There is a wealth of research on the current use of auction sales, both for residential and commercial properties, but the message is always the same; while the number of lots sold at auction against the same time period last year is down, the percentage sales achieved at auction is on the increase. In July's edition of Property Auction Newsletter, it was reported that there was a drop of nearly 30% in lots put to auction in April to June 2009, against April to June 2008, but during the same time period, the increase in sales was nearly 20%.
The fact that fewer properties are for sale reflects the state of the property market in general, but what awaits the seller who decides to take his chances at an auction?
Advantages
Price certainty is one of the most obvious advantages. On the fall of the hammer in England, or the signing of the minute of enactment in Scotland, the seller has a binding contract. In current market conditions, "price chip" is becoming an all too familiar phrase, one that sellers almost expect to hear during the course of negotiations, whereas the once familiar "take a view, this has no effect on value" has almost disappeared. In an auction sale, however, the diligence is carried out before the purchaser makes his bid, so he makes the purchase knowing what he is buying. The seller can be assured that the price agreed on the date of the auction will be the contracted purchase price.
Retail investments of no more than £1m are still the usual package found at a commercial auction, and given the wide range of potential purchasers these type of lots attract, this type of investment can benefit from the wide marketing that an auction can achieve. However, Allsops, Jones Lang LaSalle and Cushman & Wakefield have all reported recently that lot values at auctions are increasing and the type of property sold is changing, with shorter let properties also selling. At the Jones Lang LaSalle and Cushman & Wakefield auctions at the start of the summer this year, average lot sizes of £1.05m and £900,000 respectively were reported.
Speed is another attractive quality in the current market. If your property does sell at the auction, there is a set time frame between preparing for the auction, the auction itself and then the date of settlement or completion. Sellers in the current market know only to well that negotiations seem to be taking longer, as purchasers are naturally more cautious, or are having to jump through additional funding hoops, all of which add to the length of negotiation.
Disadvantages
The unpredictability of who has considered the auction catalogue is one of the main disadvantages. While the marketing is wide, and it is possible to keep track of those who have requested legal packs, auction marketing is simply not as focused, as targeting individuals or companies who property professionals already know may be interested in a purchase of that type.
While the fact that an auction takes place on a set day can be an advantage, it can also be a disadvantage, as it relies on the right people looking at the right time and making a quick decision on the day. In the traditional auction houses, while a purchaser can have someone make an offer on his behalf, there is no time to take extensive instructions, decisions have to be made in advance and there is no room for the cautious purchaser who needs board approval or hasn't carried out a full appraisal of the figures before going into the auction house.
Cost is another important factor. The auctioneer will take a fee whether the property is sold or not. This should be coupled with the fact that the seller's solicitors may become engaged in diligence discussions from a number of interested parties.
The US Model: A New Trend?
Could our auction houses limit of some of the inherent disadvantages in the system, by taking a leaf out of the book of our American counterparts? Repossession Auctioneers REDC, have set themselves apart by changing the familiar set up in three main ways:
- Instead of charging the seller the normal fee of 1-2%, the buyer is charged a fee of 10% of the property value, (although critics say this will artificially decrease the price achieved as the purchaser considers the fee in making his bid);
- they utilise modern technology to provide online pre-auction bidding, which some critics have nicknamed "e- bay style" selling; and
- auctions are taking place at "trendy" venues with music playing in the background and bidders are encouraged by bidding assistants parading around the venue.
Pattison, a Newcastle based auction house, has embraced some of the REDC ideas, and has said that pre-auction bidding is "pushing prices well over the reserve [due to] maximising the exposure of the property. We can negotiate for the sale 24 hours a day and can attract worldwide interest, so there is no limit. This leads to the best price we can achieve for that property at auction."
Richard Auterac, auctioneer at JLL and chairman of the RICS Real Estate Auction Group has said "I have always felt that the auctions market could have a far larger share of the transactional pie if it responded more intuitively to changes in society’s need for buying and selling real estate" but he is generally critical of the REDC model stating that "the overarching principal should always be giving best professional advice, gained through years of market knowledge, not the razzmatazz of the day".
Auction contracts: room for more buyer friendly provisions?
The traditional auction contract consists of general conditions of sale, which are generally contained within the auction catalogue and generic to all lots, with special conditions of sale drafted by the sellers' solicitors on a bespoke basis for each specific property. The special conditions of sale will deal with issues such as the address of the property, the VAT status and any unusual obligations that the buyer will have to comply with, like entering into a back letter.
The general conditions are generally slanted in favour of the seller, and not reflective of a balanced/ negotiated contract. This is due in part to the fact that the general conditions are usually based on the set of common auction conditions which were drafted by the RICS, first in 2002 and then updated in 2005. At those times, auctions were mainly used in insolvency situations and in, it is fair to say, a sellers market. That is no longer the case, and so it is worth considering whether some of the general conditions could be modified within the special conditions, to enhance the appeal.
General conditions tend not to provide the purchaser with any leasehold warranties, which would be commonplace in a negotiated sale contract. While warranties from an insolvent entity may be of little value and unlikely to be forthcoming at all from an insolvency practitioner, many purchasers will be nervous of purchasing an investment with no warranties from a solvent seller, which they would expect to get in a traditional sale. If certainty that the leasehold documentation that is provided in the legal pack is the only documentation regulating the landlord and tenant relationship could be given, a wider audience may be interested. Warranting the position on rental arrears is also worth considering if the seller has the information available anyway.
The position on future rent reviews should also be considered. General conditions often apportion rents on a reviewed rental basis, based on the seller's reasonable estimate, even though the reviewed rental has not been determined.
In a uniquely Scottish situation, general auction terms tend not to provide for updated searches or letters of obligation. Again, it is worth considering reconsidering this stance to ensure that the contract on offer does not limit bidders.
The future?
The evidence shows that success rates at auctions are on an incline. Only time will tell if tips will be taken from the US model to try and boost sales further, or if it will become the norm to modify the special conditions to reflect a more balanced offer.
In 2008, the RICS issued a consultation paper which looked at modifying the common auction conditions. While consultation has now closed, the intention is that new common auction conditions will be issued this year. Given our changing market, it will be interesting to see if these conditions are modified to be more purchaser-friendly.
