Modern Auction vs Traditional Auction

The property market over the last few years has been unstable and sellers are trying to find other way to make their properties standout and become more attractive to buyers. A Modern Auction is becoming an increasingly popular tool to use. 

When the word Auction is mentioned, it is very easy to think of the television programme ‘Homes Under the Hammer’ and bidding to buy a house. However, a Modern Auction is not like this and there are various important differences and considerations.

An Auction no matter if it’s Modern or Traditional can benefit both sellers and buyers. For a seller, it might mean a quick sale; avoiding the possibility of dealing with viewings and spending several months on the market. For a buyer, they might be able to pick up a cheaper property than would usually be the case and again will be able to get their hands on the keys quicker.

Traditional Auction 

A seller would arrange via their Solicitor for a sales pack to be prepared (containing searches, title deeds and various other documents) which a buyer would review (with legal advice) prior to Auction. On the day of the Auction, the buyer would bid for the property and once the hammer drops, the exchange of contract occurs and 10% deposit is handed over. The buyer is usually then given 28 days to complete the purchase. 

Modern Auction

A seller would arrange via their Solicitor for a sales pack to be prepared which would be reviewed by a buyer. A buyer would place a bid (generally online) and if successful a reservation fee is paid to the agent (usually in the region of 3%-5% of the purchase price) to secure the property. The important difference is that a buyer is not locked in to buy the property as exchange of contracts has not occurred. The buyer is usually then given 56 days to complete the purchase.

What happens if you want to withdraw?

On a Traditional Auction, you have exchanged contracts once the hammer falls so you are locked into a binding agreement to buy/sell the property. If a buyer withdraws, the deposit (usually 10%) is lost  and the buyer can be sued for further out of pocket expenses that the seller has incurred. There is a possibility that the buyer could be sued for further monies if the seller makes a loss on the next sale.

On a Modern Auction, a buyer might be able to withdraw as exchange of contracts has not yet occurred. The buyer would forfeit the reservation fee paid however as it is non-refundable. 

Stamp Duty Land Tax

On a Traditional Auction, the deposit you pay on exchange forms part of the purchase price so you would pay stamp duty on the prevailing rate based on the full price.

On a Modern Auction, you pay stamp duty on the reservation fee you pay plus the purchase price.  For example; let’s say the full purchase price is £150,000 and the reservation fee is 5% (£7500.00). The stamp duty land tax liability is based on £157,500

Financing

It is very important that a buyer arranges their finances before a bid is made no matter if it is by any type of auction or by private treaty. However, on a Traditional Auction, you will be given little to no time to arrange your mortgage financing after the hammer falls. If you are unable to arrange financing, as the contract is unconditional, you will be in breach. This is why most Traditional Auctions are financed by cash only. On a Modern Auction, a buyer is given a greater period to arrange financing and as exchange has not yet taken place yet, there is less of a risk save on the reservation fee.

What happens if the property is defective?

It is very important that you carry out all surveys, inspections, tests, and searches before a bid is made on Auction. If a buyer fails to do so and there is a fault which is discovered after the bid, the buyer is left with the option of continuing with the purchase and buying at the price bid (a buyer will have to fix any defects at their own time and expense) or withdrawing. As discussed above, if a buyer withdraws on a Traditional Auction they will be in breach of contract. On a Modern Auction, a buyer won’t be in breach of a contract but will be liable for the Reservation Fee.

How can Hegarty help me?

We have experience in acting for sellers and buyers of both methods of Auction and we understand that an Auction can work well for both a seller and buyer but only if they proceed with full knowledge and understanding of the procedure.

We can help sellers build their sales pack, gather their documents and disclose all necessary information that they are obliged to do so. We can then help the seller move to completion by liaising with the buyer’s solicitor. We understand that time is of the essence, and we can move swiftly on this.

We can help buyers before the auction in reviewing the sales pack and highlighting any issues and guiding them what arrangements you need to have in place before bidding. There might be matters unknown to a buyer that we can find because of the review of the pack that means caution is urged or we have to explain that perhaps this is not the right investment for a buyer. If all is deemed ok, we can then help you from the bidding process to completion. Again we note that time is of the essence here and we can move quickly to help you.

Regardless if you are selling or buying, it is most important that you place your instruction with us at the earliest possibly opportunity before bidding commences.