Inside the Auction House: Premiums - Buyer Beware

Inside the Auction House: Premiums - Buyer Beware




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Answers from the Rostrum...

 
Benjamin Tobin, Chartered surveyor and director of Strettons, has been selling properties by auction since 1979. Each month he will correct our common auction misconceptions, giving us the real answers from the Rostrum...
 
Over the past few years there have been a stream of television programmes on the subject of buying properties at auction. Frequently these have followed a similar format; the camera follows a buyer or buyer around the property market, inspecting buildings, most frequently houses or flats (but occasionally small business premises) with the suspense provided by following the auction process and watching either the joy or the disappointment of the successful bidder at the auction.
 
I have featured on numerous such programmes and I am still questioned by clients who see me on daytime satellite TV selling a property that went through our auction sometimes several years earlier. One lady tells me that her trips to the gym would not be the same without me selling (or occasionally not selling) a property!
 
But why the fascination with part of the property market that the vast majority of buyers never get to engage in? My guess is that it is the element of the unknown both with where the roulette of whether the buyer, the seller or sometime both, are overjoyed, disappointed or merely satisfied with the price.
 
Bridging Lenders, however, frequently use auction, and yet sometimes without a detailed understanding of how it works. The rationale seems to be “it does work, so don’t get involved”
 
In any event, there is never any shortage of questions when people (whether or not they are from a property background) find out that I am a property auctioneer.
 
With that in mind here is the latest in my series of questions and answers:
 

Question: What is a buyer’s fee and why should I pay one?

 

 

Answer

 

The buyer at auction will need to factor in a number of costs. Most of these will be the same as for a private treaty sale – Stamp Duty Land Tax, costs of obtaining finance and legal fees although really these should be less at auction since the sensible seller will have got his lawyer to provide a comprehensive legal pack, there is no contract to agree and there should be less work for the buyer’s lawyer.

 

But there can be other costs levied either by the auctioneer or by the seller.

 

Chattels auctioneers have been charging buyers’ premiums for many years and they can be substantial as the current rates quoted by Sotheby’s, Christie’s and Bonham’s show below:

 

up to £25,000 - 25%

£25,000 to £500,000 - 20%

£500,000+ - 12%

 

Clearly this can have a substantial effect on yield and profit, especially when you bear in mind that the auctioneers are also charging a fee to their sellers. At property auctions there tend to be two types of charge, and sometimes both.

 

Buyers’ Administration Fee

 

At Strettons, in 2002 we made a radical change to the way in which our buyers could obtain the legal documents relating to the sale. Previously buyers had to ask us to send them a copy of the legal pack which could often run to hundreds of pages. We took a payment usually of about £25 per pack, depending on size. In 2002, we invested in systems for rapid scanning of documents and made everything available for download, direct from our web site, something that larger firms only did relatively recently. To cover the costs of this we instituted a charge made to the successful bidder only (so that abortive costs for unsuccessful bidders are minimised). This buyer’s administration fee is currently £475 including VAT. We have never received any complaint about this charge, once buyers understand what it is for.

 

Buyer's premium

 

In recent years some sellers, notably public bodies (but some property companies too) have started to charge a buyer’s premium towards their sale costs. This tends to vary between 1–2 per cent and is kept by the seller. It is difficult to prove but our view is that buyers will simply reduce their bid by this amount in those cases where the charge is made. It is relatively unusual; perhaps 2-3 per cent of the lots that we offer but we do find considerable resistance to such charges by bidders who often think it is us who are benefitting from the premium!

 

The RICS Guidance Notes for property auctions require the auctioneers to ensure that bidders are notified in advance of any “payment in addition to the usual deposit or completion monies” so bidders should be safe that they won’t be caught by any surprises. However, some vendors may ask their solicitor to slip in a buyer’s fee in the special conditions at the last minute, which might not always be picked up by us and the old adage “buyer beware” applies and you should read all documentation carefully.

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