fall down.
But what about buyers? We take a look at what to consider before buying a house in a Modern Auction.
Usually when a seller uses an estate agent to sell their house, they pay the estate agent’s fees themselves. But the Modern Method of Auction flips this completely: the seller often pays no fees to sell their house, the buyer picks up the tab instead. This is one of the main Modern Auction pitfalls for buyers.
How it works is that with these online property auctions, you can bid on the property for a fixed period of time, often 30 days. The highest bid at the end of the auction is the winning bidder, as long as the property’s reserve price is met. When an auction ends, the winning bidder must pay a non-refundable ‘reservation fee’. There may be other fees to pay too – read on for more on these. This reservation fee is on top of the agreed sale price.
And if you’re buying a house via a modern method auction and selling your home with an estate agent you will have two sets of fees to pay. That’s a lot of money going in fees that you could otherwise use to buy you more house.
With modern method auctions, reservation fees are usually at least 3% (inc VAT) of the sold price, or a minimum of £6,000 (inc VAT).
So, on a property sold for the average house price of £275,000, you would pay a reservation fee of £8,250 (incl VAT) if the fee is 3%. This reservation fee is on top of the agreed purchase price.
One of the benefits of Modern Methods of Auction is that the sale process is much quicker. If you make a successful bid on a property, you’ll then have 56 days to complete the purchase. But if you pull out, or don’t complete in time, you’ll lose your reservation fee, unless the seller agrees to an extension. In one case, a buyer agreed to go into a reservation agreement to buy a house after an auction had ended, but then pulled out and lost the £13,650 reservation fee they had paid. They complained to The Property Ombudsman but it did not support the complaint.
If the seller pulls out, you should be refunded the reservation fee. But a word of warning, get your conveyancing solicitor to carefully check the terms of the contract before you sign up. We have heard of buyers not being refunded if the delay is caused by the seller.
Plus, you’ll need to have your reservation fee ready and waiting, it can’t be part of your mortgage funds as you’ll need to pay it straight away.
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HMRC charges stamp duty on the final sale price agreed on the property – plus the reservation fee. So if you buy a property for £275,000 and pay a reservation fee of £8,250, your stamp duty bill would increase from £1,250 to £1,662.
You can check what stamp duty you would pay using our free, instant stamp duty calculator.
Another of the other major Modern Auction pitfalls for buyers concerns surveys. When buying a house in the traditional way, once your offer is accepted it’s recommended that you instruct a surveyor to carry out a survey investigating the condition of your property. This will flag up any problems, whether it’s structural issues, damp or a leaky roof and give you costs for repairs. You can then renegotiate your offer or get the problems fixed, avoiding expensive repair bills further down the line.
But with Modern Methods of Auction, you’ll need to decide whether you’re prepared to pay for a survey before you make a bid. That’s because if you make a bid and it ‘wins’, you’ll be committed to buying the property, warts and all. You won’t be able to alter the price if you later commission a survey and you get a bad survey report that reveals problems. And if you decide to walk away, you’ll forfeit your reservation fee.
If you do want to instruct a surveyor, you’ll need to check the date of the auction to see whether there will be time to get one done. When you’re speaking to surveyors be clear about your timescale.
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When using the Modern Method of Auction, the seller will usually instruct a conveyancer to prepare a legal pack, which contains information such as the Title Register and Plan from HM Land Registry, a TA6 form, and Local Authority searches. However, read the small print carefully before bidding as the buyer may need to pay for this and these typically cost up to £300.
You may also have to pay a ‘participation fee’ to take part; this is usually refundable but check.
If you’re bidding on a property and rival bids are made, these aren’t necessarily being made by another potential buyer. For example, in its terms and conditions, one auction house that works with estate agents up and down the country, Iamsold.co.uk, says ‘Where there is a reserve price the Seller may bid (or ask us or another agent to bid on the Seller’s behalf) up to the reserve price but may not make a bid equal to or exceeding the reserve price. You accept that it is possible that all bids up to the reserve price are bids made by or on behalf of the Seller.’
There are a number of factors that can cause conveyancing delays. For example, it is not uncommon for the full details of the leasehold title to be missing in the legal pack and this would take time for your conveyancer to get hold of. In the normal buying process, this would just cause a delay. But when you have a 28 day time frame to exchange or risk losing your reservation fee, through no fault of their own, the buyer is may be suddenly out of pocket to the tune of thousands of pounds.
If you need a mortgage to finance the purchase, making sure you get it in place in time is another of the Modern Auction pitfalls you’ll need to beware of. If you’re considering buying at a Modern Auction, speak to a fee-free mortgage broker in advance to find out what deals you may get access to. And get your mortgage in principle in place too. If you do bid on a property and are successful, go back to your mortgage broker as soon as possible in order to start the full mortgage application process.
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As well as being confident that you’ll be able to borrow enough to buy the house, you’ll also need to consider whether the property will meet the lender’s requirements before bidding, says David Hollingworth, from award-winning fee-free mortgage brokers L&C.
It the property has issues that could render it unsuitable for mortgage, you could end up losing the reservation fee. ‘It’s therefore vital to have done your homework on the condition and construction of the property to make sure it won’t throw up any surprises once the auction is complete,’ he says.
And even if the mortgage lender would lend on the property, they might not think it’s worth the amount you’ve agreed to pay for it. This is known as a ‘down valuation’. The lender may offer to lend you less or even pull out.
If you’re buying a house in the traditional way and it is downvalued, a buyer may try to renegotiate the price or walk away from the purchase. But one of the Modern Auction pitfalls is that you can’t renegotiate the price and you’ll lose your reservation fee if you can’t proceed.
If you can avoid buying a house through the Modern Method of Action, you should because it is heavily weighted against the buyer. You could lose thousands of pounds if your purchase falls through.
However, there are some circumstances when you may consider it, such as if you’re an experienced buyer or investor and feel comfortable with the potential modern auction pitfalls. And as it becomes a more popular way to sell houses you may feel you have no choice other than to buy this way.
If you are planning to buy in a modern auction you should ensure that the auction pack is complete (such as that it contains the full title) and that it’s correct. Get a conveyancer to do this.
A common complaint is that incomplete or erroneous information on the title has been provided which has meant the buyer cannot exchange contracts and has to withdraw from the purchase meaning they lose the high reservation fee. We know of one case where someone put down their reservation fee to find out that the property was ‘non-standard build’ and no mortgage lender would lend on it. This should have been in the pack.
Another common complaint is that the sales particulars and information are wrong and this is only discovered after the reservation fee has been paid. So check it all out thoroughly before making your bid.
When making your bid, take into account the reservation fee and include it as part of the overall purchase price.
And it’s crucial to think carefully about whether losing the reservation fee would be life changing. If it would be, walk away.
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And when it comes to modern auction pitfalls, remember, the devil is in the detail so you and your conveyancer should go through the T&Cs very carefully. For example, Iamsold says that a ‘prudent buyer’ will take actions including taking ‘professional advice from a conveyancer and, in appropriate cases, a chartered surveyor’ and ‘inspect the Buyer Information Pack for the relevant Property’ before bidding.
It says a ‘prudent buyer’ will also ‘carry out usual searches and make usual enquiries, check the content of all available leases and other documents relating to the Property and check that what is said about the Property in the Buyer Information Pack is accurate’ before buying. And that if you choose to buy a Property without taking these normal precautions you do so at your own risk.
Be clear about the amount of work you will be expected to carry out on a purchase and that timescales may mean this is impossible to do fully. For example, if you’re being advised to carry out the usual searches but searches may be delayed and therefore not be back in time.
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