Buying Property By Auction
An auction is a public sale by a licensed auctioneer where the property is sold to the highest bidder. The vendor will set a reserve price in consultation with their agent. This is the lowest amount they are prepared to accept for the property.
If the property reaches the reserve price, the property will be sold to the highest bidder. Contracts will be signed, and the buyer is expected to pay a deposit there and then. Importantly, there is no cooling off period when you buy via auction so all of your due diligence must be done prior to auction day.
If the bidding doesn’t reach the reserve, the property is ‘passed in’ and the agent will then begin negotiating with the highest bidder in an effort to achieve a price both parties are happy with.
There are a number of key advantages of buying at an auction which include:
- The price is benchmarked with other buyers in public
- You can assess the competition on the day and observe them bidding
- You get an immediate result as there is no cooling off period
- If you are the winning bidder, you will buy the property
- High degree of comfort that the price is right
What to do before the auction
Set aside a few Saturdays to attend some auctions in your area as a spectator, this will help you familiarise yourself with the process. Auctions move quickly so it's better to go in armed with some understanding before you do your own bidding.
Here are 10 considerations to ensure you are auction ready:
- All inspections including building and pest inspections have been conducted
- You must have financial pre-approval to spend to your maximum limit
- Ensure you have stress tested your finances to ensure you could still make repayments if interest rates were to rise, or if you were unemployed for a while
- The contract has been reviewed by your lawyer or conveyancer
- Any variations to the contract must be agreed prior to auction day as there is no cooling off period and no flexibility to make changes to the contract after the auction
- Make sure you understand the expected demand for the property. Ask the agent how many buyers have requested contracts, conducted building inspections or even just the number of people who have inspected the property. This can give you an idea of the properties demand.
- You have a good understanding of the likely selling price based on comparable market analysis and you have finances approved to this level
- Make sure you set a limit and most importantly stick to it
- If you are uncertain, employ a buyer’s agent to bid on your behalf or ask an experienced friend to help out
- Attend other auctions prior to your auction day to get a feel for the flow, how people bid and what style of bidding may suit you
For more information on how to make pre-auction offers and tips on how to successfully bid at auction download our Buying a Property Guide.
No cooling off period when buying by auction
When the highest bid is reached and the auctioneer declares the property sold, the buyer is legally obliged to buy the property as per the pre-agreed contract. With this in mind, any changes to the contract must be agreed to before auction day, any inspections such as building or pest must also be done and importantly you must have your finances in order so you can pay the deposit immediately after the auction.
Have a solicitor or conveyancer look over the contract of sale before the auction to ensure the terms suit you and to get an understanding of any legal obligations you are under. Any changes to the contract must be done prior to the auction through your legal representative.
In some States or Territories you need to register your intention to bid at an auction with the selling agent, so contact them to confirm if this is required before the auction date.
Offers prior to auction
You are permitted to make an offer on a property before the auction, if you want to try and avoid the stress of auction day. If your offer is above the reserve price the seller may choose to accept it but they may just let the market decide the price by going to auction.
Make sure you know the value of the property before putting in an offer. You want your offer to be considered serious so talk to the agent and explain you are keen to buy prior to auction and ask for a contract. Let them know you're willing to negotiate on settlement terms or the size of the deposit if it encourages the vendor to accept.
You always run the risk that the property could sell for less than your offer at auction but if it is a property you want at a price you are willing to pay then it's probably worth the risk.
For tips on how to make a pre-auction offer download our Buying a Home Guide.
The auctioneer's role is to achieve a price above the reserve set by the vendor. They oversee the bidding process and keep track of bids. Laws for auctions in each state or territory may vary slightly so talk to the agent if you feel unsure about any part of the process.
As the auctioneer begins, they announce details pertaining to the running of an auction including the state laws applying to auctions in general, rules applying to this particular auction, including whether vendor bids will be used.
Finally the auction begins with the auctioneer asking for an opening bid which sets an amount by which all bids must rise. When bids reach the reserve price the auctioneer declares the property on the market and will be sold to the highest bidder from here.
Have a strategy in place before you start bidding. One strategy if there is heavy bidding competition on the property and another prepared in the case you are the only bidder. You aren't obliged to offer a bid at the increments the auctioneer is asking, it is acceptable to offer less.
You can pay a buyers’ advocate to bid on your behalf to take the nerves out of the auction process. They will either charge you a fixed fee or commission on the sale price but they’ll stick to your limit and won’t be intimidated by other bidders’ tactics.
Alternatively ask a family member or trusted friend with some auction experience to bid for you but make sure they don't go over your budget.
If the property is passed in and you are still keen to secure it, start immediate negotiations with the vendor though their real estate agent.
If you are the highest bidder you are required to make a deposit, generally 10 percent of the final price.
Stick to your limit
Many property buyers let their emotions affect their decision making process, which can result in exceeding their bidding limit. This can cause problems if you are unable to afford the amount you bid.
Don’t get excited and bid too soon as you may become too emotionally involved. Use the time at the beginning of the auction to look around and work out who the serious bidders are and then work out a strategy that would be most effective to buy the property you want as a price you can afford.
For more information on other methods of buying a home read our Buy with McGrath page.
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