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Selling or buying a property can often be stressful. This stress is typically heightened due to the uncertainty surrounding timelines and the lack of control over when the completion will occur.
This is especially true in standard conveyancing processes where neither party is obligated to the transaction until contracts are exchanged.
Selling or buying a property at auction can quite sizeably decrease the timeline or at least provide more certainty as to when the exchange of contracts and completion will likely take place.
There are two methods of auction by which a property can be sold – a traditional action and a modern auction.
Understanding the Intricacies and Risks of Traditional Property Auctions
A traditional auction usually takes place in person at an auction house.
A legal pack containing the contract for sale, title documents, and property searches is made available for prospective buyers to consider before the auction day.
If a bid on the auction day is successful, contracts are exchanged when the hammer falls.
This means that the contract becomes contractually binding on the buyer and seller. The buyer will pay a deposit of 10% of the purchase price on the day.
From then, the buyer has 28 days to complete. If this deadline is missed, the seller can claim interest at the interest rate specified in the contract.
The seller can serve a notice to complete, which would usually afford the buyer an additional ten working days to complete before the seller can rescind the contract. If rescinded, the seller can keep the buyer's deposit before selling to another buyer.
However, we have seen contracts within legal packs drafted to heavily favour the seller.
This might include higher than normal interest rates or reduced time to complete after a notice to complete is served, down from 10 working days to 5 working days.
Given the consequences of failing to complete by the deadline and the short turnaround time, it is always advised to have a solicitor review the legal pack for you before bidding at the auction.
This is especially important because once contracts have been exchanged at the auction, you will have little opportunity to raise any enquiries with the seller or their solicitors about the title or property.
The contract usually contains a clause stating that the seller does not need to answer such enquiries.
Suppose there are any major defects with the title or property, even if it makes the property unmortgageable. In that case, the buyer has already committed to the purchase by the exchange of contracts.
The buyer will need to decide whether to continue to complete the purchase or withdraw from the purchase, losing their deposit.
Whilst buying a property via the traditional auction method can be attractive to buyers and sellers wanting the certainty of a quick sale, the risk for buyers can be high.
This method often attracts more experienced buyers or those buying in cash and, therefore, are not reliant upon having a mortgage in place.
Reducing Risk with Modern Auctions
The modern auction method scales down the risk. Unlike traditional auctions, modern ones do not take place in person but rather online.
A legal pack should be made available to prospective buyers to consider before bidding.
If the buyer's bid is successful, they must pay a reservation fee, which could be as much as 5% of the purchase price.
However, contracts will not be exchanged immediately.
Modern auctions allow the buyer 28 days from their successful bid to exchange contracts, with a further 28 days to complete – so 56 days in total.
While the parties are not contractually bound to exchange contracts within 28 days, failure to do so could result in the loss of the buyer's reservation fee.
This method still offers the parties some degree of speed as there is an incentive to meet the 28-day exchange deadline. But the risk for the buyer is not as great as that in a traditional auction.
Importantly, the buyer's solicitors will have time to review and advise on the legal pack.
They can raise any necessary enquiries with the seller's solicitors and negotiate amendments to the draft contract if necessary.
This time allows the buyer to make a more informed decision about whether to commit to the exchange of contracts.
Growth in Auction Sales Amid Market Challenges
Despite the current challenging market conditions, banks and economists have predicted a fall in house prices.
This prediction is due to a fall in demand as a consequence of high mortgage rates.
Buyers are looking to wait to purchase until the rates fall.
In contrast, sales at auction, both traditional and modern methods, have seen growth.
Sellers needing to sell now are exploring these alternatives to the standard conveyancing process.
They are keen to avoid delays to standard conveyancing timelines or transactions falling through.
This drive is due to the instability in the market, as buyers are holding out to get the best possible price and mortgage product for themselves.
Sellers want to find a reliable and quick way to close sales amidst these market challenges.
Conclusion
The number of lots offered for sale in the residential property sector increased by almost 25% between March 2023 and May 2023.
It will be interesting to see whether the popularity of auctions continues to grow and whether it will no longer just be mainly investors and property flippers buying at auction, and whether families and mainstream purchasers will now see auctions as a suitable option for them, especially modern auctions where buyers may perceive there to be less risk compared to that of a traditional auction.