On average, around 20,000 residential properties are sold at auction in the UK each year: only about 1 in 50 of the total. Auctions remain a mystery to many people buying and selling property. For sellers, the perception is often that auctions are a “last resort” to offload property that can’t be sold in the conventional way, and will result in a poor selling price. Buyers, meanwhile, are only likely to consider auction if they have have done their homework carefully and have cash in hand, and a healthy appetite for risk.
In this guide, we will examine the pros and cons of selling at auction, and identify the situations where this may be the best method of finding a buyer. We will also provide more information about the auction process, the risks involved, and the differences between traditional “auction room” sales and the newer style of online property auction.
In 2021, 21,190 residential properties were listed at auction, and just over 80% (17,088) of those sold, according to Essential Information Group, which tracks data from almost every UK property auction. The total value of these sales was almost £3.2 billion. Compared to 2020, that’s an increase of 11.7% in volume of sales, and 29.6% in terms of value, but still somewhat below the long-term average, as the market was affected by the pandemic. Auctions remain a relatively small part of the housing market, representing less than 2% of the total of roughly 1 million residential transactions each year.
There are two types of property auction. The first will be familiar if you have ever watched Homes Under the Hammer: the traditional auction-room sale (although these days, the auction room can also be virtual). Bids are placed in real time, and when the hammer falls, the buyer is legally committed to buy the property and complete the sale within a fixed period, so they need to have done their homework in advance. The second type is a conditional auction, also known as the “modern method of auction”. These are carried out online, over an extended period, and give the winning bidder an exclusive right (but not obligation) to buy.
In the traditional method, bids are only accepted during the auction itself (although the auction house will advertise properties during the period leading up to the sale, so they may attract pre-auction offers). Bids can be placed in person, by telephone or, in many cases, online. If the bidding reaches the reserve price, then the winning bidder pays a deposit (usually 10% of the purchase price), contracts are exchanged and both parties are legally bound to proceed with the sale. The exact terms vary between auction houses but generally the deal must be completed within 28 days.
This type of auction has grown in popularity in recent years, and is something of a halfway house between traditional auctions and estate agency sales. This style of auction is more akin to an eBay auction: properties are often listed through more traditional methods by local estate agents, and bids are open for a longer period of time (typically three or four weeks), during which bids can be made at any time. Unlike eBay, however, there is not a firm cut-off point. If bids are still coming in at the scheduled closing time, the auction can be extended: for example if a bid comes in in the final minute, an additional minute will be added, and this can repeat until no more bids come in. (This is to prevent eBay-style “sniping”.)
Assuming the reserve has been met, the winning bidder pays a reservation fee (typically 4-5%), on top of the agreed purchase price, which gives them a period of exclusivity to buy the property. However, unlike a traditional auction, contracts are not exchanged at this point and there is no legal obligation to proceed. Generally, this exclusivity period will last for 28 days, by which time contracts must be exchanged, and completion must take place within a further 28 days (56 days in total from the date of the auction.)
In a traditional auction, the sale is legally binding. If either party pulls out, they will be in breach of contract and are likely to face heavy costs. If it is the buyer who pulls out, the deposit will be forfeited to the seller; if the seller pulls out, the deposit will be returned to the buyer. In both cases, the party in breach of contract will be liable for costs and expenses incurred by the other party.
In a conditional auction, there is no breach of contract if either party pulls out, but the auction process is still designed to discourage this. If the buyer pulls out, they will forfeit their reservation fee, although because this is not a deposit, it does not go to the seller but is instead kept by the auction house. If the seller decides to withdraw from the transaction, then they are liable to cover the cost of refunding the buyer’s reservation fee.
If a traditional auction lot does not attract any bids, or bids fail to reach the reserve price, then the auction house will advertise it as an unsold lot, usually on a dedicated section of its website and to its mailing list. Buyers can make offers on unsold lots at any price level, which the seller might choose to accept. Alternatively the seller could choose to wait and list the property in another auction. Auction commission is only paid if the property sells (including post-auction sales), but if it doesn’t find a buyer then the seller will still have paid the entry fee as well as the costs associated with preparing the legal pack.
