Selling commercial property at auction can be a quick and relatively stress-free way to sell properties that may otherwise be difficult to sell. It can also help sellers who are working towards a tight deadline.
With the right auction and the right auctioneer, you should have access to a broad range of serious buyers who will be committed to complete the purchase of a property within a limited period of time. It pays dividends to have a commercial property solicitor involved at the outset to ensure that you have the right paperwork in place to help attract the most bidders possible.
Contents:
- Advantages of selling commercial properties at auction:
- Disadvantages of selling commercial properties at auction:
- How do I prepare my property for sale?
- What paperwork do I need to sell my property at auction?
- How do I sell my property at auction?
- How much does it cost to sell at auction?
- What happens if my property does not sell?
- Summary
Advantages of selling commercial properties at auction:
- Selling at auction can be very quick. Provided everything is straightforward, you can go from submitting the property to auction to completion in 6 to 8 weeks.
- Auctions can be a great way to sell property that may be difficult to sell on the open market. For example, those with structural problems, that needs significant refurbishment or those with title defects. Auction buyers often love a project.
- You are able to set a reserve price at auction. This means that there is less risk of selling it for a perceived undervalue.
- You are able to list multiple properties in the same auction and sell them all at the same time.
- Selling at auction gives certainty; as previously stated, contracts are exchanged when the gavel falls. This means that both parties are legally committed to the transaction from this point and there is a lower risk of it falling through.
- Auctions are chain free. You do not have to synchronise the transaction with any others and so don’t have to be slowed down by other parties. Buyers have normally already got their funding arranged in principle, so it is merely a case of drawing it down.
Disadvantages of selling commercial properties at auction:
- You may not sell the property for the price you were hoping to achieve. Whilst you can set reserve prices, this doesn’t guarantee that you will get what you want or even that it will sell.
- You might not sell the property at all. There are no guarantees that every lot will sell.
- Auction fees can be high and you can still incur costs even if the property doesn’t sell. This is discussed in more detail below.
- The fixed timeline from the gavel falling to completion can be restrictive. If problems arise during this period, then there is not much time for the parties to resolve it.
- You may find that it is less well marketed than a property sold via an agent on the open market. This will be something to investigate with your auction house before listing the property.
How do I prepare my property for sale?
Firstly, you should work out whether it is the best time to sell. Organisations sell property for all sorts of reasons, so perhaps you don’t have a choice. If there is no time imperative, then you should look at the market and see what property prices are doing. Look at other recent auctions; most auction companies maintain auction records that are available online. You will be able to see what has and has not sold. Often you can also see the final price achieved.
It is sensible to find out how much your property is worth. Obtain a valuation from a surveyor so that you have a feel for where to pitch it at the auction. Auction houses can often help with this and give guidance on the opening price. Have a think about whether you would like to set a reserve price. If there is a reserve on the property, then it cannot sell for under this so sellers feel that it gives them a little more control over the final sale price. The reserve is often subject to an agreed level of auctioneer discretion just in case the bidding gets very close; they can decide it was close enough and sell the property. You are not required to set a reserve price, but you should think seriously about whether it would be useful. If in doubt, talk to your auctioneer.
Take the time to make any repairs to the property that you feel will help it attract buyers and sell. Ensure that it is also clean, tidy and clear of rubbish as this will appeal to buyers.
Gather together all of the paperwork relating to the property and to any occupational tenants so that it is easier for your solicitor to put together the legal pack.
If you have a tenant in the property you might want to speak to them about your plans. Think about checking whether they are complying with their repairing and decorating obligations to ensure the property is in as good a state as it can be prior to being listed. You should also take advice from your commercial property solicitor on what notice/s you will need to serve on them and when.
It is good to be organised and get everything ready as early as possible before the auction as a lot of the work with auctions is front loaded. Providing the best information possible in the legal pack will help you attract the best buyers.
What paperwork do I need to sell my property at auction?
You will need to instruct a commercial property solicitor to put together what is known as the ‘legal pack’. In many ways this is similar to the contract pack if you were selling in the conventional fashion on the open market.
The legal pack will contain documents including the following:
1. Freehold and leasehold Land Registry title and plan (if any);
2. Documents referred to in the Land Registry title;
3. Original leases and any associated documents such as licences to alter, rent deposit deeds etc.
4. Replies to CPSE as appropriate. CPSE stands for Commercial Property Standard Enquiries and they are a standard set of questions used in all commercial property transactions. There are 7 sets of enquiries and the ones you need to provide will depend on your circumstances.
