Wednesday June 6, 2007Guardian Unlimited
WHEN the word "auction" was first mentioned in connection with the sale of a relative's house I gulped. Memories of recession-hit banks selling off thousands of repossessed homes in the 1990s set alarm bells ringing.
But I shouldn't have worried. The house, a honey-coloured 16th century cottage in the Cotswolds (pictured) - bought 25 years before the area was discovered by bankers and celebrities - turned out to be prime auction material.
As the local auctioneer explained, trying not to blink at the thought, he had 30 "disappointed" buyers left over from his last auction. All were "desperate" to buy a house in the country. One email sent to potential buyers and the bidding war would start, he said.
Rising values
Using an auction to buy or sell a residential property is becoming more popular. Last year there were nearly 27,000 lots sold at 1,300 auctions in the UK, compared to 24,000 in 2005. The value of the homes going under the hammer has also boomed - sales last year hit £6.1bn compared to £4.9bn in 2005.
The benefits of selling or buying at auction are not immediately obvious. It's scary, for a start - sellers think they might see their home go for a song, while buyers think a sneeze or misplaced wink will see them lumbered with a derelict barn for half-a-million quid.
Melfyn Williams, chairman of the auctioneering committee of the National Association of Estate Agents (NAEA) is keen to lay those ghosts to rest.
"It's fair, open, transparent and encourages competition," he says. "On the fall of the gavel you've sold the house - it's a legally binding contract." The result is no gazumping and none of the unknown fear associated with sealed bids.
"In the early 1990s, repossessions tainted the auction process," admits Williams, who is an auctioneer in north Wales. "But these days some properties might actually achieve a better price at auction than through an estate agent's window."
A classic auction property is something that needs some work done to it, or a property being sold by a local authority, charity or trust, all of which demand full transparency in the sale process. Or it could be a home that simply must sell by a particular date - for inheritance tax purposes, or if the buyer is moving overseas, for example.
Steps to sale
The sales process is relatively straightforward. Auctioneers must follow regulations laid down by the Estate Agents Act, and if a member, by the Royal Institution of Chartered Surveyors (Rics).
The Rics website has some advice for those with a property to sell: "First ask the auctioneer's advice about its saleability. Ask what they'd recommend as the guide and reserve prices."
The guide price is the figure that goes in the catalogue. The reserve price is usually a little less or the same as the guide price and is the figure the vendor will not sell below.
You should then ask the auctioneer for their terms of appointment. This includes how much commission they will charge - typically 2% - plus any extra charges such as advertising. If the property is part of a larger sale it will be included in a catalogue and may be advertised in the press and online.
The cost of basic promotion may be around £800, more if the auction is advertised in the property section of the Sunday papers. Promotion will start four to six weeks before the auction.
The auctioneer will also ask your solicitor to prepare all the papers - searches, surveys, legal documents, building certificates etc - a home information pack in all but name.
Buying at auction
For buyers, the first step is to get a copy of the catalogue. "Always deal with the auctioneer direct," advises Rics. "This way you can be sure you have the most accurate information."
If looking online, be wary of sites that only sell lists of auctions. These are often out of date and not worth the money.
If you like a property and think you might want to bid, treat it as you would a normal sale - ask to see the legal pack, get a survey done, send an architect round if you think you want to make changes.
Before you bid you must have the finance to buy the property in place. The fall of the gavel is the equivalent of exchanging contracts - you will lose your deposit if you back out after winning the bid.
Once you've decided to bid, you can either bid in person at the auction room, or by proxy or phone. "If you want to feel the atmosphere though," says Williams, "you need to be in the room."
If you win, you will need to pay a 10% deposit on the day - usually a banker's draft, not a personal cheque. The balance must usually be paid within 28 days. The property is then yours.
Snakes in the grass
It all sounds very simple, but for the beginner there can be pitfalls. David Sandeman, managing director of the Essential Information Group, an industry-backed auction listing website, says beginners can avoid "snakes in the grass" by being prepared.
"Check the legals," he says. "Set a limit - in the heat of the moment you can get carried away." He also says "don't rely on the guide price - it's only an indication of where the reserve is, not the value of the property".
"Just because it's in an auction doesn't mean it's going to be a bargain," he says. "You do get them, but be realistic about your bidding price, back it up with homework and do your legal checks."
He cites a recent example of a woman who failed to do any preparation. She bought a leasehold flat in Kensington, London, for £95,000 at auction. She paid the 10% deposit and only then discovered the lease was just four years long. "An easy way to lose £10,000," says Sandeman.
Once they are prepared, buyers should be bold, recommends Williams. "Be firm, don't mess around and don't wait." Your confidence, he says, could have the added benefit of scaring off competing bidders.
Bidding on the house in the Cotswolds, meanwhile, opened at £500,000 on a guide price of £550,000. After creeping slowly upwards there was a race to the finish - when the hammer came down it went for £700,000. A typical example of a successful auction sale, perhaps, but no less exciting - or nerve-wracking - for it.
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