For the modern method of auction, the usual approach would simply be to start a new auction period, perhaps adjusting the guide price to attract more interest. There may be additional fees to pay to relist, depending on the auction house’s terms.
Selling at auction exposes a property to a different audience from selling through an estate agent, which has its advantages and disadvantages:
Auctions are fast. This is the biggest point in favour of selling at auction, especially with traditional auctions. If there’s a winning bid, then you know that the buyer is committed, you get 10% of the sale price there and then, and you know the sale is going to complete within a reasonable time. The timescale for modern method auctions is longer, but there is still a sizable financial incentive for the buyer to complete on time. With a traditional estate agent there can be long delays, chains can break, and buyers may pull out because they change their mind or their finance falls through.
Auctions have a high sales rate. Looking at the stats from the last 10 years, about 77% of homes that have come up for auction have sold. This represents a very good chance of success when you consider that estate agents on average only tend to sell about half the homes on their books – and doubly so when you consider that many properties that come to auction may have some type of problem. Bear in mind though, that when levels of demand in the market as a whole are high (as they are at the time of writing in early 2022), the estate agents’ sales rates will be higher so auctions may not have such an advantage.
Auctions are transparent. Bids are made in the open, and there is the chance of competitive bidding driving the price up.
Auctions have a smaller pool of buyers. When most people are looking to buy or sell houses, they use an estate agent. A lot of buyers simply won’t be looking at auctions, and those that do tend to be a particular type of buyer. Because of the speed of the auction process, there is not usually time to arrange a mortgage (and, as we will see in the next section, they may not be able to get a mortgage on the property anyway). This means the buyer pool will be limited to cash buyers – typically investors will have more of a hard-nosed approach to price than typical owner-occupiers. They will be looking for a bargain that will make them money.
Note that this is less true for the modern method of auction, because the longer timescale and more user-friendly bidding process attracts more conventional buyers. One large modern method auction operator reports that 40% of its buyers use a mortgage.
Auctions are more expensive. Whereas estate agent fees are typically less than 1.5%, the commission taken at auction is often around 2.5%. Sellers also have to pay an entry fee to have their property listed, which is usually several hundred pounds. In the modern method of auction, although it is the buyer who pays the fee (typically 4-5%), this does not form part of the purchase price, so they will generally take that into account and the price the seller gets will be lower as a result.
Auctions tend to deliver a lower selling price. With a smaller pool of buyers, the majority of whom are investors looking for bargains, it makes sense that prices paid at auction will be lower than those on the open market.
While auction houses will assure you that they can get a great price for your property, we have done some research to work out how much lower the prices achieved at auction really are. This is not an exact science because of the nature of properties that sell at auction – as we discuss in the next section, they will often have some kind of problem, so it is hard to make a like-for-like comparison. We took a sample of properties that sold at auction in the last year that had a lot of closely comparable properties nearby: for example flats in large blocks, or houses on streets of very similar properties.
We compared the prices those properties achieved at auction with online sold prices and estimated values of neighbouring properties, and found that on average the auction sales were at a discount of 19% on the open market value. While it is impossible to separate out the auction effect from the condition of the house or other problems, this does give an indication that auction buyers are looking to pick up properties at a significant discount.
Given that auctions cost more and tend to deliver a lower price for a property, why do sellers choose to go to auction instead? In the simplest terms, there are two main reasons:
Why would a property be unsuited to selling through an agent? Perhaps the biggest reason would be because it is unmortgageable. Auction expert Scott Gray, star of the TV series Homes Under the Hammer and head of 247 Property Auctions, puts it simply: the less mortgageable a property is, the more auctionable it is. This is because whereas most buyers searching through estate agents will be taking out a mortgage, the majority of auction buyers will be paying cash: the rapid nature of traditional auctions means there is little time to secure a loan. (However, buying with a mortgage may be feasible with the newer style of conditional auctions, which we will discuss later.)