5. Documents referred to in the CPSEs. This is likely to include:
- EPC;
- VAT election (if relevant);
- Any guarantees or warranties relating to the property and any plant or equipment that is staying;
- Planning permissions and building control paperwork;
- Electrical safety certificates;
- Asbestos report; and
- Fire risk assessment.
This is not an exhaustive list. There may be more documents to provide depending on your property.
6. Searches. You will usually provide a full pack of searches including Local Authority search, drainage and water search and if relevant an environmental search and chancel check. The cost of the searches is usually charged back to the buyer as a completion expense.
How do I sell my property at auction?
Once you have decided to sell by auction and have done all the groundwork above, you will need to find the right auction house for you. Do your research and ensure that the auctioneers regularly sell properties such as your own. Check their old auction catalogues to see their recent sold prices and check their data regarding successful sales.
You will need to decide what type of auction to use. Conventional auctions are face to face and require buyers to attend in person in order to bid. The alternative to this is a modern auction where it all takes place online and buyers submit bids via the website. You will need to decide what works best for you.
Now that you have selected your auction house, the next stage is to instruct a commercial property solicitor to prepare the legal pack. Once complete, the legal pack will be uploaded to the auction house’s website for prospective buyers to download. The buyers will use this to do their due diligence on the property and work out whether they want to bid on it. They may look over it themselves or they may instruct their solicitor to do so.
In a conventional auction, the auctioneer will manage the bids for each property face to face and in the order of the auction catalogue; the highest bid will win the property. At a modern auction it is usually more akin to the familiar auction websites where the auction is held open for a number of days and bids are submitted during this time. As with a conventional auction, the winning bid will be the highest.
If you decide to put a reserve price on the property, it cannot sell for less than this. Although there is often an agreed amount of auctioneer discretion if the bids come close which would enable them to sell it.
Once the gavel falls, contracts are exchanged and the buyer is then obliged to pay a 10% deposit. This starts the clock running down to completion.
Completion often takes place 28 days after the auction. During this time the parties will agree the form of the transfer and arrange to get it signed. The buyer will often also finalise any lending arrangements in this time ready to have the funds in place for completion day.
On the day of completion, the buyer’s solicitor will send the balance of the purchase monies to the seller’s solicitor and once they arrive, the solicitors will date the documents.
The property is now officially sold!
How much does it cost to sell at auction?
When budgeting for the sale, you will have a few things to take into consideration.
In a manner similar to when you sell on the open market with an agent, you will have to pay a percentage fee to the auctioneers when you sell. The percentage is normally around 2.5% of the sale price but this will vary from auction house to auction house. You should also look out for whether there is a minimum selling fee (for example £1,500). This minimum fee would be relevant where the property being sold is of low value.
Some auctioneers will charge a fee to list the property (a catalogue fee) and some will also charge an additional fee for the marketing of the property prior to the auction taking place. You should check whether there is a fee for withdrawing the property from the auction in advance just in case your plans change.
Your commercial property solicitor will charge a fee for the production of the legal pack and you will need to pay for searches. You will be able to reclaim some or all of these costs by including the relevant clauses in the contract for sale. At the very least, most sellers reclaim the cost of the searches.
What happens if my property does not sell?
There are no guarantees when sending a property to auction and failures to sell do happen. As such, you should have a plan B.
There are plenty of alternatives to consider:
1. Relist the property in another auction at the same or a different auction house – perhaps the failure to sell was just bad luck and the right people were not in the room on the day. This could be a good option where you had interest in the property but not at the right price bracket. It could be an opportunity to reconsider your expectations regarding the sale price and try again.
2. List the property for sale on the open market – as with an auction there is no guarantee that this will result in a sale. However, most selling agents operate on a no sale, no fee basis and so there may be little to lose. It is possible you may also get better feedback from those who look around it so that you can work out what you need to do to sell it. The downside of course is that this is slower than an auction sale.
3. Grant occupational lease/s – this would enable you to take an income from the property whilst you decide what to do next. Alternatively, it may be that this replaces your decision to sell and you decide to operate as a landlord. This option would not suit everyone, but it is something to consider.
4. Sell the property to the current tenant – where you have an occupational tenant you could offer to sell the property to them. This may be attractive to tenants who already know the building and have goodwill attached to it as their known place of business. However, it would rely on them being committed to the building for the long term and it would also rely on them being able to raise the funds to purchase.
Summary
Selling property at auction can be a great option for a seller who needs to sell quickly or who has a property that may be otherwise difficult to sell. With the right advice, it can work well.
Remember to speak to a commercial property solicitor early on so that you can prepare all the necessary paperwork in advance. The work in selling a property at auction is very front loaded with most being done before the auction even happens. Advance planning will pay dividends on the day.
