January 29, 2014
Buying at Auction
If you’re a local or about to buy a property that makes you a local then in Sydney’s inner city there’s a good chance you’ll end up buying a property at auction. This method of buying and selling holds many opportunities for both vendor AND purchaser so you’ll need to know your stuff before you proceed. So what’s special about buying at auction and what do you need to know and do?
Before auctioning a property, the vendor will nominate a “reserve” price that is not usually disclosed to potential purchasers. The reserve price is the lowest price the vendor is willing to accept. If the highest bid is below this price, the property will be “passed in”. The vendor will then either try and negotiate a price with interested purchasers or put the property back on the market. If bidding continues beyond the reserve price, the property is sold at the fall of the hammer. The successful purchaser must then sign the contract for sale and pay the deposit immediately. The deposit is usually 10% - though it can potentially be negotiated to 5% beforehand by agreement – ask your solicitor about this.
Before the auction
- Make sure your pre-approval is current and covers the maximum purchase price you are prepared to pay. Be pragmatic about this – if the property is close to your office, your preferred school and just around the corner from the best pizza place south of the harbour then it might be worth a bit more – to YOU.
- And make sure that’s enough to secure the property you’re interested in – agents will always quote you “bidding to start from…” which may not really indicate how high they expect that to go. Before you do your pre-purchase inspections research comparable prices – call us and we’ll do an RP Data report for you to help narrow down what you might expect to pay – be realistic.
- Get all your inspections done – strata reports and pest & building reports take time and you need to know about any potential pitfalls well before you’re due to bid. And as with any open house don’t be afraid to go back and be sure you’re comfortable with the property as it is – remember on the fall of the hammer it’s yours.
- Make sure your solicitor or conveyancer has checked the full contract and given you the all-clear. There’s no cooling off period (see fall of the hammer above!)
- Real estate agents are human too – if you’re on good terms with the selling agent you might be the first to hear of any crucial activity and the most likely to get closest to the truth. But play your cards close – don’t give too much information away. No-one (except your mortgage broker!) should know your maximum purchase price.
- Register to bid – check with the agent about this – in NSW you must have provided name, address and proof of identity. NSW Fair Trading has a good guide – click here http://www.fairtrading.nsw.gov.au/ftw/Tenants_and_home_owners/Buying_property/Bidders_guide.page?
- Practise – go along to a few auctions to get a feel for how it all happens – mostly fast. Get comfortable with the pace and decide on your own individual strategy. This strategy may vary according to the style of the other bidders so experience and forethought counts.
At the auction
Auctions move quickly so you need to be prepared beforehand and have laid out your parameters - discuss your maximum bid with your partner or set yourself a firm limit. Consider making that limit just over a rounded figure, just in case!
Make sure you’re prepared to pay the deposit – have your cheque, bank cheque or deposit bond organised.
Avoid bidding early – leave others to set the early tone and avoid pushing the bids up too soon. Remember one vendor bid is allowed. Once the auctioneer declares the property is “on the market” it means the reserve has been reached.
Consider your strategy. If other bidders seem timid then hard and fast bids may “blow them out of the water”. If your competition is strong maybe staying cool is the answer – disinterest may disarm them. Changing the increments of the bids away from the auctioneer’s or other bidders’ chosen amounts may give you control over the process and intimidate other bidders. But above all – remember your limits – be prepared to walk away. If you feel you don’t have the will power to stick to a limit get a tough and reliable friend with clear instructions to do it for you.
Remember that the successful bid is the price you will pay. After this you need to get a copy of the exchanged contract to your broker and your broker will progress your application from pre-approval to unconditional approval. This primarily consists of the lender doing a valuation on the property to determine whether the price paid is a fair market price. An auction that has not overheated and not gone way past a reasonable value will generally be regarded as a fair market value. If the valuation is less than the purchase price you paid you will need to make up the difference. Discuss this risk with your mortgage broker so you are prepared.
If the reserve is not reached and the property passed in then some pretty tough negotiation starts. The agent might be jumping between you and the vendor trying to get the best price as well as a successful sale. Remember the agent is acting for the vendor. If you are prepared to accept different settlement conditions such as a shorter settlement period this may help your negotiations.
After all this you might just have bought the home of your dreams – good luck and ask for lots of advice.