Auctions: What are they, how do they work & how are they financed? 

An "auction" is a public sale where goods or services are sold to the highest bidder. Bidders compete by placing bids, and the item is typically sold to the bidder who offers the highest price.

Auctions can take place in various formats, including live auctions conducted in person, online auctions conducted over the internet, or silent auctions where bids are submitted anonymously. Auctions are commonly used for selling a wide range of items, including art, antiques, collectables, real estate, and even services. They are governed by specific rules and procedures to ensure fairness and transparency in the bidding process.

Navigating the diverse landscape of auctions involves understanding their intricacies and benefits, especially when considering financing options like bridging finance. Auctions offer price discovery, efficiency, competition, transparency, reach, speed, unique assets, and flexibility.

Bridging finance is widely recognised as a useful financing product when purchasing high-value items such as property from an auction. Bridging finance bridges the gap between short-term financing needs and long-term solutions, making it ideal for auction property purchases due to its speed and flexibility. It aligns with the fast-paced auction environment and ensures timely acquisitions.

How do Auctions work?

There are 10 types of auctions, each with unique characteristics and rules. Here are the top 10 auctions used in the UK and how each works.

  1. English Auction: This is the most widely recognised type of auction in the UK, also known as an open ascending price auction. Bidders openly compete by making increasingly higher bids, and the item is sold to the highest bidder when no one else is willing to bid higher.
  2. Dutch Auction: In this type, the auctioneer starts with a high asking price, which is gradually lowered until a bidder accepts the price or the reserve price is reached. The first bidder to accept the price wins the item.
  3. Sealed-Bid Auction: Bidders submit their bids privately without knowing the bids of others. The bids are opened simultaneously at a predetermined time, and the highest bidder wins.
  4. Silent Auction: This is similar to sealed-bid auctions, but bids are written and placed before each item for public viewing. Bidders can see the highest bid and choose to outbid it by writing a higher bid.
  5. Vickrey Auction: A sealed-bid auction where the highest bidder wins but pays the price submitted by the second-highest bidder. This encourages bidders to bid their true valuation of the item.
  6. Reverse Auction: Also known as a "procurement auction", this type involves a single buyer and multiple sellers. Sellers compete to win the business by offering increasingly lower prices until the buyer accepts an offer.
  7. Online Auction: Conducted over the internet, online auctions can take various forms, including English, Dutch, sealed-bid, and silent auctions. Participants place bids electronically through a website or auction platform.
  8. Absolute Auction: In this type, the item is sold to the highest bidder, regardless of the final bid amount. There is no reserve price or minimum bid requirement.
  9. Reserve Auction: The seller sets a minimum price (reserve price) that must be met for the item to be sold. The item is not sold if the bidding does not reach the reserve price.
  10. Foreclosure Auction: These auctions involve the sale of property seized by a lender due to non-payment of a mortgage loan. The property is typically sold to the highest bidder to recover the outstanding debt.

Each type of auction also has variations and adaptations depending on the specific circumstances and preferences of the auction house and participants.

What are the 8 benefits of buying at auction?

Auctions offer a dynamic platform for buyers and sellers, facilitating fair market value discovery and efficient transactions. They foster competition, trust, and transparency and reach a diverse audience. With immediacy and exclusivity, auctions cater to collectors and enthusiasts, showcasing unique acquisition opportunities across various asset classes. Here are the top 8 benefits of buying at auction.

