Home owners’ consumer group calls for regulation of ‘murky’ online property auction sector

Consumer group HomeOwners Alliance (HOA) says agents are securing increasing income from the use of online auctions - termed 'the modern auction' by online operators - but warns there are pitfalls for buyers and says the growing sector is 'murky'.

This is how it works: The property is offered for sale in an eBay style auction. The successful bidder then has a set period to exchange and complete, usually 56 days, but must pay a large and non-refundable 'reservation fee'.

A research document issued by HomeOwners Alliance says the system is under fire because "it allows estate agents and auction platforms free rein to set the reservation fee."

It continues: "Our investigation suggests some high-street agents are still getting to grips with how this [reservation fee] works. This must be paid upfront by the winning bidder at the auction's close by debit or credit card or bank transfer and can be anything upwards of 2.5 per cent plus VAT. There is usually a minimum reservation fee of at least £5,000 plus VAT."

This is non-refundable if the buyer decides to withdraw. Buyers can be misled by this as they enter into it without any advice and there is no cooling off period. They don't realise that the fee is in addition to the price and is an add-on that goes to the auctioneers/agents. So the buyers may find themselves, as the HOA report concludes, "stung to the tune of several thousand pounds when they realise that paying the reservation fee is not like putting a deposit on a holiday."

National Association of Estate Agents' chief executive, Mark Hayward, says in a statement regarding the HOA research: "A reservation fee needs to be transparent and while there is no limit, it would need to be 'reasonable'."

The HOA points out that an agent stands to earn more than it would on a conventional sale and with less work. "We're concerned that estate agents are milking buyers for profit" it concludes.

Its chief executive, Paula Higgins, says: "We're concerned that estate agents and online platforms are using the modern auction method to pull the wool over homeowners' eyes and get commission up to 10 times what they would charge selling the traditional way. There is nothing wrong in principle with the modern auction, but it needs better regulating to ensure it works for the benefit of homebuyers and sellers rather than against them."

Buyers considering using this method to secure a property should proceed very cautiously indeed.

We have certainly seen buyers who have become trapped in by having paid a large reservation fee - not realising the implications - and then being faced with a property with title or other issues. The usual terms require an exchange of contracts within 28 days when a deposit becomes payable. Completion is then usually within a further 28 days.

The agreement is not prescribed or regulated in any way and often additional terms are included, such as a requirement for the buyer's solicitor to raise enquiries on the legal paperwork within five working days of receipt. If any of the deadlines are not met, the reservation can be terminated and the reservation fee forfeited.

In real terms the arrangement acts as an expensive and potentially one sided 28 day 'lock out agreement' which can be very costly indeed if the property or its title is defective or unmarketable in a normal market or a mortgage cannot be obtained in timely fashion, and the buyer has to walk away and forfeit the reservation fee.

Anyone looking to buy at any form of auction should take legal advice before proceeding.