Our National Commercial Director explains how conditional property auctions work and how they can benefit both sellers and buyers.
Conditional auctions, also known as the Modern Method of Auction (MMoA), are relatively new on the block when it comes to selling property. But what are they exactly, and how do they work?
To explain, we called upon our National Commercial Director, Oliver Prior, to put together this article and take a deep dive into the process, the benefits, and how we at Auction House have improved this alternative method.
Conditional auctions: finding the middle way
There are typically two ways of selling property. The first is by private treaty, through estate, commercial or land agents. The second is via a traditional auction, in which the unconditional exchange of contracts happens when the hammer falls.
There is a big gap between these two modes of sale and the conditional, or modern method, finds a middle ground.
In a conditional auction, the highest bid above the reserve price ‘wins’ the property. However, unlike the traditional method, you don’t have legal parameters imposed upon a sale when the bidding concludes.
Instead, the buyer pays a non-refundable reservation fee to the agent once the auction ends. This kicks-off a reservation period, usually 28 days. The payment of a fee for exclusivity provides security to the seller and ensures that the buyer doesn’t lose out to an alternative offer being submitted.
This reservation period means that the buyer has more time to get their ducks in a row, carry out due diligence such as surveys, and organise finances. This could include a mortgage, which can be trickier to arrange in the timescales set by a traditional auction.
A conditional auction also means that most of the legal documentation and conveyancing is prepared before the auction. This can speed up the process of preparing and exchanging contracts post-auction, something that can take months when buying through private treaty. It also means that the buyer will know more about what they are buying before they bid than they would before making an offer via an estate agent.
The unique advantages of conditional auctions
Conditional auctions broaden the market. They are quicker than selling via private treaty, but they don’t come with the legal commitment of going under the hammer at a traditional auction. Consequently, buyers have extra time to carry out due diligence and get their finances arranged. And if something crops up, they can still back out, although this will forfeit the reservation fee.
As a result, sellers benefit from a wider and more competitive bidding field. Thanks to the conditional terms of the auction, they will have more buyers prepared to come to the table and take part in the auction.
By offering this ‘third way’ both buyers and sellers can get a solution that better fits their exact needs.
For instance, a property may not suit sale by a traditional auction, which usually best fits those that are in disrepair, have structural issues, or sellers who need a quick turnaround. These kinds of properties typically suit cash buyers. But if a property is well-presented, structurally sound, or possibly even a newbuild that’s been on the market for a while, a conditional auction could be a good solution.
This is because not only can this type of auction attract more buyers, but better prices can be achieved for sellers. Sellers benefit from the competitive bidding environment of the auction and bidders benefit from the conditional commitment.
With traditional auctions, properties can be offered at a considerable discount to perceived market value. The MMoA, however, means that properties can be offered at a more modest discount. This can comfort a seller when it comes to setting a reserve price. In addition, they won’t feel as though they are taking on quite as much risk as they might if they went down the traditional route.
Essentially, it means advice can be better tailored to the situation by offering both auction methods. We can help more people and offer best guidance depending on which auction method suits their needs.
The unique disadvantages of conditional auctions
However, there are some disadvantages with the modern method of auction that has generally been offered to the market.
We reviewed the method and found that while there was a lot of good in there, some points could be improved.
For instance:
- The misleading notion of ‘selling for free’.
- The lack of incentive for auctioneers to maximise the achievable value of the property.
- The overly burdensome buyer costs and the reduced competitiveness of bidding.
- A lack of security for sellers, who have no claim on the reservation fee.
This is because the conditional auction model that is typically pitched to the market is done so on the basis that a seller can sell their property without paying a sales commission to the auctioneer. This puts all the costs of the sales process on the buyer’s side, beyond that which we would deem reasonable.
A knock-on effect of this is that the buyer’s bidding potential is limited because they must take the total cost of buying the property off their top bidding bracket. So, the seller will actually still be paying, albeit indirectly, because they’ll lose out on higher bids.
You must also remember that without a sales commission, the agent is not motivated to achieve better prices for the properties being sold. They will also lack incentive to see the sale through. Once they’ve taken the reservation fee, a set figure that bears no relation to the final sale price, they are not incentivised to progress the sale to completion.
The Auction House solution
With this in mind, we saw an opportunity to improve the status quo and the existing model by:
- Reducing the cost of buying at conditional auction.
- Better incentivising the auctioneer.
- Improving the transparency of fees.
- Splitting the reservation fee to better protect the seller.
Auction House therefore decided to create a conditional auction process that splits the cost across the buyer and seller more evenly. If a seller is instructing us to act for them, then it is perfectly reasonable for them to expect to pay a fee for services rendered. By doing this, we not only reduce the cost of the reservation fee for buyers, but we incentivise ourselves to maximise the achievable price for that property. The fee we are paid by the seller is a percentage of the end sales price, so it is in our interest to get the best outcome.
By reducing the cost on the buyer’s side, we create a more competitive bidding environment. This profits the seller when the property goes to the auction room.
We also split our fees between two points in the sales process. We take a proportion of the fee at the point of reservation and then the rest at exchange. As a result, we are motivated to progress that sale through to the end.
Finally, if the buyer pulls out of the purchase before exchange of contracts, we look to protect the seller’s best interests by splitting a proportion of the reservation fee with them.
Taking part in a conditional auction
The advice we give to any buyer at auction, whether it’s a conditional or traditional one, is to read the legal pack in full. The legal pack contains full details of the purchase.
It’s vital that you understand what’s written in it, so you should take advice from a solicitor when looking over it. If complications are spotted, take an expert with you to view the property so that you can get a clear picture. We always advise against assuming knowledge of something without previous expertise or experience, as it risks getting your fingers burnt.
In addition, if you’re a buyer, you should decide what that property is worth to you. So, when you go into a physical or virtual bidding room, make sure you’ve worked out your figures in advance so that you know what your maximum possible bid will be. You must then stick to this. The minute you bid beyond this, you’re eating into your budget or profit margin, and you could end up with a dead duck on your hands.
For sellers, I would urge you to work with the auctioneer. The big difference between what we do and what estate agents do is that they will pitch you the price that they think a property may achieve and set it as the asking price. If this price is pitched too high, you could put off potential buyers and drag out the sales process.
We, on the other hand, discuss what the minimum may be that you would accept to sell the property. We then use this as a guide price, driving up the price beyond this through competitive bidding to get you the best possible outcome.
The future of conditional auctions
The modern method of auction is a growing part of the auction industry and one that has garnered real traction. By offering it, we have a second avenue to recommend to our clients when it comes to sales.
Consequently, we can offer the best advice to you based on your circumstances and the condition of your property, ensuring that you choose the platform of sale that delivers best value and caters to your needs.
Get in touch with us
If you’d like to find out if your property is the right fit for an auction, book a free valuation today.
Alternatively, take a look at our upcoming auction dates.
About our author
Oliver Prior has been a part of the Auction House team since 2021, bringing his chartered surveying and auctioneering skills to our central and corporate client base.
In addition to these duties, he is also a member of our senior management team and the Royal Institution of Chartered Surveyors (RICS). Oliver is part of a working group within the RICS that is focused on improving best practice within the property auction industry.
