How to buy a home at an online property auction

You can buy almost anything online these days and property is no exception.

Online auctions have been steadily growing in popularity for a while, with thousands of homes now going under the virtual hammer every year.

The ‘Modern Method of Auction’ (MMoA) mirrors the eBay model where prospective buyers are invited to make offers on property over a set period – usually 30 days – before they are sold to the highest bidder.

With deals able to be done at the touch of a button, and often for well below market value, it almost sounds too good to be true. Like everything, however, there are pros and cons that people should be aware of before logging on.

What are the advantages of buying properties at online auctions?

The most obvious advantage for savvy buyers is the likely cost saving. You are still competing against other bidders who may force the sale price up, but typically online auction properties are sold for up to 20% less than the price they would go for on the open market.

It is also, according to the auctioneers, a transparent process where interested parties are able to see what each other has offered in real time. The highest bidder wins, and the decision is final so there’s no risk of being gazumped.

The sale window is usually 30 days therefore, unlike in-person auctions which are done on the day, potential buyers have around a month to weigh things up if they’re getting cold feet.

Speed of transaction is also a selling point. You have 28 days to exchange contracts and 56 days to complete, compared to buying outside an auction which can take several months. Homeowners who are in a chain, however, should note that these timeframes still apply regardless of whether their current property is sold.

The 28-day window also gives you a degree of flexibility not afforded in a traditional in-person auction where contracts are exchanged on the fall of the gavel. In online auctions, the decision is not immediately legally binding should buyers have a change of heart.

What to watch out for before using online property auctions?

Buyers in online auctions are charged a ‘reservation deposit’ or ‘reservation fee’ on top of the purchase price which is non-refundable and immediately payable once the auction has ended. This varies but is typically in the region of £6,000.

Whilst this is separate to the purchase price, however, it is included for the purposes of Stamp Duty. It’s important to be aware of this as it can make a significant difference.

For example, if you buy a house for £245,000, which falls below the £250,000 threshold for paying Stamp Duty but are then charged a reservation fee of £6,000 on top then that will take it over.

If you are the successful bidder, you must pay the reservation fee whether or not the property sale goes ahead. Most auction properties require significant renovation, for instance, but if issues come to light and you’re forced to pull out then you are still liable for the deposit.

Should the seller withdraw – which is rare – auctioneers say the deposit will be refunded, however, there are cases where people have had problems getting their money back.

The speed with which transactions take place may seem attractive but it can work against you. In my experience, most buyers have a mortgage in principle prior to auction and then have 28 days in which to obtain a mortgage offer with zero flexibility should you encounter any unplanned delays.

Similarly, buyers only tend to contact their conveyancer once their bid has been accepted and that leaves limited time to carry out the necessary checks to ensure formal exchange of contracts meets the 28-day deadline.

How to prepare for an online auction

Weigh up the advantages and disadvantages before deciding if an online auction is the right route for you as, if it doesn’t work out, you may end up wasting thousands of pounds.

The reservation deposit is supposedly to cover the estate agent and auctioneer’s fees, although quite how online auctions can command these kinds of fees when traditional auctions do not is unclear. Both professions are, as yet, unregulated. The fees they charge are non-negotiable and therefore must be factored into your budget.

If there is a property you’ve got your eye on, make sure you read the auction pack beforehand which should be made readily available with any online listing.

This contains important details such as evidence of ownership, copies of any lease or tenancy agreements, the conditions of sale and results of any searches.

You should also share the contents of this with your conveyancer who will be able to flag any potential problems at an early stage.

Finally, remember that many bids are likely to come in during the closing stages of an auction, possibly even in the last few minutes. It can be easy to get caught up in the excitement, but it’s important to stick to your budget as it will be a costly mistake if you end up having to pull out afterwards.

John Jones is head of conveyancing at Jackson Lees