Modern Method of Auction

With the ease of an online service and the thrill of an auction, the modern method of auction (MMoA) provides property buyers with a way to access a wider spread of properties. Importantly, MMoA sidesteps the biggest problem of traditional auction for mortgage users - the 28 day payment window.

Is the modern method of auction a replacement for traditional auctions and the way forward for property purchase? Dive deep with Clifton Private Finance.

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What is the Modern Method of Auction?

Modern method of auction (MMoA) is a process where potential buyers bid online to secure an exclusive right to purchase a property. This period of exclusivity typically lasts 56 days, which is long enough to arrange mortgage finance. The highest bid at a modern auction pays a non-refundable reservation fee, which is split between the auctioneer and the estate agency.

Designed to give more time to put financing in place, the modern method of auction offers a 56-day payment window, twice that of traditional auctions. This means mortgages can more easily be put in place in time to meet the deadline of online property auctions, attracting many more buyers to help secure a sale.

There are some important nuances to consider, however:

• The reservation fee: Perhaps the most controversial aspect of the modern method of auction, the reservation fee is a non-refundable fee that is paid to the auctioneer and estate agent for the service. This is often as high as 4-5% plus VAT (which takes it to 6% in real numbers). It does not go to the seller, and it is not part of your payment towards the property, merely a fee for using the modern auction service.
• The lack of proxy bidding: If you are used to eBay, then you are used to proxy bidding, where you put in a higher value you are willing to pay and allow the system to automatically raise your bid as others compete. MMoA does not follow the same system, meaning the bid you put in is set each time, and should you win, is the amount you must pay.
• Anti-sniping protection: Though each auction has an end time, a bid placed in the final minute or so will extend the timer by another 2-3 minutes. This gives watchful buyers the opportunity to up their bid calmly, preventing automatic systems ‘sniping’ as happens in other online auction markets. The auction only fully closes once all bids are placed, with some competitive properties adding 30 mins or more to the end time.

The modern method of auction combines property sales and the traditional auction method with an online-based automatic system for efficient auctioneering. It does not replace traditional auctions however, sitting alongside as an extra tool in the estate agent’s toolkit.

Modern Method of Auction vs. Traditional House Auctions

There are several differences between MMoA and traditional auctions, resulting in contrasting environments that provide opportunities in different ways. It is not true at all to think of the modern method of auction as simply being traditional auctions moved online.

1. The 28-Day vs. 56-Day Deadline

One of the headline-grabbing differences between the two types of auction comes from the double-length payment window. Importantly, this has the effect that many traditional mortgages can be put in place in the time provided by the modern method of auction. On the face of it, this can seem to simply be a good thing, but it actually has some important side-effects.

Because it is very hard to get a mortgage inside of a 28-day deadline, traditional auctions focus on cash buyers - those who already have the funds ready to buy. These are often investors or others looking for a bargain, perhaps to renovate a property and flip it for a quick profit.

By contrast, the ability to get a mortgage to fund online property auctions has created a market that is far closer to standard non-auction sales where, despite the auction trappings, there are few bargains to be had. Rarely will rundown properties whose condition prevents them from being mortgageable be found on MMoA sites.

2. The Reservation Fee

The modern method of auction treats the reservation fee as a payment for the service, which is due when you win the bidding process. As the winning bidder at a modern auction, you enter into a conditional sale process.

This buyer's fee simply reserves your right to buy the property during a period of exclusivity. You get 28 days to exchange contracts and a further 28 days to complete.

Buying a house at a traditional auction is legally binding and you are expected to complete the whole process. Whereas the highest bidder in a modern auction is paying for the exclusive right to buy the house within a period of time, but there is no legal requirement on the buyer to complete the deal.

3. Auction Timing

While traditional auction houses allow you to bid online and by phone, the process is still steeped in traditional methods. One area where potential buyers will notice a significant difference is the length of the auction period. A traditional auction house will set considerably shorter time slots for each auction listing than those for modern auction sales.

This means traditional auctions can be quiet, limiting the number of engaged participants and lowering the competition. This is an advantageous factor for property developers and bargain hunters looking to pick up a property with big potential at a small price.

Conversely, the modern method of auction allows for a far wider window of opportunity, allowing prospective buyers to take their time and come into the auction when it suits them.

4. Pre-Auction Preparation

Traditional auctions work by providing potential bidders with a portfolio of featured properties weeks in advance of the auction. This gives you the chance to properly evaluate and assess the properties, perhaps even scheduling visits and personal valuations, before going to the auction.

Bidders have a far better idea of the property’s true worth and, with the opportunity to conduct appropriate due diligence checks, are at less risk.

In the modern auction process, you can typically arrange to view properties either in person or through a virtual tour. It’s also important to obtain the property’s legal pack and factor its contents into your pricing decisions. Viewings and the auction legal pack are typically requested from the auction house or estate agency.

The legal pack should include:

• The title plan and register (or other proof of ownership)
• Local authority searches, water and drainage information
• A property information questionnaire
• A fixtures and fittings list

Keep in mind that a short lease or the presence of sitting tenants can significantly affect the property’s market value.

