Buying and selling property at auction

There are advantages and disadvantages of selling property at auction. If the property attracts bids and sells, the main advantages of selling property at auction are certainty and speed. Upon the fall of the hammer, the buyer is obliged to complete on the date stated in the sale contract. However, if the title of the property requires consent, the contract may be conditional on obtaining consent. As the buyer cannot withdraw without penalty, they cannot enter into post auction negotiations, or raise enquiries. 

There are various other reasons a seller may be selling their property at auction, and these include:

• Price
• Contractual certainty
• Wanting/needing a quick sale
• The property is a repossession
• The property is difficult to value
• The exchange happens when the hammer falls
• The seller may achieve a higher price at auction
• Complexities (legal issues and/or structural issues)
• The property needs refurbishment or redevelopment
• There is limited opportunity for a buyer to negotiate or withdraw
• A lender will be under a duty to get the best price. At auction, the property will find its value and they will be able to evidence that they have discharged their duty to the registered proprietor

The main disadvantage of an auction is the cost. The seller may have to pay the auctioneer’s fees even if the property does not sell. In addition, the commission payable if the property does sell, may likely be greater than would normally be charged on a sale by private tender. The Seller will need to provide a legal pack (see below) which will incur “upfront” legal expenses.

If you are intending to sell your property at auction, then you should consider which auction house is suitable for the property you are intending to auction. If the auction lots are, for example, predominantly repossession sales, it may not be an appropriate auction for the seller to sell garden land with development potential.

Importantly and firstly, check the date of the auction. The seller should check how much notice the auctioneers require to include the property in a forthcoming sale. This is to allow time for the auction catalogue to be published, and for the property to be properly marketed to optimise the chances of your property being seen by prospective buyers. Placing property in an auction where there has been no opportunity to market the property via the catalogue would increase the risk of the property not selling, whilst the auction fees would still be payable.

You will also need to allow sufficient time for your solicitors to prepare the legal pack. For example, it may be necessary to obtain a local search from the local authority before the pack can be completed.

Auction House Essex and Kent | Property Auctioneers in Essex & Kent

Essex Property Auctions – Land & Property Auctions Southend

The auction catalogue is prepared by the auctioneers and contains the particulars of each property (or “lot”) that will be offered for sale at the auction.

The information in the auction catalogue may include:

• A photograph of the property
• The full address of the property
• The tenure of the property (freehold or leasehold)
• The guide price for the property. The seller should obtain professional valuation advice on the guide price
• Brief details of any leases to which the property is subject, including annual rents and unexpired lease terms
• The seller’s legal advisor’s contact details in the catalogue. These details, together with a file reference, are usually included in the catalogue to ensure that any correspondence is correctly directed

It should also state the energy performance indicator from the energy performance certificate (EPC). An EPC should be included in the legal pack.

Either the seller or their legal advisor will be asked to provide the above information. If the information is provided directly by the seller, the seller’s legal advisor should be asked by the seller to check the particulars against the title documents. If a mistake is found in the auction catalogue, the auctioneers should be notified as soon as possible. If it is not possible to correct the mistake before the catalogue is printed, the correction will be printed in an addendum.

Your legal advisor will normally prepare the legal pack, which should include:

• Copies of the title deeds
• The special conditions of sale
• Where applicable, an EPC and recommendation report
• Replies to standard form pre-contract enquiries, if these are being provided
• Copies of any leases or other legal documents to which the property is subject
• Copies of any searches undertaken by the seller. The seller may wish to provide in the special conditions that the buyer will reimburse the seller for the cost of the searches

Once the legal pack is produced, any additional information or amendments should be provided to the auctioneers and to prospective buyers. This will usually be dealt with by way of an addendum.

The seller should check with the auctioneers whether they will provide copies of the legal pack to prospective buyers, or whether the seller’s legal advisor will be expected to do this. If only the auctioneers are providing copies of the legal pack, it is vital that any enquiries from prospective buyers received by the legal advisors are promptly passed on to the auctioneers.

The sale contract for a lot in an auction sale, can comprise some, or all, of the following documents:

• General conditions of sale. The general conditions of sale are the same for all of the lots in the auction and may be printed in the auction catalogue.
•  Extra conditions of sale. The extra conditions of sale, which are produced by the auctioneers, vary the general conditions in relation to all the lots in the auction. As with the general conditions, the extra conditions may be printed in the auction catalogue. Not all auctioneers produce extra conditions of sale.
• Special conditions of sale. The special conditions of sale, which are produced by the seller’s legal advisor, set out the conditions that apply to an individual lot.

An addendum may be used to:

1.       Correct the particulars in the auction catalogue
2.       Correct information in the legal pack; or
3.       Provide additional information about a lot.

Any addenda will be available to prospective buyers at the auction.

At the auction, any addenda will be made available to prospective buyers and may be announced before the bidding starts on the relevant lots. Some auctioneers require the seller’s legal advisor to attend the auction to deal with any queries that arise on the day. Other auctioneers provide their own legal advisor to do this.

The auctioneers will send the signed memorandum of sale to the seller’s legal advisor, who should contact the buyer’s legal advisor and confirm the completion date.

The completion date will be stated in the sale contract and is often expressed to be a number of days after the date of the auction. It is helpful for the parties to expressly agree the actual date on which they expect to complete, to avoid any misunderstandings. For example, if the auction takes place on 1st April, with completion 20 days after the date of the auction, is the completion date 20th April or 21st April?

This method of selling proves to be popular where an owner knows little about a property, for example a sale of inherited property or a repossession sale.  You should however consider the pro’s and con’s and discuss with a local estate agent, as well as the auction house you are considering, in order for you to make an informed choice as to how you wish to proceed.

