Beware of online property auctions

Property auctions can be useful, but contain pitfalls for the unwary. So make sure you know what you’re in for.

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In a traditional auction, once the gavel falls, you're on the hook

Auctions have long been a good way for sellers to offload a property quickly or for buyers to bag a bargain. Today, however, more and more properties are being sold in online auctions. These work in a different way to traditional auctions, and it is important to be aware of the potential pitfalls before going down this route. More than 35,000 properties come under the hammer each year, according to the Essential Information Group. Many are repossessions, while others are uninhabitable or unmortgageable, and thus only suitable for cash buyers or those with access to alternative finance.

How auctions work

Although one of the advantages of buying or selling at auction is speed, much of the work is done before the event. Buyers need to obtain the auction catalogue, visit the property, get a survey done, go through the legal pack and get their finances in order before auction day. The catalogue guide price will give an idea of the minimum price a property is likely to fetch, but most properties will go for more.

Traditional auctions are "unconditional", so when the gavel falls, you have effectively exchanged contracts and will immediately need to pay 10% of the purchase price. You will also need to pay an administration fee (£200 - £300) and, in some cases, a buyer's premium, too. Most purchases need to be completed within 20 working days, and there will be penalties if you don't complete on time. In that case, you'd also lose the 10% you put down on the day, and may have to cover the costs of re-selling the property, plus any shortfall between the price you agreed and the final selling price.

Online or "modern" auctions work in a different way. They normally take place over 30 days, during which buyers register and place their bids. At the end of the period, the highest bidder wins, and pays a reservation fee (as well as a buyer's premium). The reservation fee is set by the estate agent or auction platform and is normally at least 2.5% of the purchase price, with a minimum fee of around £5,000 plus VAT.

Unlike traditional auctions, online ones are usually "conditional" rather than binding the winning bidder to the sale, the fall of the virtual hammer gives them a 28-day exclusivity period in which to exchange contracts, and 56 days in which to complete (so there may be time to get a mainstream mortgage).

Drawbacks of going online

Although this all sounds straightforward, the Homeowners' Alliance (HOA) has concerns about online auctions. Firstly, the reservation fee, which isn't like a deposit and therefore comes on top of the purchase price, is non-refundable. The potentially hefty fee is also split between the auctionhouse and the estate agent.

Estate agents therefore often make more money from auctions than through a direct sale, even though there is less work involved. And because online auctions can be so lucrative, the HOA is concerned estate agents may be pushing sellers towards an online auction because of the potentially higher returns, not because it will be the best sales channel for their property. Sellers, meanwhile, are likely to achieve a lower price at auction as the buyer will need to factor the reservation fee into their affordability calculations.

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