Some properties are bought or sold at auction, rather than through the open market. Kathryn Shaw, Chartered Legal Executive in our Residential Property team, explains what is involved.
Traditionally, buying a property at auction is popular with investors creating a portfolio or buyers looking to renovate a property and sell on for a profit. However, other home buyers and sellers may wish to consider the auction route as there are benefits for both parties.
Selling a property at auction: how does the process work?
Selling a property via auction is generally a quicker process than the more traditional open market route. The contract (or sales) pack is compiled in advance of the auction date. Once the hammer falls, the contract is binding on the successful bidder and no negotiation on the price can take place.
Furthermore, the buyer cannot change their mind and withdraw from the transaction without being in breach of contract and risk incurring considerable financial penalty.
Properties being sold by those with a fiduciary duty to obtain the best sale price, for example mortgagees in possession or trustees or executors of an estate, often choose to sell at auction. That is because the bidding process is transparent and the sellers can be sure they have obtained the best offer available.
Auctions are often a popular solution for sellers of a property which requires considerable renovation or repair or which simply hasn’t shifted on the open market.
What should I do if I want to sell my property at auction?
Initially, you will need to pick an auction house. They will value the property and agree a reserve and guide price with you. They will usually advertise the details of the property (or ‘lot’) in a printed brochure and/or online. The auction house will generally charge a fee, which is payable whether or not the property successfully sells, along with commission based on a percentage of the final sale price.
You will need to instruct a solicitor to compile the contract pack for you. Traditionally, this will include evidence of the title of the property, special auction conditions (which will form part of the contract), EPC (which gives the property’s energy efficiency rating) and a search pack.
If there are any obvious issues with the title, you may be advised to include indemnity insurance within the contract pack. It is good practice in such situations for the solicitor to obtain the proposed insurer’s consent to disclose the policy to a prospective buyer so as not to invalidate the policy terms.
It is usual to include a clause requiring any successful buyer to reimburse you for the search pack and prohibiting the raising of additional enquiries after the hammer has fallen. This will allow for swift progression to completion. Under most auction contracts, the buyer will have up to 28 days from the date of the auction to complete the transaction.
The contract pack will be forwarded to the auction house so that any interested buyers can view it and, if they wish, obtain legal advice upon its contents before bidding at the auction. The auction house will include a copy of the latest version of the RICS Common Auction Conditions (often as part of the brochure). This will then form part of the contract, which becomes binding when the hammer falls.
What if I want to buy a property at auction?
There are several benefits to purchasing a property at auction versus buying on the open market. Properties can be obtained at a good price and the process is generally quick. Auction properties can provide opportunities for improvement and a quick increase in value once renovated.
There are, however, considerations when it comes to funding the purchase. It is crucial to have arrangements for funding in place prior to making a bid as once the hammer falls, there is no going back.
If you need mortgage finance, we recommend having an unconditional mortgage offer in place for the property, on or before the date of the auction. Otherwise you risk being legally committed to the purchase without having the funds available to complete. When the hammer falls, you will be required to pay a deposit which in most cases will be 10% of the purchase price. It is also important to note that, depending on the terms of the contract, most buyers will be responsible for insuring the property from exchange (i.e. the moment the hammer falls) so make sure you have this lined up in readiness.
A prudent buyer will instruct a solicitor to review the legal pack prior to making a bid. At Coodes, we welcome instructions no later than two weeks prior to the auction date so that a detailed review can be carried out. We will then send a report to you, highlighting any issues or points to be aware of with a recommendation as to whether or not we think the title is good and marketable.
Selling a property through an online auction
Selling property via online auction is becoming increasingly popular. Various agents have facilities to do so and generally lots are advertised with an auction date and bids are accepted up until that date.
The procedure can differ to the traditional auction. The buyer with the highest bid at the time the auction closes wins. However, often a winning bid on an online auction does not legally bind a purchaser to complete a purchase, although they are often required to pay a reservation fee which will be lost should the transaction not proceed to exchange. In many cases the successful bidder will have 28 days from the date of the auction closing to exchange contracts with a further 28 days between exchange and completion.
Buying or selling through auction can be a great option, but it is important to understand the process and get the right advice.
For more information or advice, please contact Kathryn Shaw in Coodes Solicitors’ Residential Property team on firstname.lastname@example.org or 01872 246202.