If you’re in the market for a new home, you may be considering the auction option. But before you start bidding, it’s important to know all the ins and outs of the process – what are you getting yourself in for, and how can you get the most out of it? Here are our top tips:
In a nutshell
In advance of the auction
- Get to know the auction rules in your state
- Attend some auctions as an observer first
- Research the property and the market
- Have the property independently valued and inspected
- Look at the contracts with your solicitor
- Sort your finance in advance
- Make sure you register to bid at the auction
On the day of the auction
- Arrive early
- Bid with confidence
- Know the lingo: ‘reserve price’, ‘passing in’, ‘vendor bid’
In advance of the auction
Get to know the auction rules
To keep things fair for all potential buyers, there are rules and laws governing how auctions operate. These cover things like who can bid and how. They vary from state to state so it’s a good idea to familiarise yourself with the rules wherever you’re buying.
A main one to note is that if you make the winning bid, there’s no cooling off period. The purchase is unconditional so there’s no getting out of it without losing your deposit (potentially 10% of the winning bid) and even having to pay damages to the auctioneer.
Attend some auctions as an observer
Practice makes perfect, and attending some auctions as an observer is a great way to familiarise yourself with the process. We recommend going once, going twice, going three times…
Research the property and the market
It goes without saying that you should inspect the property you’re looking to bid on. But as well as that you should view as many other similar properties as possible in your preferred area and check how much they’re selling for. This will help you establish what the property being auctioned might be sold for and whether it’s within your price range.
Have the property independently valued and inspected
In the heat of the auction, you want to make sure that you don’t end up getting carried away and paying well above what the property is worth. Having it independently valued before the auction (this usually costs around $500) will help give you an idea of what it’s worth so you can place a sensible limit on how high you go.
At this point it’s also a good idea to have a building and pest inspection carried out. This is an additional cost but could save you in the long run if there are any nasty surprises after the auction, at which point backing out of the sale would potentially cost you a lot more.
Look at the contracts with your solicitor
Before the auction, make sure you review the sales contracts with your solicitor and get clarity on any terms, conditions or clauses you’re not sure about.
Sort your finance in advance
Because a sale at auction is final, in addition to knowing in advance approximately how much the property is worth, you should be clear on what you can afford and are able to spend. Getting pre-approval on a home loan puts you in a position to bid with more confidence and gives you an upper limit to bid within (although be sure not to show your hand to other bidders or the auctioneer).
It’s worth bearing in mind, though, that your pre-approved bank loan will still be subject to a full application being approved and a final valuation of the property being completed. If the bank’s final valuation of the property falls short of what you paid at auction, you could find yourself out of pocket. This is why getting an independent valuation before the auction, and bidding within or close to that amount, is important. Having a good-sized deposit saved up (20% of the property's value is a good rule of thumb) can also protect you in the event that the final valuation isn't as high as you'd like.
And remember, if you make the winning bid, you’ll need to pay a deposit on the property there and then. It’s usually 10% of the winning bid.
Make sure you register to bid at the auction
To be able to bid at an auction you need to register with the auctioneer in advance. You’ll then be given a number to display (and raise in a dramatic fashion if you wish) when you’re bidding.
You don’t have to make a bid if you’re registered, but you can’t bid if you’re not registered. If you’re not feeling confident enough yourself, you can nominate someone to bid on your behalf. This can help take your own emotions out of the equation so you’re less likely to lose your poker face or overspend. But again, the person you nominate must register in advance.
On the day of the auction
Give yourself plenty of time to take another look at the property, ask questions and check if anything has changed with the contracts of sale. Arriving early will also give you a chance to get comfortable with your surroundings and, importantly, to check out the competition.
Bid with confidence
- Take up a prominent position at the centre of the room/area.
- Making the first bid is a common strategy to show you’re serious early on, but it doesn’t guarantees success.
- Bid clearly, with your registration number shown.
- You can normally bid by calling out the full amount you want to offer (e.g. $500,000) or an incremental increase on the previous bid (e.g. $5,000). Pick one method and be consistent.
- If someone makes a counter bid, don’t hesitate if you follow up with another bid (provided you can afford to!). Be decisive either way. This is why deciding your limit in advance is so important.
- Don’t be pressured into bidding. It’s the auctioneer’s job to achieve the highest sale price possible, but if you’re not comfortable making another bid, then don’t. Be prepared to walk away.
What happens if the property ‘passes in’?
Before the auction, the seller will set a ‘reserve price’ for the property. This is the price at which they are willing to sell. If the reserve price is met during the auction and the seller confirms they’re happy to sell at that price, the property is ‘on the market’. Any valid bids above that price must be accepted. If the reserve price isn’t met, the property ‘passes in’ which means the highest bidder has the right to negotiate with the seller in an attempt to agree a sale.
Depending on how the bidding is going, the seller (also known as the vendor) can make what’s called a ‘vendor bid’. They do this if they want to set a price during the auction that’s more in line with their desired sale price. They can only make one bid and it must be declared as a vendor bid by the auctioneer.
If you’re properly prepared, buying at auction can be a way of getting your dream home and an adrenalin rush at the same time. There are risks as well as opportunities, but knowing them in advance, and taking steps to protect yourself, should mean that by the time the hammer falls, your blood pressure won’t have risen unnecessarily.
Important information: Please note that this is only intended as a general guide in relation to issues you may want to consider when buying a property at auction. It is not intended to be an exhaustive list of all relevant issues and you should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding.