The Modern Method of Auction Is Not the Easy Option

The modern method of auction gets sold as the civilised version. You’re not bound the second the hammer falls. You get longer to complete. It’s described as mortgage friendly.

All of that is true, and none of it makes it the easier option. In some ways it’s harder, and the parts that are harder are the parts nobody mentions until you’re in it.

Here’s how the two actually compare, and then the things about the modern method that catch people out.

Traditional and modern method, side by side

Read that third row again, because it’s the one that costs people real money.

How much is the reservation fee on a modern method auction?

Typically a few per cent of the purchase price including VAT, with a minimum that bites on cheaper lots, and the important part is that it sits on top of the price rather than coming off it.

On a traditional auction purchase, your ten per cent deposit is part of the price. You pay it on the day, and it comes off what you owe at completion. It isn’t an extra cost, it’s just the first part of the money.

A reservation fee on the modern method works the other way round. It’s a separate payment to the auction house, it’s on top of the purchase price, and you don’t get it back.

Fees vary between auction houses, so check the specific one rather than trusting a rule of thumb, but they’re typically a few per cent of the purchase price including VAT, and there’s usually a minimum that applies to cheaper lots. On a two hundred thousand pound purchase that can easily be several thousand pounds.

Now think about what that money is buying. It isn’t buying the house. It’s buying an exclusivity period. If the seller changes their mind, or your lender declines, or the legal pack throws up something you can’t live with, that fee has gone and you own nothing.

There’s usually a buyer information pack to buy as well, which is a few hundred pounds. Not a huge sum on its own, but it’s another cost that doesn’t come off the price.

Can you be gazumped on a modern method auction?

Yes. Until contracts are exchanged nobody is committed, including the seller, so a better offer can still take the property off you after you have paid your fee.

Not being bound is sold as the big advantage. You haven’t exchanged, so you’re not committed. If something goes wrong you can walk away.

What people don’t follow through is that the seller hasn’t committed either.

You’ve paid a non-refundable fee for a period of exclusivity. You have not bought a property, and the seller has not sold one. Until contracts are exchanged, they can pull out. If someone comes along with a better offer, you can be gazumped, exactly as you could buying through an estate agent.

So you’re carrying the cash risk of an auction purchase with the certainty of a private treaty sale. That’s the worst combination of the two, and it’s the thing the marketing never says.

When does the 28 day clock actually start?

Not when you win. It starts when the draft contract reaches your solicitor, which is a date somebody else controls.

On a traditional purchase you know your completion date the second the hammer falls. You can work backwards from it. You know when the valuation has to be instructed, when searches need ordering, when your solicitor needs to be finished.

On the modern method, the twenty-eight days to exchange doesn’t start when you win. It starts when the draft contract lands with your solicitor.

That isn’t a date. It’s a date that depends on how quickly somebody else’s solicitor does something, and chasing them is now on your critical path.

The practical effect is that you can’t plan around it. You can’t book a valuation to a deadline nobody has set. You can’t tell a builder when you’ll have the keys. And if you’re doing works, that matters more than people expect, because trades book up weeks ahead. I got quoted for some fencing in October and the chap couldn’t start until December. Try telling him you’ll confirm the date once someone else’s conveyancer sends a contract.

Can you use a high street mortgage for a modern method purchase?

You can, and people do, but fifty-six days is tighter than it sounds. This is the assumption I hear most, and it’s the one that causes the most trouble.

The logic goes: the modern method gives me fifty-odd days instead of twenty-eight, so I don’t need bridging finance, I can just use a high street lender.

Fifty-six days is longer than twenty-eight. It is not the two to three months a mainstream application can take once anything goes slightly wrong. A down valuation, a query on the title, an underwriter who wants one more document, and you’re past the date.

I have done modern method purchases with high street lenders, and they completed. Low loan to value, strong income, clean credit, nothing unusual about the property. On paper they were the easy ones.

If I rang those clients today and asked whether they’d do it that way again, I’m fairly confident they’d say don’t bother. Getting it over the line in time was genuinely stressful, and the stress came from having no control over a deadline that someone else had set and could move.

That’s not an argument that you must always use bridging finance. It’s an argument that fifty-six days is a timescale, not a comfort blanket, and you should plan for it the way you’d plan for twenty-eight.

Where that leaves bridging

For a lot of modern method purchases the sensible structure is the same as a traditional one. Bridge to exchange and completion, so the date is never in doubt, then refinance onto a longer term product once you’re in and the pressure is off.

That costs more than going straight to a mainstream lender. What you’re buying is certainty, and on a purchase where you’ve already paid a non-refundable fee of several thousand pounds, certainty is worth something. Losing the fee because your mortgage application ran four days late is an expensive way to save money.

The decision is genuinely yours and it depends on the deal. If your lot is straightforward, your lender is already on board and you’re borrowing modestly against a conventional property, a mainstream application may well be fine. If any part of that isn’t true, think hard about it.

A word on stamp duty

There’s an unsettled question about whether the reservation fee forms part of the chargeable consideration for stamp duty.

I’m not going to give you a position on it, because it isn’t my area and the treatment isn’t clear cut. What I’d say is that it may form part of the chargeable consideration, it’s worth knowing about before you commit rather than after, and your conveyancer is the person to confirm it.

While you’re on that subject, remember the surcharge if this is an additional property, because it applies to the whole price and people routinely leave it out of their budget. The rates differ between England and Northern Ireland, Scotland and Wales, so check the ones that apply to where you’re buying.

Modern method of auction questions people ask

How long do you have to complete on a modern method auction?

Usually around twenty-eight days to exchange and another twenty-eight to complete, so roughly fifty-six in total. The first twenty-eight only begins when the draft contract reaches your solicitor.

Do you lose your deposit on a modern method auction?

There isn’t a deposit as such. You pay a non-refundable reservation fee, and if the purchase doesn’t go ahead for any reason, including the seller withdrawing, you don’t get it back.

Is the modern method of auction legally binding?

Not at the point you win. You’re buying an exclusivity period, and neither side is committed until contracts are exchanged.

Does the reservation fee come off the purchase price?

No. It’s a separate payment to the auction house on top of the price, which is the single biggest difference from a traditional auction where your ten per cent forms part of the price.

Can you use bridging finance on a modern method purchase?

Yes, and it’s often the sensible route. Bridge to completion so the date is certain, then refinance onto a longer term product once you are in.

Is the modern method cheaper than a traditional auction?

Not for the buyer. You pay the reservation fee and usually a buyer information pack, and the seller saves the commission they would otherwise have paid.

So what’s it actually for?

Here’s the honest answer, and it isn’t a criticism of anyone.

The modern method solves the auction house’s problem, which is getting paid. It solves the seller’s problem, which is paying commission. Both of those are legitimate problems and the structure deals with them neatly.

It does not solve the buyer’s problem.

You still have to read the legal pack properly. You still have to know whether the property is actually lendable before you commit. You still have to hit a date that somebody else sets. And you’ve paid a few thousand pounds that you won’t see again whatever happens next.

None of that means avoid it. Plenty of good lots only come to market this way, and plenty of people buy well through it. It means go in with your eyes open and your finance sorted, rather than going in relaxed because somebody told you it was the gentle option.

If you’ve found a lot being sold this way and you want to know what’s actually possible on it, send me the details and the legal pack before you reserve. Ring 0330 133 4442 or book a call. Twenty minutes, no credit check, and if the honest answer is that you don’t need me, I’ll tell you that.

Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

This is general information, not a quotation, an offer of finance or personalised advice. No lender is named. Rates, fees, timescales and lender criteria vary by lender and by deal, and the terms available to you may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided.