The popularity of online property auctions – good or bad?

There is much to be said about the growing popularity of online property auctions, especially at a time when transactions are taking longer and over 300,000 purchases fell through last year.

But is it all it’s cracked up to be? Richard Copus explains why buyers and sellers need to tread with caution…

Over the last few years, a new way of buying and selling via an online property auction has appeared.  Known as the Conditional or “Modern” Method, it differs from traditional auctions because contracts are not exchanged on the fall of the gavel.  Instead, the buyer pays a reservation fee which allows more time in which to prepare him/herself to exchange.  These types of auction are growing in popularity because they allow people who need time to raise the money to buy properties they would otherwise be unable to do.  These transactions will complete a great deal faster than buying on the open market and there is no risk of gazumping.

However, this new method of buying and selling via an online property auction is successful for estate agents who are using it to prise extra fees from buyers and to entice sellers to part with their homes on a no fee basis.  Traditional auction, where exchange happens immediately and completion is 28 days later, is well regulated by law and has been used successfully for centuries.  The seller pays a commission, usually around 2%, and the only charge to the buyer is a few hundred pounds administration fee.  This encourages the maximum number of bidders and the full market price is obtained for the seller.

On-line property auction fees explained

The Modern Method of online property auctions does away with all of this.  A high non-returnable reservation fee is charged to the buyer, normally a minimum of £5,000 and generally around 4% including VAT which is way above the traditional buyers’ administration fee.  This fee reduces the number of bidders and reduces the amount the property is sold for because, such a high amount, materially affects what the buyer can afford. This fee is also added to the purchase price for stamp duty purposes creating an additional cost for the buyer.  The seller might think they are saving money by not paying a fee, but in reality, they often come away with less at the end of the day because their house has sold for a lower price than it would have otherwise.

Why are these reservation fees so high?  Mainly because the fee is split between the auctioneer and the estate agent marketing the property and this fee is non-negotiable.  Unlike traditional auctioneers who are qualified professionals and who carry out their own marketing, the Modern Method is often run by tech platforms who work with estate agents to offer this service, and in return, these estate receive a large chunk of the fee.  This fee varies between a third and half the total amount paid by the buyer; about double what they would earn through selling a house normally.

Non-returnable reservation fees and other issues

One of the main complaints buyers have with the Modern Method is not being able to recover their reservation fees when the seller has been unable to exchange contracts within the given timescale, usually between 28 and 56 days, and when the agent has not provided enough information about the property to enable the buyer to exchange in time.  For example it is not uncommon for the full details of the leasehold title to be missing in the legal pack.   Through no fault of their own, the buyer is suddenly out of pocket to the tune of thousands of pounds.

Agents rarely give buyers their money back in such cases because they say the contract states that it is only the buyer who is bound by those terms and not the seller.  However, a contract is a two way agreement and one which is weighted unfairly against the consumer is often unenforceable.     In addition some agents have failed to provide the information they are required to do by law which has caused the delay.  However, the buyer is usually told categorically that his fee is non-refundable “because that is what it says in the contract” and they walk away penniless. Learn more about what you can do if you are in a dispute with your estate agent. 

Over the last decade or so, estate agents and auctioneers have had to comply with more legislation to protect consumers.  The most important of these is the Consumer Protection Regulations to ensure full and correct information is used when marketing properties.  Hiding behind a simple clause in a contract does not mean that the consumer cannot get their money back.

Under the Property Ombudsman Code of Conduct, before taking on a property agents have a duty to advise their clients of the best method of sale and the pitfalls of the one they recommend.  Some of the houses on the market through the Modern Method are ordinary, mortgageable homes where the home owner has been attracted to sell this way because there is no fee payable.  Selling these properties by any form of auction is not normally advisable, unless the seller needs a very quick sale and is not too worried about the price he will achieve, and there is a duty to spell this out to the seller at the outset. Learn more about what the Property Ombudsman does and how to make a complaint. 

My advice to buyers is: Only use the Modern Method of online property auctions when the reservation fee is low and the property is your dream home, and be very wary of the terms in the contract.  For sellers, my advice is: Don’t be seduced by the offer of not having to pay any commission; there is no such thing as a free lunch!

By Richard Copus,  Fellow of the National Association of Valuers & Auctioneers and the National Association of Estate Agents and founder of property-redress.co.uk.

Kindly shared by HomeOwners Alliance (HOA)

Main photo courtesy of Pixabay