Buyers have been warned to be wary of new eBay-style online property auctions that could cost them thousands of pounds in extra fees.
A growing number of estate agents are pairing up with auctioneers to sell property by the “modern method of auction”.
This type of auction is run online and offers a longer completion timescale than traditional auctions, giving buyers time to arrange a mortgage.
But campaign group Homeowners Alliance has warned this way of buying a property can be complicated and involve hefty fees.
Estate agents, meanwhile, can earn much higher commission selling this way, while sellers save cash too.
Current auctions listed on Right Move include a three-bed semi in Coventry with a guide price of £525,000, and a one-bed flat in Kidderminster with a guide price of £70,000. Both are up for auction with auctioneer IAM Sold.
How do modern auctions work?
With an online or “modern” auction, a guide price is published and an undisclosed reserve price set. Buyers need to register with the auctioneer and place their bids over a 30-day auction period.
At a traditional property auction, the winning bidder exchanges contracts on the day and has to complete in 28 days.
But a modern auction grants the winner a 28-day exclusivity period in which to exchange contracts, and 56 days in which to complete the purchase.
This longer timeframe is billed as one of the plus-points of modern auctions – but most buyers face extra costs and risks when buying this way.
Homeowners Alliance chief executive Paula Higgins says: “Although we think the modern method of auction could be an exciting way forward, we aren’t impressed with the hefty fees being charged.
“Meanwhile, the process can be complicated, and buyers and sellers are not always fully aware of what they are letting themselves in for.”
How much do buyers have to pay?
Once the hammer falls in a modern auction, the winning bidder must pay a reservation fee set by the estate agent or auction platform.
IAM Sold typically charges a reservation fee of between 2.5% and 4.2%, with a minimum of £6,000 – although it says vendors can choose to pay the fee instead of the buyer.
Jamie Cooke, managing director of IAM Sold, said: “In general, auction fees are higher than in private treaty, as in IAM Sold’s case.
“It’s not just about technology, the seller is receiving a service from two professional companies which results in the property getting sold in a timeframe that suits their needs at a price that they are happy with.”
The reservation fee must be paid straight away and doesn’t form part-payment of the final selling price.
However, for tax purposes it is counted as part of the purchase price – so you’ll need to pay stamp duty on it.
You’ll lose the reservation fee if you pull out of the sale (although you should get it back if the vendor drops out).
Homeowners Alliance says the big issue is that this fee is split between the auction house and estate agent.
Even if it’s shared equally, agents stand to make more of a profit than they would by selling on a traditional commission basis, particularly on lower-price properties.
“In our recent investigation we found properties being advertised where the achievable commission would be more than 15% due to the low guide price,” said Higgins.
“This fee is not part of the overall purchase price – it goes straight to the estate agent and auctioneers, yet buyers will be liable for stamp duty on it.”
How much that could cost you
According to the Office of National Statistics, the average house price in the UK stood at £228,000 in January 2019.
A buyer paying this price at an online auction would pay a reservation fee of £9,576.
But Cooke says buyers are willing to pay a premium for speed and security.
“The fees charged by IAM Sold and our partners are made clear to all parties at all points of the transaction; prior to payment they are required to read and sign a very clear and specific reservation form which states the cost of fees, purchase price, timescales and terms of the agreement,” he said.
What are the costs for sellers?
Vendors who choose for the buyer to pay the costs associated with a modern auction sale can save money compared to what they’d normally pay an estate agent.
However, one risk of the modern method of auction is that estate agents will persuade sellers to sell this way because they want to earn more commission, not because it will achieve a higher selling price.
In fact, your home may sell for less as buyers will factor the reservation fee into the price they are willing to pay.