Auction Versus Private Treaty
Should I Sell My Property by Private Treaty or by Auction?Deciding how to sell a property is one of the biggest decisions that any vendor can take. There are two options open to vendors; these are private treaty or auction. Both have their pros and cons. In this article, we delve a little deeper into these two different methods of selling a property as well as examining some of the benefits and drawbacks of each method.
How Does a Private Treaty Sale Work?
A private treaty sale is when a vendor, typically via an estate agent, puts their property on the market and invites offers. In order to give buyers an indication as to what price the vendor is expecting to achieve / willing to sell for, a guide price typically accompanies a private treaty listing. There are many terms used synonymously with “guide price” such as AMV (Advised Market Value) & asking price but all serve the same purpose ie to set expectations amongst buyers as to the approximate price that the vendor is expecting to receive. Of course, buyers can make offers of whatever amount they see fit eg just because a guide price is set at €500,000 that doesn’t preclude a buyer making an offer of €300,000 albeit that would typically be a waste of time as is too far below the guide price to be entertained. A good rule of thumb is that anything below 90% of the guide price is unlikely to be entertained. Of course, if no offers are forthcoming, a vendor may decide to reduce the guide price in order to engender some interest / offers albeit at a lower level than originally hoped for when the property was listed for sale.
If there is more than one bidder on a property, the price of the property can be bid up beyond the guide price. Ultimately the property is valued by what the highest bidder is willing to pay. The majority of estate agencies manage this process over email and the telephone, calling underbidders back to advise them of the latest offer on a property and offering them the opportunity to go higher. This process can go on for quite a while as each time a bidder increases their offer, the estate agent again calls back all the other interested parties and continues this process until such a time as no counteroffer is made. Auctioneera manages this process automatically on our website with all underbidders being kept up to date in real time in their Auctioneera account. The highest offer is then presented to the vendor who decides to accept or not. There is no obligation on the vendor to accept any offer, even if it exceeds the guide price.
If it is acceptable, the estate agent will request a booking deposit and mark the property as “sale agreed”. Sale agreed, as a status, has no legal basis at all and both buyer and seller can still walk away from the process at any point, up until contracts are signed. It simply means that both parties are agreeing in good faith to endeavour to close a sale at a given price ie the sale agreed price.
At this point, the vendor’s estate agent drafts what is known as a sales advice note and issues it to both sides’ solicitors. This basically informs both parties’ solicitors of the proposed parties to the transaction, the price agreed and any specific terms eg if furniture is to be included or not. The solicitors then commence the conveyancing process which is the legal part of the process. This involves the buyer’s solicitor carrying out all necessary due diligence to ensure that the buyer is buying a property without any unknown issues eg checking if there are any outstanding planning issues, if the vendor has clean title on the property, if the local property tax has been paid up to date, if management charges are up to speed if the property is part of a block of apartments, etc. In parallel with these checks, the buyer will typically arrange for a surveyor to inspect the property to provide a report as to its overall condition. While every property will typically have a number of minor issues requiring attention, the purpose of the survey is to ensure that there are no major problems that the buyer will inherit when (s)he buys the property. If a mortgage is being raised on the property, the bank will require that one of their approved valuers carries out a formal valuation on the property. This is to ensure that the buyer is paying a reasonable market price for the property. A bank won’t want to lend to a buyer paying substantially more than what a property is worth as in the event of a default and subsequent repossession, the bank won’t be able to recover its balance if the property is worth less than the finance raised against it.
Once the buyer’s solicitor is satisfied that all is in order, the buyer is satisfied with the result of the survey, and the bank valuation goes smoothly, the buyer’s solicitor will advise his/her client to sign the contract and pay what is now a legally binding booking deposit ie up until the signing of the contracts, both buyer and seller can pull out of the transaction. However, once a buyer signs contracts for the purchase of a property, (s)he is legally obliged to proceed and close the same. Failure to do so can result in the vendor suing the buyer in order to oblige them to proceed with the purchase. On signing of contracts, a closing date is agreed. On this date, the balance of funds is transferred to the vendor, legal title to the buyer and keys are released bringing the sale to a conclusion. From listing a property for sale until closing typically takes in the region of 6 months. The bulk of this time is taken up with conveyancing, which is characterised by archaic, outmoded, hyper-inefficient practices by the legal profession eg sending letters back and forth by post instead of email.
How Does an Auction Work?
In an auction, a vendor will list his/her property for sale with a reserve price – this price is the minimum that the vendor is willing to accept and very often is set artificially low in the hope of attracting interest, bidding and so pushing the final price upward – some agents will say it’s better start low and end high than the other way around. Unlike private treaty, all legal documents pertaining to the sale will be available for inspection by potential buyers in advance of the auction. This is necessary as the highest bidder on the day, assuming the reserve price has been met, will be obliged to sign contracts there and then. If no offer is received for the reserve, typically the property will be withdrawn.
Bids are invited from interested parties. While it might seem like semantics, it is important to note that typically one “bids” on an auction property whereas one makes an offer on a property for sale by private treaty. In reality, the term “bid” and “offer” are used interchangeably. There is however a key legal difference. A bidder at an auction is making legally binding bids and will have had to submit a deposit before the auction in order to be eligible to partake in the bidding. This differs markedly from an offer on a private treaty property which has no legal basis at all and can be withdrawn at any time right up until contracts are signed.
Another key difference between an auction and a private treaty sale is that an auction has a clearly defined beginning and end whereas a private treaty sale’s duration is not clearly defined at the outset. An auction, be it online or offline, will continue in real time on the day / time of the auction until no more bids are made. The familiar site of an auctioneer shouting to a packed room of bidders “going once, going twice, sold!” marks the end of the bidding and whomever is the highest bidder at that point is legally obliged to conclude the transaction for his/her bid amount. A private treaty sale on the other hand can run for weeks, months but equally can be over in a matter of days – the duration is purely at the discretion of the vendor and his/her estate agent. If a buyer makes a “take it off the market offer”, an agent in cooperation with his/her client may decide to take this offer and quickly move to sale agreed. On the other hand, anyone with any familiarity of Daft and MyHome will have seen properties languish on there for months, and sometimes years in the hope of an acceptable offer emerging. The point is that there is no clearly defined end to a private treaty sale at the start of the process. The agent lists the property for sale and sees what offers emerge. If there is strong bidding, the agent may strike while the iron is hot and quickly look to move to sale agreed whereas weak / no bidding at all might force the agent to sit it out in the hope that the market might turn and an acceptable offer may emerge.
Which is Better – Private Treaty or Auction?
It really depends on the vendor. A vendor in no major rush to sell and keen on extracting the very best price will typically choose the private treaty route. This route means that the property can be shown to interested parties for weeks, even months to ensure that the very last Euro of value is extracted from the property. However, in return for this flexibility, the vendor runs the risk of a buyer pulling out at any point in the process. It is not unheard of for a property to have been sale agreed for weeks, even months as the archaic and hyper-inefficient conveyancing process meanders at a snail’s pace towards conclusion, only for the buyer to change his/her mind, request the return of the booking deposit (which again has no legal basis) and land the vendor right back at the very start of the process again.
An auction eliminates this execution risk ie if the property exceeds the reserve price on the day, contracts will be signed there and then and the property will typically close within 4 weeks. The highest bidder cannot pull out. This is attractive for sure but the downside is that a large swathe of the market will be intimidated by an auction and avoid properties being sold by this method ie those selling by auction are de facto excluding a large pool of potential buyers. The more flexible private treaty approach where an offer can be made and then, if accepted, followed up with a survey and assuming all goes well with that, proceed to a successful sale/purchase is a more attractive option to novice buyers (the vast bulk of the market) than the more hard-nosed, intimidating, legally binding auction. There is also the expense of surveys to bear in mind. In private treaty, a buyer will only go to the expense of carrying out a survey if they are successful in the bidding ie if they end up as the highest bidder, they will arrange a survey at that point, safe in the knowledge that if the survey highlights any red flags / unforeseen issues, they can withdraw their offer and receive a refund of their booking deposit. However, someone intent on bidding on a property at auction will have to have conducted a survey in advance to ensure that they know precisely what they are bidding on. It can be quite disheartening to incur the expense of a property survey (running to several hundred Euro) on a property with an attractively low reserve, only for the bidding to quickly run well beyond your limit thereby rendering the expense incurred on the survey a total waste. If this happens on a number of occasions, the costs can run to thousands of Euro with no property to show for it at the end.
For these reasons, auctions are very often used for distressed properties. For example, if a bank is owed €400,000 on a property that an estate agent values at approximately €500,000, the bank may well decide to sell at auction with a reserve of €400,000. From the bank’s point of view, this is the quickest way of recouping the money that it is owed. While the ultimate bidding may push beyond €400,000 as the bank is only entitled to keep the sum that it is owed, it has no incentive to push for the very last Euro – it wants €400,000 as quickly as possible. Shrewd buyers willing to do the legwork of getting a survey done in advance and having their finance in place can bag bargains at auctions buying from sellers who have no incentive to get the very best price.
So auctions and private treaty both have their place in the Irish property market. Those looking for certainty and speed of execution will gravitate towards an auction whereas those under less time pressure and intent on extracting maximum value for their property will tend to choose private treaty.