Think hard before using the hammer
Auction can be a convenient way to sell a difficult property, but may prove expensive if the hammer doesn't fall.
The last ten years have seen a dramatic rise in the number of commercial properties sold at auction. Although this growth has slowed in the recent economic downturn, auction remains a useful tool particularly for properties which are difficult to value.
The main attraction of an auction sale is competitive bidding – from a potentially very large circle of interested parties. And once the gavel falls the successful bidder is legally bound to purchase the property. The buyer won't be able to impose conditions, and the purchase will not be subject to finance or inspection. However a well advised buyer can often negotiate changes.
The auction process is also generally much quicker than a conventional sale. Whilst there is quite a bit of work to be done before the auction catalogue comes out, the auction usually follows abut 21 days later and there are seldom if ever any negotiations afterwards which would delay exchange (the hammer falling) – the seller sets any conditions of the sale that he wants and all the buyer can do is inspect the auction catalogue and the legal pack to see what they are. Completion usually takes place 28 days (or 20 working days) after the auction.
And if that is not fast enough, you may be lucky and have an approach from a potential buyer wanting to pre-empt the auction by closing a deal beforehand.
So if your buyer is well organised, properly advised and has the requisite financial resources you can enjoy a quick sale on your own terms and potentially at a higher price than you may have achieved on the open market.
So why isn't everyone doing it?
There are of course potential drawbacks.
Marketing costs are typically higher than those incurred on an open market sale. Most auctioneers will charge a commission of approximately 2.5% of the sale price and a fee must be paid even if the property does not sell.
Your solicitor will have to prepare a complete legal package prior to marketing. This will contain details of the title to the property, searches, an Energy Performance Certificate, replies to standard enquiries and the all important conditions of sale (although on house sales this is now a requirement on a conventional sale (HIP)). The costs of issuing copies of the legal pack to any interested party can be significant.
So, you've got to auction day and things are looking promising. Your solicitor has sent out close on twenty legal packs. You have hopes of twenty bidders lining the auction room battling it out for your property. But of course because this is an auction there is no guarantee that your property will sell at all. The timing of the sale is going to be critical, both in terms of finding interested buyers, and getting the buyers there on the day. Even if you have received some promising pre-auction offers there is no guarantee your property will even achieve the reserve price.
But if it does... Your buyer pays the auctioneer a 10% deposit which can be passed to you less the auctioneer's commission and he is contractually bound to purchase the property in 28 (20 working) days time.
Has he got the money? In today's climate, he may need more than 20 working days to secure funding. You can allow him that, but if he still fails, you then need to decide whether to reduce the price to secure the sale, or simply pull out and keep the deposit.
If the buyer fails to complete on the completion date, provided you are ready to complete, you can serve notice on the buyer to complete within a short period of time, typically ten working days, failing which you cancel the contract and keep the deposit. You will usually have to pay a proportion of the auctioneer's costs and your legal costs. And you face the prospect of going through the whole thing again in a future auction.
An approach favoured in the present climate is to extend the period between exchange and completion often to six weeks or more, to give your buyer time to secure funding,
If it all falls through after that, you might think "to hell with it" and go back to a conventional sale. But in the right circumstances, the hammer could be the best way to crack the nut.
Ian Gill, Partner
Commercial Property Practice
email [email protected]
tel 020 7591 3363