What is an Online Conditional Auction and how does it work?
Buying a property at auction is becoming more popular with the growth of live online auction events. More home sellers, working with their local estate agents, are choosing to put their homes on the market in this way, which means a wider variety of auction properties are now getting the attention of not only investors, but also first-time buyers, second steppers, families and downsizers looking to make their next move.
There are lots of advantages to buying at auction. Firstly, there is the potential to get a good deal if you do your homework. You also won’t get gazumped in a busy property market.
However, before you consider buying a home at auction, it is important to know how different methods of auctions work and the timescales associated with your purchase so you can be as prepared as possible as a buyer.
Online conditional auction – did you know?
- You can arrange a physical viewing of a property being sold at Online Conditional Auction before you bid
- The time to exchange and complete contracts is 56 days (but this can vary)
- Online auctions last between 48 hours and 14 days on average (however time frames can vary)
- You can buy some properties with a mortgage
- Many properties are sold chain-free
- You can view the legal documents relating to the sale before bidding
- The successful bidder pays a non-refundable Reservation Fee to show commitment to the seller and to reserve the property exclusively. This is payable in addition to the purchase price.
- Stamp Duty Land Tax (SDLT), or the equivalent tax in Scotland and Wales, is payable on the full purchase price, which will be calculated to include the Reservation Fee
- Placing a winning bid does not mean you become the legal owner of the property. This happens at completion of contracts
- The Reservation Fee shows commitment to the sale. If a buyer withdraws from the purchase, it is unlikely to be refunded.
What is the difference between Online Conditional Auction and Traditional (Unconditional Auction)?
The overall concept of Online Conditional Auction and Traditional Auction is the same: the highest bid above the reserve price wins the property. However, the key differences between the two auction methods are the contractual conditions and timescale.
An Online Conditional Auction, also known as the Modern Method of Auction (MMoA), is a process of buying and selling property that allows a longer timescale for the exchange and completion of contracts than is allocated to purchases made at a Traditional Auction (also called Unconditional Auction).
Many properties are sold chain-free, and most of the legal and conveyancing documentation is prepared prior to the auction going live.
The exchange of contracts does not occur immediately at the end of an Online Conditional Auction. Instead, there is a Reservation Agreement between the buyer and the seller which guarantees an exclusivity period – usually 56 days to exchange and complete – which allows more time to arrange finances and to secure a mortgage loan.
The timescale of completing a purchase made at Traditional Auction is 28 days in total, which can limit this method to cash buyers and investors.
Another key difference is that at Traditional, or Unconditional Auction, at the fall of the hammer the highest bidder has made a binding contractual commitment and a deposit is held as security. The seller is also legally bound to the purchase.
For properties bought at Online Conditional Auction, you become the legal owner after completion, however you will sign a Reservation Agreement and pay a non-refundable Reservation Fee to have the exclusive right to buy the property for a specified period.
This is a sign of commitment and provides security to the seller that you are a serious buyer. If you don’t proceed with the sale at the end of that period, you will forfeit the Reservation Fee, but you will not own the property.
How long do Online Conditional Auctions last?
An Online Conditional Auction for a property can be over in a matter of days, or it could last for several weeks, depending on the level of interest in the property. It is strongly recommended that you arrange a viewing as soon as you can during the pre-auction marketing period, or while the listing is still live.
You should also contact the estate agent handling the sale to register your interest, so you are kept informed throughout the process.
You can view the property before you place a bid
Bids can be placed at any stage during the auction process. However, you can – and should – arrange to view the property before placing a bid.
Following a viewing, if you are keen to move forward, you can also seek advice from a conveyancer and arrange a survey of the property. Survey costs start at £400 on average.
If an auction is ending soon, there may not be time to complete a viewing or a survey. You should always check with the estate agent handling the sale as they can propose delaying the auction while you arrange this, depending on the level of interest in the auction lot. This will typically be approached on a case-by-case basis.
You can view the legal documents relating to the property before you place a bid or make an offer
One of the benefits of buying at Online Conditional Auction is that most of the legal and conveyancing documentation is prepared before the auction starts. For Private Treaty sales, the conveyancer usually obtains these during the process, which can cause delays.
A Legal Pack, also called a Buyer Information Pack, should always be available to you prior to placing a bid, and should contain documents such as:
- Title Register or EOT (Epitome of Title) if unregistered
- Title Plan
- Property Information Form
- Fixtures and Fittings Form
- Local and Water Searches (Mining searches are provided for some regions where necessary but would be a requirement if there was any associated mining area risk)
- Leasehold Information (if applicable)
You should only be asked to pay for the provision of this pack if you are the successful bidder, with fees starting from about £300.
In a Private Treaty property sale, you wouldn’t expect to see these documents until after you’ve made an offer. This pack speeds up the process in comparison to buying through Private Treaty, which is often slowed down by conveyancing delays. If the pack isn’t available for a property you are interested in, you can register your details and be notified when it’s ready.
The pack may not tell you everything you need to know about the property, so it’s important to check if there are any outstanding documents as soon as you can to give you enough time to ask any questions you may have before placing a bid.
You should also ask your solicitor to specifically confirm the conveyancing process in your location, as this varies across England and Northern Ireland, Scotland and Wales.
And it’s a good idea to complete your own investigations, where possible, by seeking independent advice from a solicitor and arranging your own survey, as your reservation fee won’t be refunded if you withdraw from the purchase after your bid or offer has been accepted.
You should always seek advice from a mortgage lender to make sure the property is deemed suitable for mortgage lending purposes. Also, to speed things up, it’s best to arrange a mortgage in principle prior to placing a bid.