  1. Price Discovery: Auctions allow sellers to discover the true market value of their items as they are sold to the highest bidder. For buyers, auctions provide an opportunity to purchase items at a fair market price determined through competitive bidding.
  2. Efficiency: Auctions are efficient mechanisms for buying and selling goods or services. They facilitate quick transactions, especially when sellers need to liquidate assets or buyers are looking for specific items.
  3. Competition: The competitive nature of auctions often leads to higher prices for sellers and better deals for buyers. Bidders compete against each other, driving prices up to reflect the item's true value or driving them down through strategic bidding.
  4. Transparency: Auctions are transparent processes. All participants can see the bids placed and track the auction's progress in real-time. This transparency builds trust among buyers and sellers and ensures fairness in the bidding process.
  5. Reach: Auctions can reach a wide audience of potential buyers, both locally and globally, through various marketing channels. This increased exposure can lead to better prices for sellers and a larger selection of items for buyers to choose from.
  6. Speed: Auctions offer a relatively quick way to buy or sell items compared to traditional methods, such as listing items for sale individually or negotiating prices with potential buyers. This can be advantageous for sellers needing to sell assets quickly or buyers looking for immediate purchases.
  7. Unique Items: Auctions often feature unique or rare items that may not be readily available through other channels. This can attract collectors, enthusiasts, and investors willing to pay a premium for one-of-a-kind items.
  8. Flexibility: Auctions can accommodate various items, from real estate and vehicles to art, antiques, and collectables. This flexibility allows sellers to liquidate various assets efficiently and gives buyers access to diverse inventory.

Overall, auctions provide a dynamic and efficient marketplace for buying and selling goods or services, offering price discovery, efficiency, competition, transparency, reach, speed, access to unique assets, and flexibility.

What are the disadvantages of buying at auction?

While buying property at auction offers numerous advantages, there are also disadvantages. Here are the top 7 drawbacks.

  1. Limited Time for Due Diligence: Auction properties are often sold with little time for thorough inspections and due diligence, increasing the risk of unforeseen issues or hidden costs.
  2. Non-Refundable Deposit: Auction purchases typically require a non-refundable deposit, usually 10% of the property's purchase price, which you'll lose if you cannot complete the purchase. There may also be legal ramifications if you don't complete the transaction you've successfully bid for.
  3. Competitive Bidding: Auctions can be highly competitive, with multiple bidders vying for the same property, potentially driving up the price and leading to overpaying.
  4. Unpredictable Auction Results: There's no guarantee of success at auction, and you may lose out on the property you want despite investing time and effort in the bidding process.
  5. Hidden Costs: Besides the purchase price, buyers at auction may incur additional costs, such as auction fees, legal fees, and potential repair or renovation expenses.
  6. Seller's Advantage: Auctions often favour the seller, as they set the reserve price and terms of sale, leaving buyers with less negotiation power.
  7. Emotional Decision-Making: Auctions' fast-paced nature can lead to impulsive decision-making, causing buyers to overlook important factors or pay more than intended.

Why are properties auctioned?

Properties are put into auction for various reasons, both commercial and personal. Aside from auctions offering a quick sale, businesses, councils, charities, individuals, and mortgage lenders sell properties at auction because it's a way of determining and achieving fair market value. Here are 8 underlying reasons a property be auctioned.

  1. Distressed Sales: Properties facing foreclosure, bankruptcy, or financial distress may be auctioned to expedite the sale process and satisfy outstanding debts or obligations.
  2. Probate or Inheritance: Properties inherited through probate or estate settlements may be sold at auction to distribute assets among beneficiaries or settle estate taxes.
  3. Liquidation: Businesses or individuals may auction properties to liquidate assets quickly, raise funds, or wind down operations.
  4. Unwanted or Surplus Properties: Owners may auction properties they no longer need or want, such as vacant land, inherited properties, or surplus real estate holdings.
  5. Investment Properties: Investors or developers may auction properties as part of their investment strategy to buy, renovate, and resell properties for profit.
  6. Court-Ordered Sales: Properties involved in legal proceedings, such as divorce settlements, partition actions, or eminent domain cases, may be sold at auction to resolve disputes or satisfy court orders.
  7. Non-Performing Assets: Lenders may auction properties secured by non-performing loans to recover outstanding debt or mitigate financial losses.
  8. Unique or Specialty Properties: Properties with unique features, historical significance, or specialised uses may be auctioned to attract buyers

How do you buy at auction? The 6 key steps.