If the seller is selling a property at auction due to ‘complexities’, the seller should consider disclosing these in auction back to ensure no allegation of misrepresentation. A seller does not have to disclose structural defects etc. And the principle of ‘caveat emptor’ applies, but the representations the seller may give by replying to pre-contract enquiries may land them in trouble. However, there is a risk of putting off prospective buyers by disclosing known structural issues, but the seller will limit the risk of misrepresentation.

It is important to instruct a solicitor experienced with auction transactions to ensure the auction contract is prepared specific to the proposed transaction, providing the seller with bespoke advice.

The buyer has a great number of matters to consider. See below a non-exhaustive list of important considerations: 

1. The buyer should be aware that they are required to pay a deposit at auction (usually 10%). They should have funds available to facilitate this payment.
2.  The buyer should be ready to put their buildings insurance on risk from the date of the auction. It is advisable to make enquiries with insurers prior to auction to ensure that there are no difficulties insuring the property.
3.  The contract may state that the deposit paid shall be held as agent. The seller will have a right to access and spend the deposit prior to the legal completion date.
4. The completion date is likely to be 20 business days from the auction date. The buyer should be aware of this and be ready to make the balance of funds available for this date. This is relatively a short period of time if the buyer is seeking to obtain a mortgage.
5. The buyer should inspect the property to ensure there are no persons in occupation, and if there are, that all tenancy agreements have been disclosed in the legal pack.
6. The contract may require the buyer to reimburse the seller for their legal costs.
7. The buyer should instruct a surveyor to conduct a survey prior to auction to establish any structural issues which may exist. They will also be able to advise on market value.
8. The cost of obtaining a survey will not be recoverable if the buyer does not win the auction.
9. The seller may not be willing to reply to any enquiries post-auction.

10.  The cost of obtaining legal advice will not be recoverable if the buyer does not win the auction, however, the buyer should instruct an experienced solicitor to review and advise on the legal pack prior to auction. There are many legal issues that need to be considered and are often overlooked. The worst thing a buyer can do is to buy blind and not seek professional advice prior to auction.

1. The auction contract may not allow the buyer the right to raise requisitions where title documents are missing. The buyer needs to be advised of the issues this may present.
2. There may be legal issues which affect the marketability and value of the property.
3. The buyer may need to raise mortgage finance and a solicitor will need to advise them that the title and supporting documentation provided in the legal pack is satisfactory and able to comply with a lender’s requirements/instructions. If there are complexities which need to be reported to the lender you may lose your deposit if you are not in a position to complete the transaction on the legal completion date.
4. If no searches are available, the solicitor will be able to obtain these on the buyer’s behalf if there is time to do so.
5. Where it is not possible to obtain searches in time, and none are available at auction, the buyer’s solicitor will be able to negotiate on the buyer’s behalf that the contract gives them the right to rescind if the search results are not satisfactory.
6. The special conditions of the contract may incorporate terms which are not favourable to the buyer.
7. There may be onerous rights burdening the property such as rights of way and other easements.
8. The property may need rights over adjoining property which are not reflected in the legal title.
9. There may be restrictive covenants on the title which will interfere with your proposed use of the land, or that have already been breached.  
10. Commonly, the seller may not be the current registered proprietor of the land so it will be essential to establish that they actually have the legal right to sell the property.
11. The property may not be title absolute and in fact be an inferior class of title.
12. There may be issues with the boundary.
13. There may be planning and building regulation issues to consider.
14. There may be chancel repair liabilities, manorial rights, and other unusual issues to consider.

If the buyer’s bid is successful, they will have exchanged contracts and will be contractually bound to complete the purchase on the legal completion date irrespective of any of the above issues being present, hence the importance of seeking legal advice prior to auction.

The seller appoints an estate agent to advertise and market the property prior to auction. They will also arrange the viewings.

The seller will set their requirements for online bids. This often includes a participation fee payable by the buyer.

When the auction period expires (typically 30 days in length) the highest bidder will be declared.

The buyer will enter into an exclusivity agreement with the seller where they are required to pay a non-refundable reservation fee.

The modern auction – the exclusivity period

The reservation fee is a non-refundable payment, usually 2 ½% or the sale price, or typically £5-6k.

The buyer should avoid paying the fee on credit card if they are purchasing with a mortgage. The lender’s instructions are to ensure that the balance of the purchase price is sourced from the borrower’s savings and not additional borrowing, and they may consider the reservation fee to form part of the overall consideration paid for the property. You may also be required to pay SDLT based on the sum which is the total of the purchase price and the reservation fee paid under the exclusivity agreement.

Essentially, at this point the buyer has secured themselves an option to purchase the property in consideration of the reservation fee paid. If the transaction does not proceed, then they will lose their non-refundable deposit. The exclusivity agreement reserves the property for a set period of time. The buyer is given 28 days to exchange their purchase and 56 days in which to complete the transaction. This gives the buyer more time to secure a mortgage.

• SDLT will be calculated on the total of purchase price and reservation fee
• The buyer should be prepared to pay the reservation fee if their bid is successful
• The buyer will be required to pay a non-refundable participation and administration fee
• The reservation fee is not the same as a deposit. It may be payable in addition to the full purchase price
• The reservation fee is non-refundable. It is therefore advisable that you instruct a solicitor to review the pre-auction marketing pack prior to submitting a bid and paying the fee
• If you are obtaining a mortgage, it is advisable for the buyer to review the pre-auction marketing pack to ensure that the information supplied is capable of satisfying the lender’s requirements