5. Reserve Price Alterations

With many modern method of auction sites, sellers have the option to adjust the reserve price before it is met. This lack of transparency can lead to inflated bidding and subsequent funding complications.

6. A True Purchase vs. The Right to Purchase

When the hammer falls on a traditional auctions, contracts are exchanged and the deposit is paid. You have purchased a property.

With modern method of auction, you pay the fee which means the seller takes the property off the market and agrees to sell it to you if within 56 days you raise the funds required, but you haven’t actually bought the property.

It’s a subtle difference, but can lead to complications should the buyer or seller wish to withdraw.

Can You Get a Mortgage on a Modern Method of Auction Property?

Yes, in fact, this is one of its core advantages. The 56-day window for payment is plenty of time to get a mortgage put in place, especially if you already have an Agreement in Principle (AIP).

At Clifton Private Finance, we can explore the full marketplace of lenders to help you get a mortgage approved in plenty of time, securing the property and making sure you don’t lose that reservation fee.

It is important, however, to understand that your mortgage will be based on the true valuation of the property, not the price you agreed. If you have overbid and the mortgage valuation comes in lower than you need, then you may find yourself short.

Your Clifton Private Advisor may be able to help, looking into alternative funding options to make sure that shortfall is covered in time.

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Can You Get a Bridging Loan for a Modern Method of Auction Property?

Yes, you can get bridging finance to cover your MMoA property, but except in some special circumstances, it is rarely the perfect option. Bridging finance for auctions is specifically designed to be quick, with an exit strategy based on refinancing during the term of the loan. With modern method of auction, there is less need for bridging finance as mortgages can usually be put in place directly.

However, if the mortgage is delayed or other problems arise that prevent you from meeting the MMoA deadline, then a bridging loan could help. It may be possible to secure the short-term funding you need against the value of the property you want to purchase, with the loan paid off once you secure mortgage finance.

Our expert advisors at Clifton Private Finance can work quickly to get the bridging you need so that you don’t lose your property.

Modern Auction Pros When Buying Property

The modern method of auction sits in a unique place for both sellers and buyers, with specific advantages that are worthy of consideration by anyone looking to enter the property market. With the right understanding and well-considered approach, MMoA can deliver in unique ways.

1. Mortgage-Friendly Auction Process

The ability to use a standard residential mortgage to purchase an online auction property cannot be understated. This is a key advantage that entices buyers from across the UK. For sellers, this funding flexibility for potential buyers makes it more likely their property will sell in a shorter time than most other options.

2. Widest Marketplace

Being internet based, online auctions are not limited to local sales. Sellers can offer their properties to a fully international market, while many buyers looking to move to more distant locations can secure homes without the need for long, expensive trips.

3. Greatest Choice

Buyers seeking a new property, either as a residential home or as a rental investment, can easily compare properties, working from the comfort of their home to explore different houses for sale with a range of additional online tools such as Rightmove’s Sold Prices webpage, or the official government Land Registry.

Landlords looking to develop a property portfolio can access additional data through paid portals such as Property Data for more comprehensive information.

All this, plus the final purchase, without needing to leave the living room.

Modern Auction Cons When Buying Property

The modern method of auction sits in a unique place for both sellers and buyers, with specific advantages that are worthy of consideration by anyone looking to enter the property market. With the right understanding and well-considered approach, MMoA can deliver in unique ways.

Modern auction houses (and the modern auction sale process) should be properly understood by both buyers and sellers

1. The Reservation Fee

There’s no avoiding the fact that the reservation fee is a high cost for using the service. As the fee doesn’t go to the seller but is used to pay the agent, it can feel particularly uncomfortable for what is, in essence, an automated web-based service.

The reservation fee also cannot be rolled up into the mortgage but must be paid, usually by credit or debit card, as soon as the auction is complete. This can hamper your cash reserves or affordability test for the mortgage deposit.

Should something happen that results in you failing to complete within the 56-day timeframe, the fee is simply lost with no recourse to a refund. Clifton Private Finance can help - if you find yourself approaching the end of the payment window and your mortgage is delayed, contact a bridging finance advisor immediately to secure additional funding to effectively keep that window open, giving you the breathing space you need to finalise the deal.

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2. Extra Stamp Duty Liability

You will pay a higher amount of stamp duty when completing a deal following a modern auction process. HMRC will include the reservation fee in the stamp duty calculation, as opposed to only using the agreed offer price.

Modern Method of Auction reservation fees are typically around 2.5-5.0% of the final sale price, with VAT on top. Some modern auction houses will also set a minimum reservation fee, which is due regardless of the sale price.

At 2.5%, using an example where you agree to buy a property at £300,000, you would pay an additional fee of £9,000 (£7,500 reservation fee + £1,500 VAT).

If you have bought a home before, and assuming you qualify for the normal rate as opposed to the additional property rate, your stamp duty bill on the property itself would come to £5,000. With the reservation fee on top, the stamp duty you would owe comes to £5,450.

