by Jen Lemen
Hot Topic Highlight - Methods of Sale
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What is today's blog about?
This week, we will be looking at the different methods of selling a property. This applies to both the residential and commercial sectors. This will be an essential component of your knowledge and advice relating to the Purchase & Sale RICS APC competency.
What are the different methods of sale?
- Private treaty
- Informal tender, also known as sealed bids
- Formal tender
What is private treaty?
Private treaty is the most common method of selling a property. This is when a property is marketed openly, including the use of marketing particulars, paper-based advertising and online website portals, to afford a potential purchaser the opportunity to ‘treat’ with the seller.
Offers are then made and a suitable purchaser is usually selected after recommendations are made to the seller by their agent. This will include consideration of whether the offer is at the right level and whether the potential purchaser is proceedable or not. Typical information to ask for when considering proceedability includes proof of funding, solicitor’s details and further contextual information on any chain or other related issues.
The advantages of private treaty are:
- Flexibility - the parties can negotiate in their own time and without commitment in the open market
- Advertising can be limited or extensive to suit the client’s requirements
- It is relatively inexpensive
- The seller is not obliged to sell
- It is a confidential process
The disadvantages of private treaty are:
- There is the potential for gazumping or gazundering, both of which are considered to be unethical practices by RICS
- There may be the risk of a late decision not to buy (withdrawals) and associated abortive costs
- The quoting price could be under or over stated, requiring prudent advice on offers put forward or offers considered
What is informal tender?
Informal tender, also known as sealed bids, is used where there is good market demand or where negotiations need to be brought to a close after a period of marketing via private treaty. However, the costs are generally higher than selling by private treaty.
Situations where informal tender might be used include for sensitive sites, where there are competing developers for land, when advising a local authority and price is not the sole consideration, where a property requires modernisation (e.g. defects highlighted at the time of survey) or a closure date is desired.
The selling agent invites interested parties to submit their written ‘best and final’ bids at a specified time and date. This is generally accompanied by the interested party's solicitor's details, finance arrangements and any conditions.
The informal tender details should also confirm that the vendor the reserves right not to accept the highest, or any, offer made to avoid process becoming a binding tender. Offers of a variable nature should not be considered, e.g. escalator bids or offering an amount in excess of the next highest offer.
If a late bid is received, the seller should be informed as per the requirements of the Estate Agents Act 1979. However, RICS again consider accepting late bids to be unethical practice.
The bids should then be opened in front of an independent witness and the parties informed of the outcome. However, the process is not legally binding so either party can withdraw until the point of exchange. There may also be subsequent rounds of bidding to bring the process to a close.
What is formal tender?
Formal tender is generally used where there is strong demand for a property or public accountability is required. The process is generally expensive due to the administrative requirements of the tender process.
The tender pack should include full marketing material, a legal pack and requirements for the contents of written bids, e.g. being in excess of a specified figure.
Applicants bid blindly and there is no opportunity to withdraw or alter bids after they are submitted. After the closing date, offers are opened in front of an independent witness and the seller’s agent will then make a recommendation on which offer should be accepted.
At this point, a purchaser will be selected and either the parties proceed to exchange in accordance with the terms & conditions of sale or a banker’s draft is accepted and contracts are immediately exchanged.
What is auction?
Auction is sometimes called a ‘method of last resort’, where it is difficult to accurately assess price in the open market.
Auction should, therefore, produce the highest price in certain circumstances, e.g. a property is in poor repair, has serious defects or is unconventional, a quick sale is required, redevelopment or renovation is required or where high demand is expected. Typically, auctions may appeal to cash buyers.
Terms of engagement are agreed between the seller and auctioneer in advance of the auction, including the auctioneer’s right to refuse bids, bidding increments, types of bid accepted, reserve price and authority to sign the contract on the seller’s behalf.
Relevant legal and marketing documents are published prior to the auction, e.g. General Conditions of Sale, Memorandum of Sale, particulars and notices to bidders. Potential purchasers must undertake full due diligence prior to auction, including viewings and structural surveys.
When the gavel falls, contracts are exchanged and the purchaser generally pays a 10% deposit and arranges insurance.
The advantages of auction are:
- Short certain timescales can be achieved
- ‘Best price’ can be achieved after wide market exposure
- The property can be sold with certainty over selling terms
The disadvantages of auction are:
- Expensive advertising costs
- It is not a confidential process
- The marketing period is likely to be short
- A failure to sell might lead to the property becoming ‘blighted’
- There is little control over the identity of the purchaser
What factors do I need to consider when advising on the most suitable method of sale?
Although this is not an exhaustive list, some of the key factors include:
- Client’s objectives
- Public accountability
- Market conditions
- Timing of sale
- Marketing budgets
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Stay tuned for our next blog post to help build a better you
N.b. nothing in this article constitutes legal or financial advice.