May 25, 2014
Have you ever considered buying a house at an auction?
You might even have pre approval in place and have come across an auction while out and stop and decide ‘hey this seems good value’ and then find yourself swept up in the emotion and even to the point of biding; then it becomes serious and you may be taking a massive risk.
Buying at auction means that the ‘subject to finance’ clause does not exist and just because you have a pre-approval it’s incorrect to assume you have the authority to purchase ‘anything’.
Your lender’s pre-approval will almost always state its ‘subject to the lender approval of the security and the lender’s valuation of the security'.
Why would your lender not accept the security?
Not all lenders accept all securities. The most accepted security is one classified as residential. Anything other than residential will need to be cross checked with the lender.
A title search of the property may reveal it’s classified as rural, water shed, primary producing, heritage, bush fire zone. Or is may be the wrong size (small apartments are often not acceptable), or not the correct postcode or correct condition. Yes the lender may reject the security all together.
Why would the bank not accept the price paid?
Auctions are very emotive and if the buyer doesn’t know the recent comparable sales in the area, chances are the price tag you have paid may be more than the acceptable market value.
When your lender goes to value the property they take into account the comparable sales and use this to determine their valuation of the property.
This can put you in a precarious position in that if you have paid more than the lender's valuation you may have to come up with more of your own money to close the deal. And if you don’t have ample ready cash available the contract may fail.
Have your circumstances changed since pre-approval
A pre approval can last for up to 6 months, usually with a 3 month check to determine that your financial situation has not changed.
What about if your situation has changed? You may have dipped into your savings, your work conditions may have changed. Or there may be missing information in the pre-approval stage and when the formal approval is sort this may lead to a rejected application.
If the above factors result in you not being able to close the deal you may lose more than your 10% deposit (generally the norm at an auction).
In fact if the vendor cannot re-sell the property at the same price or more, you may find yourself being sued for damages and costs.
But the biggest cost is when the property is sold at a lower price than what you paid. If this happens you will pay the difference.
If you are considering buying at auction and want pre approval make sure you make an appointment with our office to ensure we cover all the risks with you.
Call Julie Browne today on 0421 206 543