There are many reasons why mortgage providers may not be willing to lend on a home, for example:
Other types of property that are especially suited to auction include development plots (including properties where the plot rather than the building is likely to be the chief attraction), mixed-use buildings (such as a shop with a flat above), and investment properties that provide an income stream.
Auctions can also be used to sell property that is difficult to value because of a lack of others to compare it to: “oddities” such as lighthouses, follies, former pubs and so on. If you can’t work out what price tag to put on a property, one option is to “let the market decide”. However, our advice in this situation would be to speak to a few local estate agents first, to get as many opinions on value as possible.
The second reason for selling at auction is that you need to secure a sale quickly – for example because of a change in personal circumstances, a need to release cash urgently or to avoid foreclosure. Other examples could be a probate sale, where a bereaved family wish to dispose of a property with as little hassle as possible, or where there is a dispute among beneficiaries over how to sell: auction is a transparent way of putting a value on a home.
In all these cases, speed and simplicity takes precedence over necessarily obtaining the best possible price. Is this trade-off worth it? This will depend on three things: the urgency of your situation, the type of property, and perhaps most importantly, the state of the market. In a buoyant market, assuming the property is of a type that will attract plenty of demand, you may be able to sell quickly through an estate agent. Indeed, when demand is high local agents may have clients ready and waiting, so it would be worth calling them to gauge interest levels.
When you choose to sell at auction, the auction house will advise on the valuation. A traditional auction house will generally produce its own valuation, which could be a desktop valuation or done in person, whereas for the modern method the auction house will often be working with a local estate agent to come up with the valuation. In both cases the approach is going to be different from what a local agent would use for a sale on the open market. An estate agent will look at the target price they would ideally like to achieve, and expect that buyers will probably put in offers below that. For an auction, the valuer will be looking at what sort of price level is going to attract bids, and hope that the bids will go above the asking price.
This is the price that is advertised in the auction listing, and will be set at a level the auction house believes will attract maximum interest.
This is not disclosed to the bidders, and is the minimum price that the seller is willing to accept. If bids do not reach this level, the lot goes unsold. Note that the guide price must be within 10% of the reserve price, but it can be either higher or lower.
The best route will depend on the type of property. A traditional auction, with its more investor-focused audience, will be better suited to properties that need a lot of work, riskier opportunities, development plots and so on. If you think the property is especially likely to appeal to a bigger developer rather than attracting local interest then it could be wise to approach one of the big London auction houses, because they will have a bigger pool of buyers who may not be particularly set on where in the country they are buying.
The modern method of auction has more similarities to a conventional estate agent sale, so you are still likely to attract some local buyers who may be looking for a house to live in. So if the property is in relatively good condition and it’s your own personal circumstances that are pushing you towards auction, then choosing a modern method of auction in collaboration with a local estate agent might give you better results.
In a traditional auction you will be exchanging contracts right away, so you need to have all the documentation ready. The seller must produce a legal pack which will be made available for prospective bidders to examine before the auction. This will include:
Getting all these things together can take several weeks so you need to act quickly. If you don’t have the legal pack ready in time then you will have to withdraw from the auction, and end up being charged a withdrawal fee. In some cases that might even be as much as the commission you would have had to pay if you sold for your reserve price, so it definitely pays to get organised.
For a conditional auction, it is not legally necessary to have the legal pack ready until you are exchanging contracts, but most auction houses will want you to have it in place before the sale. Apart from anything else, buyers are much less likely to make a bid if they don’t have all those documents available to examine prior to making an offer.
We hope you have found this information useful. Movewise specialises in finding the best route to sell any property, and our expert advisors will be happy to discuss options with you, whether that is auction or a traditional estate agent sale, or a combination of both. For example, we could offer a marketing proposal where the property is listed with the best estate agents for a fixed period of time, following which, if no buyer has been found, we list the property at auction.
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