3. Auction Pressure without True Auction Advantage

Participating in an online auction can be extremely exciting, especially for an auction of this scale. However, it can also lead to poor decision making as the adrenaline catches up with you, driving you to bid higher and higher because it’s so easy to do.

The main advantages of property auctions are lost. Unlike a traditional auction, where bargains are to be had, online property auctions rarely provide such great opportunities:

• Properties that are in need of renovation are considered unmortgageable: This means that lenders cannot provide funding for them and must reject your application. You would have to be a cash buyer to acquire one, which makes traditional auctions a more enticing arena for investors looking to flip properties or buyers willing to put in work to get the perfect home.
• Reserve price limits opportunities: Sellers set a reserve price that is typically at, or very near, the market value. It is unlikely that you will win an auction that is truly below market value (though it is possible).
• Reservation fee pushes up real price: The extra cost of the reservation fee narrows the margin for a bargain discount.

4. Mortgage Might Not Meet Your Need

A serious concern for many is that your mortgage will be calculated based on the true market valuation of the property, not the final sale price, reserve price, or guide price. When you apply for the mortgage, your lender will undertake their own valuation and use that figure.

Because the vast majority of sellers set their reserve price to the market value, if the bidding goes high, that extra cost will not be covered by the mortgage. An over-enthusiastic auction session towards the end can leave you thousands of pounds out of pocket.

Consider the following illustrative figures:

• Property market value: £250,000
• Reserve price: £250,000
• Guide price: £230,000 (set slightly lower to entice bidders)
• Final bid: £263,000 (after a boost in last minute interest)
• Lender’s valuation: £250,000

In this case, a 90% LTV mortgage is offered for a total of £225,000. You would therefore need to cover the remaining £38,000 from your own funds.

This is a significant increase on the expectation of between £25,000 (if the property had sold at the reserve price) and £26,300 (if the lender valuation had met your purchase price). The shortfall can put the deal at risk, losing you the property with the additional cost of the non-refundable reservation fee.

When bidding on a MMoA property, it is always wise to consider stopping once the reserve has been met, or to bid cautiously, aware that every £1,000 above that price is a thousand pounds you will need to find personally.

Modern Method of Auction Fees vs. Traditional Auction with Bridging Finance

Bridging finance is often used in traditional auctions to present the appearance of a cash buyer. With bridging finance, you have the money available within the 28-day traditional auction window, so can take advantage of the opportunities the traditional auction arena offers.

Of course, this type of short-term loan also comes at a cost, somewhat similar in size to the reservation fee of modern method of auction. It is worth comparing those two options side by side to help inform the decision regarding online property auctions vs. traditional.

In this illustrative example, bridging finance is obtained at a rate of 0.55% per month, for a period of three months to meet the time needed to put a standard mortgage in place. Fees of 2% plus Clifton Private Finance’s standard arrangement fee are also added to provide a clear and transparent comparison. To contrast, 5% + VAT is illustrated as a MMoA reservation fee.

MMoA Fee vs. Bridging Finance (Traditional Auction)

Exploring these figures, it can be clearly seen that even with the interest and fees associated with bridging finance, it presents a clear benefit over the costly arrangement fee of modern method of auction. This gap in costs widens as the property value increases, with the difference on a £1 million property an astonishing £22,000.

Even for a lower bracket of MMoA fees, where the reservation fee is set at 4% rather than 5%, bridging finance still proves the cheaper option.

To learn more about bridging finance and how it opens the door to buying traditional auction properties with a standard mortgage, speak to a Clifton Private Finance bridging advisor, or read more about bridging finance on our knowledge base.

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Can You Pull Out of a Modern Auction?

Yes, as the winning bidder you must pay the reservation fee to the auctioneer, which will also cover the estate agent's fees. However, as you're proceeding with the deal, if for any reason you don't have the money or decide that you don't want to exchange contracts, then you can withdraw from the process.

In doing so, you will lose the amount of money paid to the auction house and estate agency as the reservation fee.

Can the Seller Pull Out of a Modern Auction?

Sadly, yes. Online MMoA deals are slightly in favour of the seller, allowing them to withdraw even once the arrangement fee has been paid. However, in these situations, the arrangement fee is returned to you, allowing you to go forward to look at other prospective properties.

Clifton Private Finance and the Modern Method of Auction

The modern method of auction provides a powerful and useful way of gaining access to a huge number of properties advertised online across the UK market.

Its mortgage-friendly outlook and online flexibility give it extra benefits that are useful to many, however, online property auctions should be entered into with a clear head and full understanding of the systems they sit upon.

At Clifton Private Finance, we work for you to provide you with clear, experienced advice and offer all the relevant and viable alternatives.

We can help you secure your mortgage in time to meet your window from an auction win, support you with bridging finance should deadlines approach, and offer a range of other financial products to help secure the property you’re after.

Whether you are a first time buyer looking for a starter home, or a landlord with an extensive BTL portfolio, we’re here to help you overcome challenges and achieve your aims.

Contact Clifton Private Finance today to speak to an expert mortgage advisor and move forward confidently with your auction purchase.

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