Bypassing the Modern Auction Method

North_South

Hi,

I'm a first time buyer, and I've viewed a property that I'm interested in potentially purchasing. I'd like some advice.

It's being sold under the "modern auction method," which means if I make an offer on it that's accepted, I would have to pay a total of £6000 inc VAT to the auction house as a "non-refundable reservation fee" - bear in mind that the properties market value is around £50,000 top end, and the seller doesn't see a penny of this "reservation fee."

I'm not willing to pay a 12%+ reservation fee i.e. 12%+ commision for the auction house - both in principle and from a fiscal standpoint!

This £6000 reservation fee is not relevant to a property of this price range! (considering the normal rate is 3.5% from this auction house and this £6,000 is a minimum fee!)


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Would I and the vendor be okay from a legal standpoint, if I were to ask the vendor directly to remove the property from auction (bidding has not started - it's in the premarketing stage), and in exchange I pay any early withdrawal fees the vendor is charged (as well as purchase the property at a reasonable price)?

I'm not a property investor (currently), I'm a first time buyer, and I consider a 12-14% commision paramount to daylight robbery. I also don't have oodles of cash - £6,000 upfront is ridiculous in my view for a property of this price. I'd like to use that money to decrease my LTV rate, that's a good chunk of my deposit!

eddddy

North_South wrote: »

....
Would I and the vendor be okay from a legal standpoint, if I were to ask the vendor directly to remove the property from auction (bidding has not started - it's in the premarketing stage), and in exchange I pay any early withdrawal fees the vendor is charged (as well as purchase the property at a reasonable price)?
...

Hi North_South

The short answer is that the vendor will almost certainly have to pay the £6,000 to the auction house.

I guess you could look at this way... the auction house people will have thought of your plan, and will have designed a contract to prevent it. Otherwise lots of people would do it.



Here's example extracts from an auction house contract that shows how they do it (although this auction house only charges £3.5k):

SOLE SELLING RIGHTS & CANCELLATION: On signing this contract you agree for the auction coordinator and partner agents to market your property for sale by auction for a minimum period of 8 weeks, This agreement may be cancelled by either party on giving 21 days notice in writing to each other.

Should you enter into direct negotiations leading to exchange of contracts with a purchaser (even if the purchaser was not introduced by us) whilst under this agreement a fee will become payable directly by you. The fee will be calculated at 3.5% of the final negotiated selling price subject to a minimum of £3,500 plus VAT. Should the auction coordinator not be aware of the purchase price the fee will be calculated against the contracted reserve price.

I guess you could make a 'secret agreement' with the vendor to cancel the contract after 8 weeks / 21 days and then sell to you. But then it could be argued that the vendor would be committing fraud, which is a criminal offence.

North_South

eddddy wrote: »

Hi North_South

The short answer is that the vendor will almost certainly have to pay the £6,000 to the auction house.

I guess you could look at this way... the auction house people will have thought of your plan, and will have designed a contract to prevent it. Otherwise lots of people would do it.

Here's example extracts from an auction house contract that shows how they do it (although this auction house only charges £3.5k):

I guess you could make a 'secret agreement' with the vendor to cancel the contract after 8 weeks / 21 days and then sell to you. But then it could be argued that the vendor would be committing fraud, which is a criminal offence.

Thanks for the response eddddy, I will take this into consideration. I guess it could be argued that the vendor is committing fraud in your example, it's a tricky one.

To play devils advocate if the auction house were to find out about a "secret agreement", they wouldn't have a strong legal recourse as their own agreement I assume doesn't expressly state any specific reasons why the agreement cannot be cancelled. Such as avoiding paying that 3.5%. It's a technical loophole?

ging84

phone the vendor, tell them you have a plan to cheat the auction house, where you save £6k and they take all the risk, i'm sure they'll be thrilled

ging84

why do you actually care who gets the money?
the £6k fee should obviously be a factor when bidding, as it will be for all other bidders, provided you have the cash to pay the deposit it doesn't really matter if the auction house was asking for 1% 12% or 75%

North_South

ging84 wrote: »

why do you actually care who gets the money?
the £6k fee should obviously be a factor when bidding, as it will be for all other bidders, provided you have the cash to pay the deposit it doesn't really matter if the auction house was asking for 1% 12% or 75%

Well I think it's a factor that the vendor should be aware of, and it not only benefits me, but also them:

If (we) the bidders are reducing how much we're willing to pay for this property by £6k, that's directly effecting how much the vendors gets... by £6k! If not by more*. Modern auction is a shortsighted system - the vendor would be better off selling with a traditional estate agent who would likely charge them directly a maximum of £1,250 (2.5%) on completion!

If I were to offer the vendor close to what they wanted as sale price, who's complaining? ...The only one is the auctioneer, who has no interest apart from pure profiteering!

In the end the vender and the buyer loose out with this modern auction system. I'd like to benefit myself and as the cherry on top; the vendor.


*potential bidders are more likely to be put off by this system. Less bids > less competition > lower selling price. Sounds good to the buyer... No, we don't even win; because we're slapped in the face with a £6k charge!

eddddy

North_South wrote: »

....
To play devils advocate if the auction house were to find out about a "secret agreement", they wouldn't have a strong legal recourse as their own agreement I assume doesn't expressly state any specific reasons why the agreement cannot be cancelled. Such as avoiding paying that 3.5%. It's a technical loophole?

If you say to the vendor "if you cancel your contract, I will start buying the house in 8 weeks" you have "entered into direct negotiations". Hence the fee should be payable.

If the auction house asks the vendor why they are cancelling the contract and the vendor lies about the reasons, he/she is making a false representation.

And the reason for lying would be to avoid paying a fee.

That's almost a textbook definition of fraud. Here's an extract from the fraud act 2006:

Fraud by false representation

(1) A person is in breach of this section if he -

......(a) dishonestly makes a false representation, and

......(b) intends, by making the representation -

..............(i) to make a gain for himself or another, or

..............(ii)to cause loss to another or to expose another to a risk of loss.

See http://www.legislation.gov.uk/ukpga/2006/35/section/2

martindow

eddddy wrote: »

If the auction house asks the vendor why they are cancelling the contract and the vendor lies about the reasons, he/she is making a false representation.

The vendor is under no obligation to lie or explain - they can just give notice.

theGrinch

walk away. I would from any agency demanding that up front.