In our recent search for our new home, we came across the “Modern Method of Auction”. After a bit of research into the details and after discussions with our solicitors, the Modern Method of Auction quickly became something that I felt compelled to warn our readers about further.
What is The Modern Method of Auction?
I will intentionally stop short of calling the Modern Method of Auction a “scam”. However, it is fairly clear that the term modern method of auction is very much a marketing tool to make this type of sale seem like it benefits the buyer and seller. It doesn’t.
In brief, the only parties who really seem to benefit from the Modern Method of Auction are the auction house and the estate agent.
The premise is that the property is sold via an “online auction”, but is effectively carried out like a traditional estate agent transaction.
The big difference is that as soon as the original bid is accepted by the vendor, the buyer is required to pay a “non-refundable reservation fee” of 3.5% + VAT, subject to a minimum of £3,000 + VAT.
Fees are usually payable by the vendor once the sale is completed and, depending on the estate agent, will usually be between 1% and 2.5% of the purchase price.
The terms also state that the parties have 28 days to exchange contracts and a further 28 days to complete, which is fairly in line with standard estate agent transactions.
The Modern Method of Auction: Bad For The Buyer
Obviously there are two huge negatives here for a prospective buyer.
Firstly, the upfront fee means that you have to be confident that you want to complete before bidding. This may involve getting a survey done (£400-£600) before you put a bid in. Depending on the results of the survey, and whether the vendor accepts a bid in the meantime, this could be completely wasted.
Alternatively, the buyer has to bid as a gamble and just hope that there is nothing wrong with the house when the survey is done. If there is, they either lose the reservation fee or have to go through with the transaction.
Also, the buyer knows that usually the vendor would be paying the fees. Therefore, the buyer will almost always factor these fees into their offer and bid lower. In fact, it may be even worse.
For example, say a property is for sale of £200,000. Usually, a buyer may need to save a deposit of 20% (£40,000) to obtain an appropriate mortgage.
If the same property is for sale under the modern method of auction, they need to pay £8,400 in fees up front. This means that they will only bid £191,600 for the property (see the obvious negative impact for vendors below).
Depending on the lender, the house then still could be designated the £200k valuation (in which case we still have to save up £40,000 deposit on top of the £8,400 fee).
In the best case, the valuation becomes £191,600 and our 20% deposit will become £38,320. In this scenario, the buyer will need to have saved up £46,720 instead of the original £40,000 under a standard sale.
Finally, be aware that the buyer will still need to pay stamp duty on the full consideration, i.e the sales price and the upfront “reservation fee” from the Modern Method of Auction – £200k in our example above.
The Modern Method of Auction: Bad For the Seller
It is easy to see how the Modern Method of Auction could be easily appeal to a vendor…at first.
Once the bid has been accepted, the buyer is highly unlikely to pull out due to their upfront fee. Add this to the obvious benefit that all fees are paid by the buyer rather than the vendor, and things are looking pretty rosy for the seller.
However, as we explored above, the reality is much less appealing. For example, take the individual property we were looking at. It was a 5 bedroom house in an estate where other properties usually sold for £225,000 to £250,000 based on their condition.
This property was on the market at £180,000 as the vendor “just wanted to downsize and weren’t that interested in the money”.
When we spoke to the vendor (an elderly retired couple), they stated that they didn’t understand the terms, but had been assured by the nice young man at the estate agent that it benefitted all parties. I’m sure he did!
Had the property been on the market for £225k, I’m confident it would have sold for the asking price. However, due to the method of sale, they had to put it on the market at a much lower price to overcome the issues outlined above.
Everyone loses it seems.
Except for the estate agents.
Let’s go back to the £200k example from above. If it had sold normally, the estate agent fees would have been paid upon completion and would have been between 1% and 2.5% plus VAT (£2,400 and £6,000). The sale would not have been guaranteed upon the bid being accepted, and the estate agent would not receive their fees for months after the bid was accepted.
Instead, under the Modern Method of Auction, the fees were paid on Day 1 by the buyer and would have been around £8,400.
Nice and easy to identify the winner there isn’t it?
The final point to note is that you effectively restrict your market by going through Modern Method of Auction. The majority of people who will feel comfortable buying in this way would be experienced investors (rather than people looking for their dream home for the family). These buyers are usually expected to buy below market value (BMV) and hence the selling price is likely to be significantly less than a standard sale.
The Modern Method of Auction: What The Solicitor Said…
Exactly what we expected.
We approached our conveyancer (property lawyer) and asked them whether we could submit a bid that would be subject to nothing showing on the survey.
His advice was that this would have to be agreed with the estate agent/auction house and there was very little chance that they would agree to this.
He also confirmed my suspicions and stated that the only party who wins in such a transaction is the person who is taking the fee.
The Modern Method of Auction: A Conclusion
With the £225,000 eventually being agreed at a mere £185,000, it is hard not to look back and think that we may have missed a trick. However, when I put my risk adverse hat on, it was fairly clear that the only person who was tricked in that transaction was the poor retired couple who probably lost around £30,000-£40,000 by going with the Modern Method of Auction compared to a standard sale.
If you think that I’m being cynical here, I’m not the only one…
So, I’ll leave you to make your own mind up and maybe you can work with your solicitors to build something into your bid with the auction house. However, please be warned: proceed with caution!
Have you had experience with the Modern Method of Auction? Let me know in the comments below.