One of the biggest frustrations with the UK property market is agreeing a sale only to have it slip through your fingers later on. Surprisingly this is very common. In fact, approximately 30-40% of sales agreed through an estate agent fall through.
But is it the same with auctions? Can property auction sales fall through?
Yes, it is possible for sales to fall through after an auction, but it’s very rare. This is for three main reasons:
- Legal work and surveys are done before bidding,
- Auction sales are legally binding,
- Buyers pay a substantial deposit or reservation fee up-front.
Less than 1% of auction sales fall through.
Some auction sales are more likely to fall through than others though. It depends on the type of property being sold, any known issues with it, and the type of auction it’s in.
It’s useful to understand these differences to get a feel for how secure (or at risk) your auction sale could be - and what you can do about it.
Wondering if auction is the right fit for your home sale? I've designed this free online quiz to help you answer that very question in the next 1-2 minutes. Click the button below to get started:
1. Recap: Why do houses sales fall through?
Before we look at why auction sales are much less likely to fall through it's helpful to understand why normal house sales fall through. (When we say "normal house sales" we mean house sales via estate agents).
1.1 Reasons normal house sales fall through
Traditional house sales fall through for three main reasons:
- Surveyor or solicitor finds an issue. Some issue is found in the property survey or the legal work that makes the buyer change their mind. Typically the issue will have some significant financial impact, or an impact on how the property can be used. Examples include if the property is found to have subsidence, or if it has legal complications.
- Buyer fails to get a mortgage. If the lender is not happy with a buyer's financial position they may be refused the mortgage. Examples include if the buyer has a poor credit history, or if the lender doesn't believe they'll have the income to make mortgage payments.
- The chain collapses. Everything may be fine with your sale, but if your buyer is selling their own home and that one collapses, then yours will automatically fall through too.
Without a major overhaul of the way properties are bought and sold in the UK house sales will continue to fall through for these reasons.
How many house sales fall through each year?
TwentyCi, a customer intelligence data agency, reported that 225,000 house sales fell through in 2019 alone. Based on data from the Office For National Statistics this accounts for around a third of total house sales.
It's not just how many sales fall through though. Fall-throughs have real financial impacts for buyers and sellers too.
Homeowners Alliance are a consumer advice site formed by ex-Government Housing Policy reformer Paula Higgins. In a 2018 report they found that buyers and sellers incurred an average of £2,700 per property fall through.
That's a shocking cost of £607.5m per year from property fall throughs! But auctions make up only a very small portion of these fall-throughs. Why is that?
1.2. Why do fewer house sales fall through in auctions?
Because of the way the auction process works the three three issues we covered above are completely removed. With auctions:
- Due diligence is done before bidding. Buyers consult with solicitors and carry out any survey before bidding on the property. This means (in theory) that no issues are found later.
- Buyers at auctions tend to use cash. Most buyers at auction will use cash to buy the house, rather than relying on a mortgage. (This is changing slowly with the growth of Modern Auctions, but we'll come back to this later).
- Auction buyers are chain-free. Auction buyers won't be reliant on any other sales completing.
Further to this, buyers pay a hefty deposit or reservation fee when they win the auction. This makes them even more committed, and gives them even less incentive to want to pull out.
So the three main reasons that house sales fall through simply don't affect auctions, and buyers make a substantial financial commitment too.
So if auctions tackle these three flaws, why do some small percentage of auction sales still fall through?
2. Why do some auction sales still fall through?
One reason auction sales fall through is because it may transpire that the buyer can't pay. This can happen if they fail to raise the finance they were expecting to.
Another reason auction sales fall through is because buyers change their mind after winning the auction, and decide not to purchase.
Why would they do this?
In almost all cases it's because they find something after the auction that they weren't aware of beforehand.
2.1. Buyers: Do your due diligence before the auction!
This is the number one piece of advice when buying at auction. Do your due diligence beforehand. We wrote about this in the following article:
Due diligence is important on any property, but especially properties going to auction. This is because auctions attract more than their fair share of "problem properties" and houses with legal complications.
2.2. Due diligence and property auction fall-throughs
Cunningtons LLP are a market leader in residential conveyancing and deal with several thousand property transactions each year. They're members of the Solicitors Regulation Authority, SRA number 619821 and have written extensively on their website about property auction issues.
Quoting from their article about dealing with property auction issues:
"One thing that many [property auction fall-throughs] have in common is that the buyer did not take any legal advice on the contents of the auction pack before bidding on the property."
- Mark Taylor, Litigation Partner at Cunningtons Solicitors.
In other words, instead of uncovering any issues before the auction and making a decision based on that information, some buyers make a set of assumptions first. They assume the property is ok and that there are no underlying issues and they bid accordingly.
After winning the auction they place their deposit and their solicitor begins finalising everything before completion. And that's where issues are uncovered.
Some issues are relatively small and people will proceed regardless. But others can have a serious financial impact. It may make more sense for the buyer to withdraw and forfeit their deposit or reservation fee entirely, rather than proceeding.
Unfortunately for some sellers, this means that if you're selling a property with complicated legal issues at auction, then your sale may be more likely to fall through than average.
3. Fall throughs: Traditional Auctions vs Modern Auctions
As a final note, it's worth mentioning the difference between traditional auction and modern auctions, and how fall-through rates differ.
With traditional auctions exchange takes place immediately upon the fall of the gavel. At this point the buyer pays a 10% deposit.
The Modern Method of Auction is a type of "conditional" auction and differs in two key ways:
- They only require a reservation fee from the buyer. This is usually around £5,000. In most cases this will be lower than the 10% deposit required at traditional auctions. This means the financial penalty of withdrawing from a modern auction is smaller.
- Mortgage buyers can take part in modern auctions. This reintroduces one of those risks that traditional auctions removed: If your buyer fails to get a mortgage then the sale will fall through.
For these reasons modern auctions do have a higher fall-through rate than traditional auctions, but still significantly lower than fall through rates for estate agent sales.
Modern auctions can still make more sense for sellers, depending on the type of property being sold and the timeframes a seller's looking to work with. It's just important to choose the right type of auction and the right auction house for your situation.
3.1. How to reduce the chance of fall-through rates
Do your due diligence before the auction. Pay a solicitor to review the legal pack before your auction. Although this is an added cost it can save you a fortune in the long run.
Take your auctioneer's advice on how to approach the auction. Decide up-front which issues should be disclosed and how prominently.
Are you thinking about selling at auction? If you're looking to save a lot of the homework, headaches and guesswork, I can help. Hit the button below to get a direct referral to my #1 Leading Auction House. You can get a free auction appraisal and have all your auction questions answered (for free) in the next 24 hours.
By Matthew Cooper, Co-Founder of Home Selling Expert