Home Buying Guide: Article Four – ‘Informal Tender Process’

‘How viable is the sale by informal tender process?’

Most people when buying or selling a house will use an estate agent. The seller will pay the agent a fee for selling the house on their behalf and the buyer (although immersed in fees to pay other professionals in the house buying process) will not normally pay a fee to the estate agent. After all, the estate agent's client is the seller, not the buyer. Well, at least that is what most of us likely understand. However, the growing trend of sale by informal tender has thrown a spanner into the works on this presumption and this article explains why.

What is sale by informal tender?

A sale by informal tender is where a buyer enters into an auction through an estate agent allowing them to bid on the property they wish to purchase but without knowledge on what others have bid. In this sense, it has been termed a ‘blind auction'.  It is a low fee process offered by some estate agents in a bid to compete for business due to a lack of supply of properties to sell.  The property is marketed at a guide price to the prospective buyer who, after viewing it, will place their bid.

The buyer will pay a fee of around 2% to the estate agent should their bid be the chosen one or in some instances a flat fee of, for example, £4,200.  However, the seller also pays a fee to the estate agent, so effectively the estate agent receives two fees per sale rather than one.

The potential problem with the informal tender process.

Whilst the sale by informal tender process is just another option open to buyers and sellers in the property market, there has been some criticism of the process.

The Homeowners’ Alliance campaign group have viewed it negatively and deemed it a further cost for the buyer to have to fork out.  They have also criticised estate agents for enjoying more money from the property selling process.  A Labour MP has also voiced concern in this respect and expressed that estate agents are effectively taking money which should have been enjoyed by the seller as buyers when bidding will have to take into account the fee they pay the estate agent and therefore, lower their bid in accordance with this.

The Property Ombudsman has also criticised this method of property purchase where they have raised concerns about a potential conflict of interest as the estate agent is entering into a contract with the buyer whilst simultaneously acting for the seller with whom they have a legal obligation towards.

In this respect, issues could arise in terms of where the buyer has a survey carried out which causes her to want a reduction in the price the estate agent will need to renegotiate but should have both the seller and buyer’s best interests at heart.  Also, as the buyers are paying the marketing fee for the property they are purchasing how neutral can the estate agent be when advising the seller on their marketing?  This conflict of interest issue surely merits concern. Estate agents are prohibited from taking part in property transactions where they have a personal interest  and whilst this scenario raises a conflict of interests rather than a personal interest, it is arguably comparable in terms of where the estate agent’s real interest lies and how this may affect their conduct.

Advantages

Buyer:

• Whilst this method of finding a property to buy incurs a fee, the buyer is made aware of exactly what this is upfront so can factor it into their prospective bid. The National Association of Estate Agents has made it clear to estate agents that any fee charged to the buyer must be communicated to them at the start of the process.

Seller:

• If you are selling your property this method of sale could save you money. You do not need to pay the agent’s commission fee and according to one estate agent, the fees are £150 plus VAT.  Whilst this price does not include marketing it is likely less than the price you would normally pay which amounts to 1.8% of the price your property sells for.
• The seller is not obliged to accept the highest bid offered , therefore, whilst paying a fee for the service there is no risk in terms of having to settle for lower than you had anticipated.

Disadvantages

Buyer:

• When buying property online in uk there are a whole host of fees for the buyer to account for within her budget and this simply adds to them. Why choose to pay further to buy when you can buy without this fee?

Seller:

• As noted earlier in this article there is a potential conflict of interest issue in terms of the estate agent. Therefore, the seller may wish to question whether or not the estate agent has her best interests at heart. Would she feel more secure paying the estate agent a fee for selling her property in the traditional way where she can be comfortable in the knowledge that the agent will not enter into any contract with the buyer?
• Potential buyers may not be forthcoming due to the fee they are required to pay the estate agent

Be cautious!

If as a buyer you choose to take the sale by informal tender process take care to ensure you understand what you are paying the estate agent for and that the contract you sign is clear. For example, in one instance where a buyer had signed a contract with the agent to pay a fee should their bid be accepted by the seller and it was not accepted the estate agent tried to make the buyer pay the fee.  Although the bid was not accepted the buyer later entered into a successful purchase directly with the seller.  The estate agent tried to claim that the buyer owed them the fee but it was found that the fee did not relate to the successful purchase as the purchase was not completed through the informal tender process.  Therefore, be sure that the wording is clear in your contract with the estate agent and that you understand what it means.

As a seller, you would be wise to make yourself aware of the guidelines created by the Property Ombudsman for estate agents taking part in the sale by informal tender process to satisfy yourself that the estate agent you are using is carrying out its duties.  For example, estate agents are required to be open upfront about the fact that the buyers have agreed to pay their fees and to tell you what the process is if they do not pay the fee.

Summary

Selling or buying a property through the sale by informal tender process is another option to complete your transaction and does have its advantages. The property market can easily fluctuate and is highly competitive so it is arguable that the buyer and seller must not close off their options and instead assess all open to them.

However, whilst such a method has its advantages for both the seller and the buyer it also has disadvantages. Selling and buying a property is a major life transaction, therefore, in terms of the conflict of interest issue, you must be sure that the estate agent you pay your fees to has your best interests at heart and not those of the person you are transacting with. As pointed out, this method of sale does have rules surrounding it which estate agents must comply with so if you do choose to take this method for your property transaction, in addition to the information we have given you here, make sure you are up to speed with these and feel secure about the method you have chosen.