Auctioneers underestimate the importance of good practices at their peril

It’s often said that change is the only constant, and over the past 5 years in the property auction market that has never felt more true…

Prior to the pandemic the vast majority of property auctions were held in the traditional way (i.e. in a physical room). Today most are held remotely, either online or via the live streaming model, and auctioneers are taking full advantage of not having the upfront cost of hiring a venue and holding a higher number of auctions.  This has led to a 20% increase in the number of lots being offered at auction between 2019 and 2023. However, according to Essential Information Group’s Q4 2023 Insight Report the success rates at auctions nationwide in 2023 exhibited a noticeable decline from their previous peaks.  Moreover, 33% of all properties that were offered at auction in 2023 had repeated entries with adjusted guide prices, almost double the number in 2019.  Clearly the market got harder.

Weathering the changes in the auction market

Most properties offered at auction are residential.  In 2023 EIG say they accounted for 87.6% of the market (31,549), compared to 4,453 (12.4%) commercial properties.  In the year to November 2019, they were 24,565 (84.9%) and 4,364 (15.1%) respectively.  Representing growth in the residential sector of 28.4%, as opposed to an almost static 2% in the commercial sector. 

Drivers for the growth in residential volumes will have included the temporary SDLT relief in 2020/21, volatility in the buy to let market following regulatory, tax and interest rate changes, and more recently rising rents.  And let’s face it, everyone needs to live somewhere. 

Ultimately, it’s sales that matter, and the overall number of lots sold at auction between 2019 and 2023 increased by 16.4%, again largely thanks to the residential sector, with commercial sales experiencing a notable reduction of 7.35% from 3,264 to 3,024. 

Evidently getting the pricing right for commercial properties in particular has been challenging, and this will no doubt be one of the reasons why we’ve seen an increase in the number of properties being reoffered in a shorter than normal timeframe.  On reflection the reasons for this are not hard to see or understand when you consider the growth in popularity of online shopping and working from home, and headwinds such as high interest rates, falling rents, higher rates / occupational costs and shorter leases.

Trusting the guide prices that auctioneers publish

Having dedicated Commercial and Residential auction catalogues has long served Allsop well.  It shows clients we are genuinely in both markets, and with the performance and success rates of each team being independently visible it helps to grow trust.  Everyone can see what we are offering, what we are selling and perhaps more importantly what we are not selling.  Moreover, that we have real wide-ranging experience to draw on when appraising properties, enabling prospective clients to make an informed decision on their sales strategy.   

Getting the price right is fundamental to achieving any sale, but at an auction prospective buyers are required to spend time and money undertaking due diligence before bidding, without any guarantee of being able to buy the property.  So, it’s vital they are able to trust the guide prices that auctioneers publish, and that all Material Information is disclosed in good time.  As required by The Consumer Protection from Unfair Trading Regulations (CPRs) and The Business Protection from Misleading Marketing Regulations (BPRs) which came into force in 2008.

We have always found the best approach to guide prices is to ensure they stay aligned with the reserve.  They are tentatively agreed at the start of the instruction and reviewed closer to the date of the auction, once we’ve had the benefit of the market feedback.  This approach ensures the most accurate information is collected and it helps us to really understand the interest and provide our clients with the best advice.  In turn this enables them to make more informed and better decisions, and in doing so this minimises the need for repeated auction entries.

Disclosing material Information in good time

The timing of when Material Information is made available was commented upon in EIG’s more recent Q1 2024 Insight.  They reviewed over 18,000 properties that went to auction during 2023 and their findings were interesting.  Some 4.6% of lots didn’t have the Special Conditions of Sale (i.e. the contract) available until the day of the auction, and concerningly some 36% of bidders didn’t even look at the legal pack before bidding!

Thankfully most of the time there is a willing seller and a willing buyer, and everything works out fine.  But with more and more auctions now being held there has to be an increased risk of Good Practices getting overlooked and firms having their brands manipulated by sellers intent on duping buyers into unfavourable contracts.  Examples of Good practices include quoting realistic guide prices from the outset, chasing late Special Conditions of Sale and legal documents, and highlighting in an addendum any unusual or onerous clauses being imposed on the buyer by the seller within the Special Conditions of Sale, such as excessive additional fees.  Something I last wrote about in June 2023 – Trust. 

The commercial auction market is essentially investment led and as such it is closely aligned with the National Investment private treaty market.  Each market takes a different approach to guide/asking prices, but prices achieved will often be broadly the same.  It is also established practice in both markets for sellers pay their own costs when selling, as opposed to passing them on to buyers.

Ensuring the unconditionality of the Auction Contract

Back in 2019 the vast majority of auction contracts formed on the fall of the gavel were unconditional and legally binding, but today in 2024 it is not always clear if that is the case. In order for an unconditional contract to be created, RICS Professional Standards and the Money Laundering Regulations require all bidders who wish to bid at an Auction to be registered beforehand, and to have Client Due Diligence (CDD) satisfactorily completed as part of that process.  Including Identification and Verification (ID&V) and CDD of the parties involved, through online systems or ‘certified’ documents and independent checks, as well as understanding the Source of Funds.

The collection of a bidders security fee can also help keep buyers focused and, if 36% of bidders are choosing not to look at the legal pack before bidding, anything auctioneers can do to protect either party from getting remorse after the ‘hammer’ has fallen is likely to become increasingly important. 

The importance of good practices

It’s not in anyone’s interest to risk the reputation of auction as a method of sale.  It’s USP’s have long been Speed, Transparency and Certainty, and they will all be at risk if good practices aren’t followed and upheld. 

Auction sales that don’t complete have wider ramifications too.  The auction market often has liquidity when wider markets do not because it is dominated by predominantly cash buyers and not as heavily influenced by the cost of finance.  Consequently, with high levels of participants and real time transactions, property valuers will often rely on sales at auction for comparable evidence.

In summary it is incumbent on auctioneers regardless of how they hold their auctions to protect their markets reputation, so that all participants at any auction have a positive experience and tell others about it.  Word of mouth is a powerful thing, and it can help enormously in attracting new entrants, which in turn enables the market to grow to the benefit of everyone. Ultimately in the long run doing the right thing is never the wrong thing.

This blog was first published on 5th June 2024 in Estates Gazette. You can see the full article here.

Contact

Mark Gower is a partner in the commercial auction team at Allsop and he manages and assists with all aspects of the auction process, with a particular emphasis on generating new business from his very wide cross section of clients.

His role as Commercial Managing Partner is to support and assist the wider Commercial Division, namely the Valuations, National Investments, West End and City Investment & Leasing, Business Rates & Lease Advisory, and Recoveries & Receivership teams.