Auction - What You Need To Know
Auction has been a common feature of the Australian property market for many years. And for good reason, the open-ended nature of an auction, the emotional bidding war between buyers, and the ambiguity on price, all of these can potentially return much higher price than what the owner originally expects. As a buyer, it is important for you to know what an Auction entails and how you can prepare for one.
How A Normal Home Sale Typically Goes
The sale process starts with the seller putting the property up for sale through a Real Estate Agent. The property is then opened for potential buyers to inspect, and expected price range is easily obtained through the Agent.
If a buyer is interested, they then negotiate price and typically do more research on the house. This can take multiple days. Once a price is agreed upon, the buyers and sellers exchange Contract of Sale.
After Contract is signed, the buyer typically has 1-2 weeks to think things over; this period is called cooling-off. If not done beforehand, Building and Pest inspections, or Strata searches, are completed at this stage. Most importantly, home loan Formal Approval can only be done during this time, after Contract has been signed.
A normal sale takes days or even weeks, giving both side ample times to do their checks and weight their options.
If any of these checks show unfavourable results, such as seriousdefects or insufficient finance, the buyer can withdraw from the purchase with a small penalty (usually 0.25% of the purchase price).
After cooling-off, the Contract becomes unconditional and both sides prepare for handover.
How An Auction Is Different
There is no specific price range so prices tend to go up quickly. While the Agent will provide a starting price, buyers frequently push up their bids in the heat of the moment. Some Agents have also been known to underquote - deliberately lowering the advertised price guide, to drive more interest and potentially more bidders pushing the price up.
Bidding means price negotiation happens on the spot, with only seconds to decide whether to go higher. There will be no time to compare other properties or call your Broker to check finances, but there will be other buyers eager to outbid you. It can be surprisingly easy to go over your budget, especially if you are emotionally attached to the house.
Once you win at the auction, you have entered into an unconditional purchase contract. There is no cooling-off so withdrawing from the purchase at this point means you will lose 10% of the contract price. It does not matter if you find any serious defects after the Auction, you have to accept it as is.
Auctions are fast and have no cooling-off period. Once you win, it is legally binding and unconditional.
What You Can Do As A Buyer
Understand that an Auction is inherently riskier than a private sale. While the most immediate risk is overpaying for the property, you also lose the exit strategy of a cooling-off period. Most importantly, the bank may not agree to the price if the auction went hot, leading them to lend well below what you need.
To minimize these risks, you need to do as much research as possible. Make sure that you are clear about how much the property is worth, have finance Pre-Approval in place, run appropriate building reports, and your Conveyancer has looked over the Contract. Give yourself plenty of time and do these before auction date.
If there is not enough time to do all of your due diligence, for example a house is going to auction tomorrow and you have not received all the necessary reports, it is best to leave this one and move on.
Even if you have done your homework, you could still go over budget in the heat of the moment. Having a clear maximum price is crucial here. You are much less likely to let the situation escalate if you have a firm stopping point. This point should have been determined by thorough market research and finance discussion with your Broker.
Try to have a buffer zone when searching for houses, don’t look for those at the top of your range. This is to give yourself room for errors. If you go slightly over budget and the loan is short, this buffer will still allow you to get over the finish line.
Auctions can be daunting, but they are still a common way through which many houses are bought and sold. With the correct preparations, you can still achieve homeownership without unnecessary risks.
Until next time, stay sensible.
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