Some auctioneers are certainly trying to make it happen. Toby Limbrick, Director, Network Auctions, says, “If auctions are now two per cent of the market, as an auctioneer I’m quite interested in the other 98 per cent.”
The problem with auctions is that auctioneers set auction dates for the year. That doesn’t suit vendors; they don’t think like that. Online provides flexibility. Robin Rathore, Bamboo.
Up until now, auctions have been something of a closed world. Robin Rathore, founder of online auctioneer Bamboo, admits that he spent most of his life as a student watching ‘Homes under the Hammer’. Even so, when he was interested in buying a property at auction he says,
“I found the process difficult to navigate as a first time auction goer; many barriers to entry for buyers and sellers – a very closed environment.” That’s one reason he set up Bamboo.
Online auctions have lower costs than the ballroom auction; there’s no ballroom to hire, so that saves a couple of grand, and no catalogues to print. But they also offer flexibility. “The big problem with auctioneering,” Rathore says, “is that auctioneers set six or seven auction dates at the start of the year. That doesn’t suit vendors; they don’t think like that. Online provides flexibility and gives vendors more choice.” For instance, corporates who need to ensure a transaction is completed before their year-end can do so with an online auction; that can have a major impact on their tax position.
Imagine holding an auction on Christmas Day. According to Jason Lee, national sales manager at SDL Auction Partners, one online bid was actually accepted on Christmas afternoon – admittedly from an investor who had used the online system before.
Ballroom auctions bring together many properties, all to be auctioned within the time available. That has limitations; each property is competing with others, not just for potential buyers’ money, but for the auctioneers’ time.
David Sandeman, founder of EIG, says that a property put up for online auction gets all the time it needs. Watching an online auction in its last twenty minutes or so, it becomes obvious that the excitement of the ballroom auction isn’t missing in the new environment. In fact, at a certain point “it becomes basically a ballroom auction,” David explains. If there’s a bid in the last minute, a 60-second extension is added to the close of the auction; any subsequent bid adds a further extension, until finally 60 seconds pass with no new bids. He believes that’s actually better than a ballroom auction, where, particularly with a lower value property or one that’s come up early in a large auction, the auctioneer may be keen to press on, and might bring the gavel down while a little more patience could have extracted a higher bid.
25% of all bids on the EIG platform happen in extension time, and 25% happen in the 109 seconds prior to the auction closing time and 80% in the last hour. David Sandeman, EIG.
According to him, 25 per cent of all bids on the EIG platform happen in extension time, and 25 per cent happen in the 109 seconds prior to the auction closing time – nearly 80 per cent in the last hour. So it’s crucial that the process gives enough time to extract those closing bids. “Everyone who bids has an emotional commitment,” he says, “It’s their moment of glory, win or lose. And there’s nothing ‘off the wall’, they’re all real bids. We give it as long as needed to crack out the best price possible.” That can involve 150-200 bids; the record is 461 separate bids for a single property.
The online auction also makes auctions much more accessible. A midweek auction naturally creates a barrier for anyone with a day job, so it’s hardly surprising the majority of attendees are property developers or investors.
BARRIERS AND BARGAINS
There’s another big barrier. Traditional auctions are geared to the cash buyer. In a normal auction, the fall of the gavel constitutes the exchange of contracts. A 10 per cent deposit has to be paid immediately, and completion is expected within 28 days. A buyer who pulls out is not only liable for the 10 per cent deposit, but can be sued for any further auction costs, or even for a shortfall in the eventual price achieved. Only a small percentage of buyers can meet those requirements, and that number goes down as the property price goes up, David Sandeman points out.
A conditional auction, on the other hand, sells what is effectively an option to purchase. The buyer pays a five per cent non-refundable fee – large enough to focus their minds on completion – and the seller is legally obliged to sell to that buyer at the stated price, as long as the exchange of contracts takes place within four weeks. That opens up the market to ‘ordinary’ buyers who need to arrange finance for their purchase.
Not surprisingly, 95 per cent of such transactions complete, against just two-thirds of private treaty sales. That gives more certainty to both purchaser and vendor. As Toby Limbrick says, “The gavel goes down and that’s the end of it, isn’t it wonderful?”
The auction process delivers what Home Information Packs were intended to do, you eliminate sales progression, because the work has been done. Toby Limbrick, Network Auctions.
Even more so for estate agents who see sales fall through regularly; Limbrick was a ‘regular’ agent before moving into auctions and says, “I was sick to the back teeth of doing all the work and then not getting paid.”
Exchange and completion can be accelerated because much of the legal work is done up front. The auction process delivers what Home Information Packs were intended to do, Toby Limbrick says, “You eliminate sales progression, because all this work has been done already.” So though the conditional model opens up the market to new buyers, it still offers the advantages of traditional auctions – security of sale and speed. Even if a sale falls through (so far, Network Auctions has not seen a single buyer fail to get finance), there’s an under-bidder who might still be persuaded to step in.
That can appeal to vendors who are selling because of divorce, or a job move; probate properties are also among those which frequently head for auctions. Jason Lee says, “Speed and security is what an auction brings to clients. It’s not so much the property but the vendor that’s relevant when determining if auction is the right route.” (On the other hand, auction doesn’t work for vendors who need a particular price or are simply testing the market.)
While the core has always been institutional vendors, that’s changing – and so is the perception of distressed property. Allsop’s 2017 results showed that 22 per cent of vendors were private (up from just 15 per cent in 2014), and only 18 per cent of properties were distressed. Auctions may have something of a stigma attached to them, but that mindset is changing – Jason Lee says SDL will handle “anything from a chapel in Wales or a barge on the Thames to suburban semis. We’re regularly selling the traditional residential market and achieving prices above what’s perceived as market value.” He reckons auctions could deal with between 10 and 20 per cent of most estate agent’s stock, from the agents he has talked to.
Perhaps the biggest change in who uses auctions, though, is down to the introduction of conditional auctions. David Sandeman says, “The biggest difference between the traditional auction and the conditional auction is that with conventional auctions, virtually none of the vendors will have lived in the premises – they’re not emotionally committed. The vast majority of conditional vendors live in the premises, and the vast majority of purchasers want to live in the premises.” The mainstream residential market is now heading for the auction sale. Another change, says Robin Rathore, is that 50 per cent of bidders on Bamboo’s auctions are women. “That’s unprecedented,” he says.
While auctions offer speed and certainty of sale, they don’t necessarily guarantee a given price. However, they can achieve even better prices than the market. David Sandeman points to a former searchlight emplacement in Devon which went on the market with a £20,000 reserve and £5,000 starting bid; two bidders took each other on, it went from £35,000 to £72,500. Not bad for a one room property with no windows and no planning permission.
Toby Limbrick gives the example of a house which had sold for £750,000 but where exchange of contracts had stalled, while the market moved on. It was put up for auction a year later, at a starting price of £825,000, and actually sold for £1m. Another property was estimated to be worth £800,000 but actually sold for £1m; when the surveyor downvalued it, Network Auctions presented the list of bids as evidence of value.
“There’s no way we would have been able to provide that information in a private sale transaction,” he says, “and the buyer wouldn’t have got the finance.”
Many agents run sealed bid auctions. But in a sealed bid scenario, bidders can still withdraw, and there’s a single round of bidding with no interaction. Jason Lee says that with sealed bids or ‘best and final offers,’ “You can’t guarantee you’ve got the best price if you go to the best and final – someone else might have come back and bid more; with auctions, you can.”
Speed and security is what auctions bring to clients. It’s not so much the property but the vendor that’s relevant when deciding if auction is the right route. Jason Lee, SDL Auctions.
If a property doesn’t reach reserve in the auction, SDL will go back to see whether the vendor will take a little below the reserve – perhaps £499,000 against £500,000 – or if the bidder is willing to close the gap. “It’s quite staggering how many deals are tied up after the auction,” Jason Lee says.
It’s also easy to cycle an unsold property back into another online auction with a lower starting price and reserve, without having to wait for another ballroom date.
That shows how online auctions deliver greater transparency than any other sales method. This transparency is another reason behind online auctions’ increasing popularity.
Jason Lee says that particularly in the public sector, where councils and other public bodies have to demonstrate they’ve achieved the best price possible in a true arms-length transaction, “Transparency is the most critical word in the market right now.”
Creditors and receivers, too, are increasingly asking for online auctions and tracking them in real time. (Contrast that with the fact that some London agents are now selling up to a third of their properties without putting them on the open market, and you’ll appreciate why.)
So what are the options for estate agents? Should agents be setting up their own auction arms? That involves new expertise, for instance in getting legal packs together, as well as expense. Robin Rathore says that a lot of traditional agents closed their auctions arms because “it was too expensive to run or too difficult to manage,” often with relatively small numbers of lots.
Neil McDonald, a partner in Town & Country, says, “You can’t just start up doing auctions; there’s a certain rationale, processes, hand-holding required.” But he thinks the direct route works well for agencies which are market leaders in their area. “It certainly worked for us!” he says, and the firm now franchises its auction service to other agents, letting them cut out some of the investment and some of the learning curve.
Moving into the auctions space taught Town & Country several lessons. “There’s a bit more science to it” than with private sales, more statistics, and more urgency; but above all, he says, “you have to make sure your pricing is spot on, you have to have the right strategy, and you have to be very plain speaking too. I think that’s very important.”
A lot of the tools are the same as those he was using as an agent – RightMove tools and stats, mailing lists – but the processes and time scales are different. And agents can’t just put auctions online and forget about them, “people still often want to speak to us face to face or on the phone; you’ve got to hold people’s hands, and you’ve got to provide the service.” Another option is to use a white label auctions service such as Bamboo, EIG, or IAM Sold, which is proving very popular with busy estate agents.
There are no additional costs or overhead; auction providers make their money from splitting commissions with partner agents, which Robin Rathore says makes them “absolutely success aligned”. Bidder registration and ID checks are handled by the auction provider, which will also support the transaction all the way.
Auctions can earn good money; Network E splits 70-30 in the agent’s favour, and since auction fees are higher than normal agency fees, agents can expect 1.75 per cent out of a total 2.5 per cent. “Most agents would struggle to get that with sole agency,” Toby Limbrick says, and that has convinced over 125 agents to join the network. (One partner agent made £200,000 from auctions in 2017.)
All the white label providers are seeing strong growth. David Sandeman says online lots in H1 2018 were 45 per cent up year-on-year; Bamboo has seen a really strong quarter of agent sign-ups, including Fisher Jermyn, Hunters and Bradleys; and SDL is seeing growth accelerating.
In part, auctions have benefited from a more difficult residential market. London, for instance, hadn’t shown much interest in auctions before; now, Jason Lee says, the market has become more difficult, and agents are beginning to show more interest.
Unsurprisingly, auctioneers are optimistic about the future for auctions. Robin Rathore says “I see no reason why auctions, both traditional and conditional, shouldn’t get to 10-15 per cent of the total property market” – not demanding, when you consider that in some Australian cities, auctions account for 25 per cent of transactions. Toby Limbrick is even more gung ho. “Auctions could make a serious dent in the private treaty market,” he says. Could that be as high as 50 per cent? “Why not?” he responds. Even if that’s not a forecast, it’s a sign of confidence in the auction market.