Auctions can be an exciting but nerve-racking way of buying property – especially if you’ve never done it before and don’t know how the system works.
How auctions work
Buying a home through an auction is a little different to buying a home through a private treaty sale. But while auction processes differ depending on where you live, there are a few rules that apply in every state:
- Auction sales are unconditional and legally binding, and the terms of the contract of sale can’t be changed
- You pay a deposit and sign contracts immediately after the sale
- Unlike private treaty transactions, you can’t change your mind after exchanging contracts as there is no cooling-off period at an auction
- Dummy bids are illegal, so vendors can’t get their friends or family to artificially push up the price
- Vendors can make a bid on a property to get things moving at the beginning – but the auctioneer should announce this to everyone
How to prepare for an auction
If you’re planning on bidding at an auction, it’s essential to keep a cool head. The financial stakes are high, so you don’t want to get carried away and bid more than you can afford.
Prepare yourself by:
- Doing your homework – You don’t want to pay too much for a home, so you need to have a good idea of what it’s worth before you start bidding. Check recent sale prices and auction results for similar homes in the local area.
- Inspecting the property – Auction sales are final, so if you’re the highest bidder, the property is yours, warts and all. Know exactly what you might be letting yourself in for by organising pest and building inspections before auction day.
- Getting pre-approval from a lender – Take the guesswork out of knowing what your budget is by getting home loan pre-approval before the auction.
- Having money on hand to pay the deposit – Auction contracts aren’t subject to finance. So you need funds in your bank account to pay the deposit (usually 10%) if your bid is successful.
- Observing other auctions – If you’ve never been to an auction before, you can get a feel for how they work by attending a few beforehand. As well as soaking up the atmosphere, look at other buyers’ bidding strategies and how the auctioneers operate.
What happens if your bid is successful?
If the hammer falls and you’re the winning bidder, you will have to immediately sign a contract of sale and pay the 10% deposit. As you now have an equitable interest in the property, it can be a good idea to get your new home insured right away.
If you back out of the deal, you will lose your 10% deposit and may be liable for any damages suffered by the vendor.
What happens if the property doesn’t sell?
Sometimes, bidding fails to reach the vendor’s reserve price and the property doesn’t sell. What happens next depends on the vendor. If they are willing to reconsider their reserve, they could enter further negotiations with the highest bidder. However, if the vendor won’t budge on price, the home stays on-market until it finds a buyer.
Auctions are fast-paced and it can be easy to get carried away by all the action. So, if you are planning on buying your next home at an auction, remember the golden rule: set a budget beforehand and stick to it. Bid with confidence by getting your home loan pre-approved with Well Money.