What is an auction?
No doubt you have seen pictures of auctions in the newspaper and on television. They typically involve a crowd standing around in the yard of a house, or in the street out the front, looking at a man in a suit with his arm raised. But did you know that an auction can also be held offsite in a meeting room?
Wherever it is held, an auction is simply an event where people who want to buy a property come together and publicly bid against each other for the right to buy it. The highest bidder gets the property.
An auctioneer, who is usually a real estate agent representing the seller, conducts the auction by standing in front of the potential buyers and acknowledging the bids they call out.
The auction ends when no one is willing to offer more than the current highest bid, and person who made that bid wins the property if the bid is above the reserve price set by the seller.
If you have your heart set on a property that is being sold at auction, you may feel a bit daunted. That is only natural. Research shows that nearly two thirds of Australians don't feel confident that they could bid for a home at auction.
The good news is that, with a bit of preparation, buying at auction is something anyone can do safely and confidently.
The broad rules are the same as buying through private treaty: do your research, get good advice, lock in finance early, and don't exceed your financial limits.
Below, we spell out the simple steps that will allow you to purchase with confidence at an auction.
The key difference between an auction and a private sale
The most important differences between buying at auction and buying privately are that:
With an auction the bidding process is public, so everyone knows what everyone else has offered for the property. This makes it easier for you as a buyer because you have the same information as the seller, unlike a private sale where only the seller knows who else is bidding and what they are offering.
If the hammer falls and you are the highest bidder, you have to sign the contract right there and then and supply a cheque for the deposit. There is no cooling off period so if you have to pull out of the purchase, you will lose your deposit and be in breach of the contract. There can be very serious legal consequences if you cannot settle the sale. This means that preparation is even more important with an auction than with a private sale, especially with getting finance arranged.
Before the auction
Most of the steps you should take before bidding at an auction are also true if you are buying privately but preparation takes on added importance because the negotiating timeframe is shorter and you can't back out if you change your mind.
1 Know the market
The key to successfully buying a property, whether it is by private treaty or at auction, is thorough research. Look at the recent sale prices for similar properties, and go to auctions. It is a good idea to try to go to a few auctions first to see how they work anyway.
If you can become a good judge of the market value of properties in the area you can avoid overpaying at auction.
Remember: It is illegal for a seller or their agent to give you a price guide for an auction property. This is because they cannot know how high the bidding will go. Before it was banned, agents were notorious for deliberately underestimating the price in order to boost the number of people attending the auction, wasting the time and dashing the hopes of many homebuyers.
2 Lock in your finance
If you are the highest bidder at the auction, you have to sign the contract, and there is no cooling-off period. If you cannot settle the price of the home by the settlement date, you will lose your deposit and be in breach of the contract. There can be very serious legal consequences if you cannot settle the sale. To protect yourself against this calamity, ensure you have done the following before you bid at an auction:
- Got your finance pre-approved, including the maximum amount you can borrow. You can get a quick Auction Approval here.
- Ensured you have enough money available to pay the deposit using the method specified by the seller's agent (this is usually 10%).
3 Know the property
When you purchase privately, your contract will typically have a Building and Pest Clause which allows you to get written reports from qualified building and pest inspectors about the property and withdraw from the purchase if they are unsatisfactory. This is not the case with an auction, so you need to get these reports BEFORE you bid. To bid with confidence, follow the steps below:
Thoroughly inspect the property and get a professional building inspection and pest reports.
If the property is in a strata scheme, review the strata reports.
Review the contract with your lawyer or conveyancer and ensure you are comfortable with it.
Do all other necessary checks, such as a:
a) a land tax clearance search
b) a swimming pool inspection (if relevant).
4 Work out your price limit
Before you go to an auction, you need to know exactly what your maximum purchase price is so you don't get carried away in the heat of a bidding war. Your maximum purchase price should be the lesser of the following two amounts: