KIS Bridging Loans
Presented by KIS Finance
17th September 2019

Property auctions are an increasingly popular method of buying properties due to the speed at which sales can be completed, security they offer, and they provide a chance to purchase properties for a bargain price.

‘The modern method of auction’ isn’t something new, it has actually been around for a number of years but it is now growing in popularity due to the extra benefits it provides to property buyers.

This guide will explore the differences between the two types of property auctions.

How does a traditional property auction work?

Properties for sale by auction can be found in newspapers, through estate agents and auctioneers, and online. The types of properties on offer can vary from repossessed properties, uninhabitable and un-mortgageable properties, development projects, and standard residential properties.

A guide or starting price will usually be given and the vendor will often set a reserve price which is the minimum price they are willing to accept. If the property does not reach this reserve price during bidding, the property will not be sold.  However, interested buyers may be able to negotiate with the seller after the auction has taken place, especially if the highest bid was close to the reserve.

What is the process for buying at auction?

  • Successful Bid
  • Deposit and suitable finance product in place before the auction.
    Valuation done before the auction.
    Pre-exchange legal work done before the auction.
  • Contracts exchanged same day as auction
  • Committed to purchase.
    Will lose deposit and potential other costs if you pull out.
  • 10% deposit required same day as auction
  • Deposit is not refundable unless the vendor has mislead the buyer or other certain legal issues arise
  • Completion within 28 days
  • Purchase must be completed in full within 28 days of the auction.
    If this is not done, you could face heavy penalties.

What do you need to do to prepare for a property auction?

If you have the winning bid, a 10% deposit and an exchange of contracts are required on the same day. This means you must be prepared to go ahead with a purchase when you turn up to the auction, even though you may not win the property.

So, if you are reliant on a mortgage to purchase the property, you need to have this agreed before the auction. Or, if you are a cash buyer, you need to have the money readily available.

If you are using a mortgage to purchase the property, you will need to complete a property survey/valuation, mortgage application and offer, and any preliminary legal work in order to be ready to exchange contracts on the day.

Alternatively, you could use other methods of finance to purchase the property initially to give you more time to arrange a suitable mortgage product without facing any penalties for going over the 28 day limit. For example, a bridging loan is a short-term funding option which can be used the purchase the property on the day of the auction, then repaid through ‘re-financing’ when you have the mortgage offer in place.

It is now also common for the vendor’s solicitor to prepare a legal pack for potential bidders to look at before the auction. This will typically include;

  • Memorandum of sale
  • Special conditions of sale
  • The local search
  • Land Registry search
  • Proof of title
  • A copy any lease affecting the property

However, you may choose to commission your own checks, rather than relying on the vendor’s legal pack. If you choose to do this, all checks should be carried out before the auction as any defects or issues identified after exchange of contracts will not release you from the purchase. The only way you will be released is if the defects found are the result of a misrepresentation from the vendor, or there are any legal issues that couldn’t have been identified prior to the exchange of contracts.

If you pull out of the purchase  for no acceptable reason, the vendor is entitled to keep the deposit and resell the property. If reselling the property results in a lower price, the vendor can also claim the shortfall from you.

How does the modern method of auction work?

Modern property auctions are carried out online.

Estate agents are appointed by the vendor to arrange viewings in order to generate interest in the property and to encourage potential buyers to put down an offer. All interested buyers have to submit their offer online in the form of a ‘bid’. With the help of the auctioneer, the seller can set rules for the auction – this includes setting a reserve price, start date and duration of the auction. This is typically 30 days or more, but can be shorter if the vendor requires a quick sale.

When a successful bid is made, the buyer is required to pay a non-refundable ‘reservation fee’ on the day of the auction in order to secure the property - this can be up to 5% of the purchase price. This fee covers the auctioneer’s costs and it is not deducted from the overall purchase price of the property, it is added on top. This fee will also be included in the calculation of the stamp duty payable, so you will be paying stamp duty on a purchase price 5% higher than it actually is.

With this method of auction, the buyer is given a more realistic time frame in order to source funding and complete the purchase. With a traditional auction, the buyer is given 28 days, with a modern auction, the buyer has 56 days – 28 days from the day of the auction to exchange contracts, then a further 28 days to complete the purchase in full.

This gives buyers more time to have funding sorted, if they are reliant on a mortgage, as you don’t have to exchange contracts on the same day.

The reservation fee can be refunded but only if the sale cannot be completed due to a fault from the vendor. If the buyer pulls out before exchange of contracts, the reservation fee will be lost and the vendor can resell the property.

Advantages to the traditional method of auction

Legal commitment to purchase

This is a big advantage to sellers of properties at traditional auctions. As the buyer is required to pay a 10% deposit and exchange contracts on the same day, this means they are legally committed to the purchase and can’t pull out, which gives the seller more security.

Purchase un-mortgageable properties

Properties that are not deemed suitable for mortgage lending are often sold at auction to cash buyers. Traditional auctions often attract a bigger audience of cash buyers due to having only 28 days to complete the purchase which is often not enough time to arrange a mortgage. That’s not to say that un-mortgageable properties can’t be sold through the modern method of auction, but sellers will have more security over the sale completing with cash buyers.

Speed of sale

This is another benefit to vendors. They are guaranteed to have the sale completed within 28 days of the auction (providing the property does have a successful bidder) which is much faster than selling via Private Treaty.

Advantages to the modern method of auction

More time for buyers

With the modern method of auction, buyers have 56 days, rather than 28 given by a traditional auction, to complete the purchase. This is a far more realistic time frame for buyers who are reliant on a mortgage to buy the property as it is possible to have a mortgage arranged in this time. In view of this, it opens up property auctions to more buyers all together rather than attracting mainly cash buyers.

More flexible for bidders

As modern auctions are carried out online, they are far more flexible in terms of bidders not having to be in a specific place at a specific time to bid for the property.

Issues to consider before purchasing a property through a traditional auction

Substantial prior costs

Without any guarantee of a successful bid, buyers must pay for any valuations and preliminary legal fees which are required in order to be able to exchange contracts on the day of the auction. Whilst this does eliminate anyone who is not a serious buyer, it can be a huge waste of money if you are outbid.

Upfront deposit

A 10% deposit is required on the day of the auction so you must have this money readily available so it is there if you do win the property. Also, this deposit is often non-refundable if the sale doesn’t proceed.

No backing out

Once your bid has been accepted, you have entered into a legal agreement to complete the purchase so there is no backing out. Before you go to auction, you have be 100% sure that you are ready to proceed with the purchase.

Purchasing inhabitable properties

A lot of properties sold at auction are often unsuitable for mortgage lending or intended for development projects. If your intention is to buy the property, renovate it, then sell or re-finance, you need to take the renovations into account when you are bidding. It is very important to not get carried away at the auction if there is a lot of competition in the auction room as you may end up overpaying for the property and not able to afford the build costs.

Issues to consider before purchasing a property through the modern method of auction

Reservation fee

When you purchase a property through the modern method of auction, you are required to pay a reservation fee in order to secure the property – this could be up to 5% of the purchase price. This fee is not deducted from the purchase price and is non-refundable, even if you change your mind and pull out of the purchase before exchanging contracts. It will only be refundable if the sale cannot be completed due to a fault of the vendor’s.

On top of this already-hefty fee, it will also be included in the calculation of stamp duty payable which means that will increase too. 

The buyer could still pull out

As a negative for sellers, due to buyers having 28 days to exchange contracts and only paying a fee on the day of the auction, buyers could still pull out of the purchase after the auction. Even though they will have a financial interest, they are under no legal obligations to complete the purchase.


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