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Auction tips and traps |
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Bidding for a property at an auction can be an extremely stressful experience. This is one of the main reasons why statistics show that more than 90% of potential buyers do not like auctions. So don’t worry - you are not alone! However, you should not rule out the possibility of buying a property at an auction. Some real estate commentators suggest (rightly or wrongly) that properties sold by auction actually sell for a lower sale price than properties sold by other methods, and as a result it can be possible to ‘snap up a bargain’ at an auction. If you are going to bid for a property at an auction, you do need to be prepared and follow a few simple rules. Things to do before the auction Before you go along to an auction to bid for a property, you need to work out how much you think the property is worth, and how much you are willing to pay for it. You should shop around and compare the property to similar properties in the area. Check out advertisements for similar properties in the local newspapers, in the windows of local real estate agencies and on the internet. If you haven’t been to an auction before, it is worthwhile attending a few so that you can see exactly how an auction works. This should make you a bit more confident (and hopefully relaxed) when the time comes for you to bid at an auction yourself. You should set yourself a limit before you go along to the auction, and having set a limit, you should stick to it. You cannot afford to get carried away in the excitement of the auction. Auctions are serious business with serious legal consequences. Once you make a bid at an auction it is generally too late to change your mind and ‘take it back’. Pre-auction inspections If you are the highest bidder at an auction, and your final bid exceeds the reserve price that has been set by the owner, then on the fall of the auctioneer’s hammer you will be required to immediately sign an unconditional contract to purchase the property. An ‘unconditional’ contract means that you cannot make the contract subject to finance, building inspection, pest inspection or any other conditions. As a result, if you intend to bid for a property at an auction you will need to get pre-approval for a loan from your lender. Also, if you want to obtain building or pest inspections on the property (which are highly recommended), then you will also need to arrange with the agent for these inspections to be carried out before the auction. This could mean that you end up wasting your money if you pay for building and pest inspections but then don’t end up getting the property at the auction. Unfortunately there is no way around this. It is also a good idea to obtain a flood search on the property before the auction. Your solicitor or local council will be able to help you with this. And if you are a foreign buyer, then you will need to obtain foreign investment approval before you can bid at the auction. Click here for more information for foreign buyers. On the auction day If you are the successful bidder at an auction you will usually be required to immediately pay a 10% deposit on the property. You can pay this deposit with a personal cheque, but of course you will need to have enough cash available in your cheque account to cover the amount of the deposit. If you intend to bid at an auction but you want to buy the property in a name other than your own (for example, you want the property to be in the name of your spouse, family company or family trust, or in joint names), then you should notify the auctioneer in advance because you may need to arrange a written authorisation. The auctioneer will explain what is required. On the auction day you should arrive early and make sure that you register with the auctioneer as a bidder. Since changes to the law in August 2006 you will need to produce photo ID to register as a bidder. The auctioneer will give you a numbered card or baton to use when bidding. If the auction is on site, this is also your last chance to take a look through the property and make sure that you still want to buy it. You should also look through the sale contract that the agent has available for inspection. This is the contract that you will be required to sign if you are the highest bidder and the reserve price has been reached. If there is anything in the contract that you don’t understand, ask the agent to explain it to you. If you still don’t understand, then you should seek legal advice or, if time doesn’t permit you to do so, then you should consider not bidding. If you miss out on this property, another property will be just around the corner. Don’t be afraid to ask for a copy of the sale contract before the auction day so that you can take it along to your solicitor for review prior to the auction. However, when the auction day arrives, you will need to make sure that the sale contract that is available for inspection at the auction is the same as the contract reviewed by your solicitor. Bidding at an auction When it comes time for the auction to start, you should stand where you can clearly see the auctioneer and the rest of the crowd. You want to be able to see the other people who are bidding. You also want the auctioneer to be able to see you. The auctioneer will start the auction by reading out a description of the property, and also the auction terms and conditions. The auctioneer will then ask for bids, usually by asking a question like ‘Do I hear $350,000?’. Often bids start quite low compared to where the price might eventually end up. You make a bid by raising your hand in response to the auctioneer’s call, or by making some other obvious gesture. You will also need to show your numbered card or baton. If at any time the auctioneer is asking for a bid of a particular amount, but you want to make a bid for a lower amount, then clearly call out the bid that you wish to make. For example, if somebody else has put in a bid at $380,000, and the auctioneer is asking for a further bid of $390,000, you can call out a bid of $385,000 instead. Generally the bidding increments get smaller as the auction draws nearer to the end. For example, at the beginning of the auction bids might go up in increments of $20,000 or more, before slowing down to increments of $10,000 or $5,000, and finally increments of $1,000 (or sometimes even $500). During the auction you may find that a real estate agent stands next to you, encouraging you to keep bidding. Don’t let an agent influence you to bid beyond your pre-set limit. You (and only you) must decide when to bid, how much to bid, and when to stop bidding. If you hear the auctioneer say ‘The property is on the market’ at any time during the bidding, this means that the bidding has reached the reserve price set by the owner and the property will be sold to the highest bidder. However there is no obligation on the auctioneer to declare when the reserve price has been reached, and often there will be no indication given at all.
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