Buying property at auction in the UK involves 6 key steps.

Step 1. Research: Identify properties that match your criteria and attend property viewings to assess their condition.

Step 2. Finance: Arrange your finances beforehand, as you may need to pay a deposit (usually 10% of the property's price) on the day of the auction and the remaining balance within a specified timeframe.

Step 3. Legal Due Diligence: Obtain legal advice and conduct thorough due diligence on the properties you're interested in, including checking for any outstanding debts, planning permissions, or legal issues.

Step 4. Attend the Auction: Register to bid at the auction and arrive early to familiarise yourself with the auction process. Bring identification and proof of funds.

Step 5. Bidding: When the property you're interested in comes up for auction, bid according to your budget. Be aware of the auctioneer's guide price and any additional fees.

Step 6. Winning Bid: If you're the highest bidder and the property meets its reserve price, you must pay the deposit immediately and sign the contract.

How can I buy an unsold auction property?

Buying unsold auction property involves contacting the auction house or seller directly after the auction. You can inquire about the availability of unsold properties and negotiate a potential purchase. Alternatively, some auction houses may relist unsold properties in subsequent auctions or sell them through private treaty arrangements. It's essential to conduct thorough due diligence before making an offer on an unsold auction property.

How can I finance a property bought at auction?

Financing an auction property typically involves the following options:

  1. Cash: If you have sufficient funds available, paying for the property in cash is the simplest option, as it eliminates the need for financing and can expedite the purchase process.
  2. Bridging Finance: If you're not a cash buyer and need to raise finance for an auction property, Bridging loans are likely the best option. Bridging finance are short-term loans designed to bridge the gap between purchasing a property and a longer-term financing arrangement, such as a mortgage. They can be a flexible option for financing auction properties, providing quick access to funds to secure the purchase.
  3. Auction Finance: Some lenders offer specialised auction finance products tailored to the unique requirements of purchasing properties at auction. These loans are designed to provide fast approval and funding, often with flexible terms to accommodate the auction process.
  4. Personal Loans: Depending on your financial situation, you may be able to obtain a personal loan to finance the purchase of an auction property. Personal loans typically have higher interest rates and shorter terms than mortgages, so they may not be suitable for all buyers.
  5. Alternative Financing: Depending on your circumstances, other financing options, such as using a line of credit, borrowing against other assets, or seeking funding from private investors, may also be available.

To ensure you can meet the financial requirements of the purchase, it's essential to explore all available financing options and obtain pre-approval before bidding at auction. Also, consult financial advisors or bridging loan brokers to determine the best financing solution.

Can you get a mortgage for an auction property?

No, it is generally not a good idea to use a mortgage to buy a property at auction for 4 reasons.

  1. Time Constraints. Mortgages are likely to take longer than 28 days completion time limit imposed by auction houses. In the UK, it can take between two and six weeks to get a mortgage approved after an offer has been accepted on a property and an application has been submitted. However, the length of the process can vary depending on several factors, including: Delays, Late documents, and Application issues.

2. Financial Constraints. Auction purchases require immediate deposit payment (usually 10% of the property's price). Due to mortgage applications taking longer to process, funds will not be quickly available, making it challenging to secure financing within the auction timeline.

3. Uncertain Financing. Mortgage approval is not guaranteed, and lenders may require time-consuming assessments of the property's value and the buyer's financial situation. This uncertainty can make it difficult to bid confidently at auction, as you may not have financing in place.

4. Financing Criteria. Mortgage lenders have strict lending criteria, such as not financing uninhabitable property, property with short leases, Japanese knotweed, planning contraventions or dilapidated properties requiring heavy refurbishment. This excludes many properties from being bought at auction using mortgages.

Final thoughts

Auctions offer dynamic benefits like price discovery, efficiency, and flexibility. With its speed and flexibility, Bridging finance is ideal for auction property purchases, bridging short-term financing needs with long-term solutions and ensuring timely acquisitions.


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