Auctions: How they work and what you need to know
- Posted in Getting Started
One of the more popular ways to buy property in Australia is at auction. The way an auction works is subject to a range of rules and regulations that often vary by state. This quick guide offers an introduction to what to expect and how to be ready if you plan on bidding at an auction.
Auctions are an exciting way to buy a home. The drama of a bidding contest is quite different to buying property in other ways.
Because of the public nature of the bidding process and the necessity of immediately paying the deposit and signing a contract after a winning bid, it’s really important that you’re properly informed and well-prepared before going to bid at an auction. Here are the key things to bear in mind.
The auction terminology
Anyone looking to bid at auction should have a good understanding of the jargon that goes along with it.
- Reserve price: refers to the price under which the auctioneer can’t sell without the express approval of the owner. In other words, it’s a bit of a safety barrier for the seller. If and when bidding at an auction reaches this price the property is regarded as ‘on the market’ and from there the seller will accept the highest bid.
- Passing in: This is when a property fails to reach the seller's reserve price so it doesn’t sell at auction. In this situation the highest bidder will get the first option to negotiate a sale with the seller
- Vendor bid: Basically, a vendor [seller] is legally allowed to make a bid on the property to help move the auction along - either to get things started or if the auction stalls. There’s no restriction on vendor bids in Victoria, but only one per auction is allowed in New South Wales. In Queensland vendor bids are permitted only up to reserve price.
How auctions work
The auction process is governed by certain general rules that apply Australia-wide. For example, all auctions are unconditional and do not have a cooling-off period. In addition, deposits must be paid and contracts signed immediately following an auction.
Beyond this, there are a number of differences by state. For instance, in New South Wales it is an offence for agents to underquote the selling price of the property ahead of an auction. New laws passed in 2016 require agents to produce evidence for their property appraisals.
In New South Wales & Queensland, buyers need to register to be allowed to bid on auction day, while in Victoria for example, buyers can turn up and start bidding on the property.
It’s always a good idea to do your research on what the auction rules are in the state or territory where you’re planning to buy. Here are some helpful links for you to do your research:
- New South Wales Fair Trading
- Consumer Affairs Victoria
- Queensland Government
- South Australian Government
- Western Australia Department of Commerce
- Tasmanian Government Consumer Affairs and Fair Trading
- Northern Territory Government
- ACT Government
The importance of pre-approval
It is always a good idea to have your loan pre-approval ready before you start house hunting. Pre-approval is when a lender or mortgage broker assesses your finances and credit rating to arrive at a decision on how much you can borrow. With this information, in writing, you can then start looking for properties that are within your financial range.
Pre-approval does not mean you are 100 per cent guaranteed to receive final loan approval, but if you’re able to maintain stable employment and income for the period your pre-approval is valid, the chances are high.
Because there’s no cooling-off period for properties sold at auction, if you are the highest bidder you must put down a deposit on the property immediately. If you can’t follow through with the contract you will lose that deposit and may be liable for any damages suffered by the seller.
Although you can agree on a different amount of deposit with the vendor, the deposit amount is typically around 10 per cent of the property’s sale price. Check with the agent before the auction what payment methods are available and make sure you have enough in your account to make a large sum of transfer on the day.
Tips for making a winning bid
There’s no sure-fire formula for success at auction, but there are some auction tips you can follow to make the best of your chances. Chief among these is simply bidding confidently and maintaining clear lines of communication with the auctioneer so you understand when the property is on the market – something that may not necessarily be announced.
The other key thing is to remember to be civil, polite and respectful, which can work wonders in the event of negotiations.
Given the demands on the winning bidder at an auction – paying the deposit and signing the contract – it is essential that anyone looking to buy a property in this way is aware of the legal requirements in their state, the terminology involved and the health of their own finances. With all this in place, an auction can be a fruitful and exciting way to purchase property.
If you’re considering purchasing your first home through an auction, start with our simple home loan pre-approval tool to see how much you may be able to borrow. Or contact one of our Lending Specialists on 13 73 77 to find out more about your home loan options today.