Registering to place a bid
Online Conditional Auction property listings on Rightmove are marked with a ‘Bid to purchase’ label. To find out more about a specific property, contact the estate agent on the listing to ask about auction dates and to arrange a viewing.
Anyone can view live auction listings online; however, you will need to register with the auction house by providing personal details such as your name, address and date of birth prior to placing a bid.
To place a bid, you will be asked to provide verification of your identity and evidence of how the purchase will be funded, for example if you’re a cash or mortgage buyer. You may be asked to provide copies of bank statements, completion statements and mortgage agreement documents.
Some auction houses may request to complete a credit check to ensure you can proceed with the Reservation Fee and purchase.
The starting bid
The starting bid is set by the seller and can be subject to change. This will be the same amount, or higher, than the undisclosed minimum price that the seller is willing to accept for the property. The start bid is not the final purchase price for the property.
Making an offer before an auction has ended
As well as placing a bid, some auction houses allow potential buyers to send a written offer to the seller, via email, to the estate agent handling the auction sale. This offer must then be presented to the seller for their consideration.
If an offer is accepted, the property will be withdrawn from the Online Conditional Auction and all current bidders will be notified.
If you are the winning bidder
The Reservation Agreement and Fee
If your offer or bid is accepted for a property listed at Online Conditional Auction, it is likely that you’ll be asked to sign a reservation agreement. Often, a non-refundable Reservation Fee (sometimes called a Buyer’s Premium) will be payable to secure the property exclusively. If you are required to pay this fee, it will usually be in addition to the property purchase price and you’ll need to ensure you have enough funds to pay this on the day of the auction, usually within two hours.
If a Reservation Fee is payable, sometimes the seller may choose to cover part of it, or all of it. This would be communicated to interested bidders by the estate agent and may be open to negotiation.
In many cases, this fee is used to cover estate agency and auction house fees.
While the Reservation Fee does not legally bind you to buy the property, it does mean you can’t get gazumped, as you will have the sole right to exchange and complete within 56 days (or within a mutually agreed timescale with the seller).
Always check with your solicitor to confirm when the property sale transaction will become legally binding, as this varies across England and Northern Ireland, Scotland and Wales.
In contrast, buying at Traditional, or Unconditional Auction, means the exchange of contracts takes place as soon as the auction ends. The buyer is then required to pay a non-refundable Reservation Fee, which isn’t part of the purchase price, plus a 10% deposit, and will exchange and complete within 28 days.
How much is the Reservation Fee?
A Reservation Fee is often payable in addition to your bid for the property. This non-refundable fee varies between providers and is calculated depending on which is greater: a percentage of the purchase price or the minimum payment fee.
You can expect to pay a Reservation Fee of about 5% of the purchase price, while minimum payments start between £5,000 and £6,000 on average.
For example, the Reservation Fee payable on a successful bid of £115,000, charged at 5% of the purchase price, would be £5,750. If the minimum payment fee is set at £6,000, you would need to pay the higher amount.
Therefore, in total, you would pay £121,000 for the property, plus any other fees relating to the sale, including costs for the legal pack, a solicitor, a survey and mortgage valuation costs.
Alternatively, based on a higher bid of £250,000 on a property, a Reservation Fee charged at 5% of the purchase price would work out at £12,500, so this added cost must be factored into your budget and final bid along with the other associated fees and charges.
You can check the terms and conditions of the individual property sale to get this information before you place a bid, and confirm with the estate agent handling the sale, so you are aware of what the overall costs will be. This should always be included within the details of the property listing.
In some circumstances, you might be asked to pay a Reservation Deposit instead of a Reservation Fee, which would be put towards the final purchase price. If the seller pulls out of the sale, this deposit would then be refunded. Again, ask your estate agent to confirm these details.
Will the Reservation Fee increase the amount of Stamp Duty Land Tax (or the equivalent tax in Scotland and Wales) payable?
Yes, a Reservation Fee could increase the amount of Stamp Duty Land Tax (SDLT), or the equivalent tax payable in Scotland and Wales, for the property transaction because it is considered as a fee that must be paid for you to acquire the property.
As such, the overall sum you pay to buy the property will be the total of your bid, plus the Reservation Fee. This overall sum will determine the stamp duty bracket applicable for the transaction.
Confirmation of the sale
Once the Reservation Process is complete, the Memorandum of Sale will be issued. This will be sent to you and your solicitor, as well as the seller and their solicitor. This document will confirm the details of the instruction and any special conditions. You will also need to contact your chosen solicitor to instruct them to act on your behalf and complete any paperwork they provide.
Exchange and completion
What happens if a buyer cannot complete within the agreed exclusivity period?
When buying at auction both buyers and sellers are required to meet the agreed timescales, which usually starts from the receipt of the draft contract. Timings can also be based on the number of working days within the set timeframe, for example 20 working days for exchange, with completion due 20 working days later.
If your mortgage loan application or source of funds is delayed, or may hit delays, it’s important to get in touch with the seller’s estate agent to discuss your options. It is possible for Online Conditional Auction sales to take place within flexible, extended timescales, at the seller’s discretion.
What happens if a buyer withdraws from a sale after placing a bid?
Unlike Traditional Auctions, you are not legally bound to proceed with the sale if you are the successful bidder. However, once you have signed the Reservation Agreement and have paid the Reservation Fee, you will not get the fee refunded to you if you withdraw from the sale.
What happens if a seller withdraws from the sale?
If the seller withdraws from the sale, they will usually be asked to cover the costs of the Reservation Fee and the buyer will receive a refund.