Whether you are buying or selling, understanding the ins and outs of auctions is essential reading for anyone looking to launch themselves into the property market. Here we will take a look at how auctions work, how you should prepare for them, and explain the often confusing terminology which surrounds them.
What is an Auction?
An Auction is where a commodity or asset (in this case, a property) is offered for sale publicly, at a nominated venue and time, where interested buyers are invited to place bids, or offers to buy it. These potential buyers or bidders will competitively bid against one another until the highest bid is reached – Typically, the highest bidder will then be the successful buyer, depending on whether or not the seller’s minimum expected price or reserve price has been reached. If the reserve price is met, the property will be sold to the highest bidder, but if it is not met, then the property is passed in, or put back on the market for sale.
What do I Need to Know About Buying at Auction?
If you are thinking about attending an auction and placing a bid, the first thing you need to do is make sure your finances are in order. Because the typical auction contract does not feature a finance clause, you need to be certain that you will have the funds ready to complete settlement on the nominated day, whether that be via cash in the bank or pre-approved finance. You will also need to ensure you are in a position to pay a 10% deposit upon the fall of the hammer if you are the successful bidder, as this is part of the standard auction terms.
You will also need to conduct whatever enquiries and investigations you wish to undertake on the property prior to the auction – Auction contracts to not give buyers the benefit of a building inspection or due diligence clause, and there is no cooling off period, so make sure you are happy with what you are buying before you register to bid. Once the hammer falls and contract is signed, there’s no turning back.
On the day of the auction, make sure you are well prepared. Ensure you have reviewed a copy of the proposed contract, cited a copy of the title search and conducted a building and pest inspection that is to your satisfaction. Know how much your budget is and stick to it, and make sure you (and anyone else who will be buying the property with you, such as a spouse or partner) bring a copy of your driver’s licenses or other photo id to the auction – Otherwise you will not be able to register.
Is it a Good Idea to Sell by Auction?
There are a number of things you should take into consideration when deciding to sell your property by auction. There are certainly some tangible benefits to it – Auctions are designed to produce an unconditional contract, with no building inspection or finance clauses, and give the added certainty of having a defined sale date, which you do not get with a normal or private treaty sale. But this can be a double-edged sword, because while it might sound great, in reality there may be some buyers who might otherwise want to buy your home who are simply unable to meet the terms of an auction contract, particularly in entry-level markets which are dominated by first time buyers. If these buyers are not in the mix, then this will reduce the level of competition on the day of the auction.
When deciding whether or not to sell by auction, you should consider first and foremost what method of sale is already predominant in your area. Have you noticed lots of properties being sold under the hammer? Or are the majority being listed with a defined price and being sold by private negotiation? This will give you a clue as to what will be the best way to go, because if auctions have not worked historically in your suburb, then it is unlikely they are going to suddenly become a roaring success.
With that in mind, your personal circumstances will play a part here also. Are you in a situation whereby you are under pressure to sell within a short timeframe? Are you under financial duress and need a sale quickly with a minimum of fuss? If you answered yes to either of these questions then an auction might just be the way to go to ensure you don’t get tied to a buyer with lots of conditions, only to find out your sale falls through at the last minute, leaving you with some serious headaches.
Auction Terminology Explained
Absentee bid – A bid made by someone who is unable to physically attend the auction, usually over the phone.
Auctioneer – The person who is responsible for conducting the auction. Must have appropriate license.
Bid – A monetary offer to buy the property during the auction.
Cooling off period – Period after sale where you are able to change your mind and withdraw your offer. Does not apply to auction contracts.
Deposit – A downpayment on the property made at point of contract signing. At auctions, this is typically 10% of the total purchase price.
Dummy bid – A fake bid designed to artificially stimulate the bidding. This practice is illegal.
Gavel – The auctioneer’s hammer.
Hammer/Knock down price – The price the property is sold for once the hammer comes down.
On the market – Once the reserve price has been reached, the property is “on the market”, meaning it will be sold to the highest bidder.
Passed-in – If the bidding does not reach the reserve price, the property remains unsold and is “passed-in” and put back on the market.
Registered bidder – Someone officially registered to bid at auction.
Reserve price – The minimum price the seller will accept. Once this is announced as being met, the property is “on the market”.
Vendor bid – A bid made by the auctioneer on behalf of the seller, normally to stimulate the bidding if it has stalled.
‘Til next time, ciao 😊