In recent years, auctions became increasingly popular with both buyers and sellers in the property market. Sellers, it seemed, opted for quicker solutions. Meanwhile, buyers were keen to bag some bargains.
The number of properties coming to auction in the UK rose by more than 11% last year. It jumped from over 13,800 lots in 2021/22, to 15,400 in 2022/23. Much of this was driven by the pandemic. Many auction houses moved online as a result of Covid restrictions. Consequently, the bidding process became more streamlined out of necessity.
However, a less simple aspect of buying or selling a property at auction is the auction fees. It can be tricky keeping up with what exact fees are involved, when they’re due, and who pays them. Which is why we have created this blog to provide you with some much-needed clarity.
Source: The Intermediary
Who pays auction fees?
Firstly, who is responsible for paying auction fees: buyers, sellers or both? Generally, the responsibility of paying the lion’s share of the fees at an auction falls on the seller. Sales commission, advertising costs, and legal fees all typically fall within the seller’s remit.
That said, the buyer often has to pay the administration fee to cover the cost of completing an auction purchase. They also need to pay the property’s ownership transfer, which will often also include a fee for a solicitor. This can be a percentage of the sale price, but some auction houses will simply charge a flat fee.
How does the type of auction impact the fees?
It can depend on how the auction is carried out. In open bidding auctions, where participants openly announce their bids, auction fees normally have to be paid by the buyer. A buyer premium is also usually added.
In sealed bidding auctions, where bids are made in private, the costs – particularly for commission fees – often fall to the seller instead. However, some auction houses will have different fee structures, so it is always important that you check ahead of time.
For proxy bidding auctions, which is when maximum bids are submitted in advance, buyers and sellers have to pay a buyer’s premium and commission fee respectively.
Elsewhere, for telephone or online bidding auctions, auction houses will often charge registration fees, online bidding costs and transaction fees to both buyers and sellers.
How much are auction fees?
Whether you buy or sell at auction, it is important to be aware of how much the fees will be. For sellers, entry or marketing fees cover the expense of advertising the property and to attract more potential buyers.
The exact cost is dependent on the property value, the nature of the property, and whether specialist marketing activities were required. Generally, however, these fees will range from around 2% to 5% of the property’s value.
Auctioneers also charge sellers a commission fee for selling their property, which is usually between 2% and 2.5%. Value Added Tax (VAT) is also added to this fee. Sometimes, however, the buyer will pay an amount of commission to the auction house as part of their administration fees.
More importantly, some property auctions will require the buyer to pay a ‘premium’ when they purchase an asset. This is another type of administration cost that goes to the auctioneer, not the seller.
Buyer’s premiums can range between 1% and 3.5% (+VAT) of the property sale. Administration fees can be between £195 to £1,200 including VAT. For properties that have been repossessed, buyers’ premium is usually charged at 10% of a property’s value. However, the seller does not have to pay any fees.
Are auction fees tax deductible?
In certain circumstances, auction fees are tax deductible. Generally, that depends on the purpose of the purchase and whether it is used as a primary residency, business, or investment asset.
If the property is being sold as part of a business activity, fees can often be treated as regular deductible business expenses. This can allow you as a bidder to offset the fees against the income generated from the asset sale, lowering the taxable profit. However, if the sale is a personal asset that is not a business or investment, then auction fees are treated as personal expenses. In that case they are not tax deductible.
For buyers, it is a little more straightforward. Auction fees are seen as a part of the overall cost to buy a property and are therefore not exempt from taxation. If an investor can prove that the purchased assets are for business expenses, it could be seen as a business expense.
As to be expected, taxation is complicated. To fully get to grips with your final tax bill, you’ll want to work with accountants and/or other financial planners.
Can auction fees be included in a mortgage or bridging loan?
For the most part, mortgages and bridging loans are used to pay for the property’s actual purchase, rather than the additional costs that a buyer might incur.
However, some providers may have different policies that could allow for the fees to be added on a case-by-case basis. For this reason, you could seek out a specialist lender who can provide a higher level of optionality and flexibility than their high street counterparts.
For instance, a personal loan could be taken out to cover auction fees if needed. But it is worth consulting a broker or specialist lender for further guidance that fits your unique needs.
At MFS, we provide bespoke and speedy bridging loans for auction purchases, allowing our clients to complete their purchase within the 28-day payment window. We can provide loans from £100,000 up to £20 million at a maximum loan to value (LTV) ratio of 75%. Additionally, we offer variable and fixed rates for up to 24 months.
What’s more, your application will have an assigned underwriter from day 1. The underwriter will tailor our funding to your circumstances, and explain how certain fees could impact your case.