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A property auction is a popular method for a prospective buyer to purchase a property due to the speed and security it offers compared to the standard conveyancing process. There are two types of property auctions – a Traditional Auction and a Modern Auction.
A legal pack from the seller will be made available to prospective buyers shortly before the auction date. The legal pack will contain the Contract of Sale and the title documents. It may also contain conveyancing searches such as the Local Authority Search, Drainage Search and Environmental Search.
The seller will set a guide price, and prospective buyers will make bids on the auction day. When the hammer falls at the auction, Contracts are exchanged there and then. The buyer is then required to pay a deposit of 10% of the purchase price, with the balance to be paid to the seller on completion. Usually, completion must take place within 28 days of the exchange of Contracts at auction. During this time, the seller cannot sell the property to another party.
A successful bid at a Traditional Auction is contractually binding and pulling out of the purchase afterwards could be extremely costly; a buyer could ultimately forfeit the deposit together with any auctioneer’s fees already paid. For this reason, if you are looking to purchase a property at auction, we would strongly recommend that you instruct a solicitor to review the legal pack and advise you of any burdensome provisions in the contract, any potential problems with the property title and any adverse matters revealed in any searches provided before you make any bids at auction.
We have, unfortunately, seen instances where there have been defects in the property title, which meant that, although the buyer could complete the purchase, they would not be able to register their ownership of the property at the Land Registry following completion, and, therefore, would not have any formal title to the property. In one such case we dealt with like this, the buyer had already committed to the purchase by the exchange of Contracts at auction and paid the 10% deposit and, therefore, if they had chosen not to complete, they would have lost their deposit. Similarly, under the terms of the contract, the seller could have kept the buyer’s deposit and resold the property to someone else because the buyer did not complete within the contractual time of 28 days.
Fortunately, the seller was amenable and so over several months, we managed to resolve the defects with the seller’s solicitor. In this instance, the issues with the title caused significant delays and increased costs due to the unforeseen problems, which could have been avoided had the legal pack been reviewed and the issues brought to light before the auction.
A Modern Auction is conducted online. Again, a legal pack will be prepared for prospective buyers to review before the auction. Prospective buyers will submit their bids online and when a successful bid is made, the buyer will be required to pay a reservation fee to secure the property. The reservation fee is not the deposit and it does not form part of the purchase price. It is a non-refundable fee that is payable in addition to the purchase price and auctioneer’s fees.
Unlike Traditional Auctions, Contracts are not exchanged at the auction and buyers are not required to pay the deposit on the day of the successful bid. Completion must usually take place within 56 days of the successful bid and during this time, the seller cannot sell the property to another party. If the buyer is unable to meet the completion deadline or if they choose to pull out of the purchase following the successful bid at auction, the buyer will lose the reservation fee and the seller will be free to sell the property to someone else.
Whilst buyers have more time to exchange contracts and complete the purchase following a successful bid at a Modern Auction, and despite the fact that the reservation fee is less than the 10% deposit required at a Traditional Auction, withdrawing from the purchase can still be costly as the reservation fee and auctioneer’s fees will be lost. Therefore, it is still imperative to have the legal pack reviewed by a solicitor and the appropriate legal advice sought prior to bidding at the auction to avoid any nasty surprises further down the line
If you have any more questions or would like more information regarding property auctions, you can contact our Residential Property Team below.