Buying at Auction

Important Note:  Where possible we have highlighted the various considerations for buying at an Auction in different States & Territories.  However, please ensure you understand all rules that apply (to you and the Auctioneer / Vendor) in the State or Territory where you intend to purchase.


The cold hard facts

Once the hammer comes down it is unlikely you will be able to get out of the contract – unless the vendor has breached their obligations, e.g. under “vendor disclosure requirements and warranties”.

At an auction, exchange happens immediately after the winning bid is accepted and the deposit (usually 10% of the purchase price) must be paid on the spot. 


Should I buy at Auction?

Contrary to what the Real Estate Industry would have you believe, we would suggest that buying a property at Auction is an inherently riskier way to purchase a property.  While there are things you can do to minimise these risks, you cannot fully remove them.

Separately, we believe people who purchase at Auction forget some very clear and obvious fundamentals:

  • The Vendor and their Real Estate Agent have selected Auction as the sale method because they believe this will increase the sale price sufficiently to also cover the added cost of the Auctioneer, Auction marketing period etc.

  • Vendors and the Real Estate Agent have the option to set a reserve price (minimum price) or, in some jurisdictions, can just refuse to sell if they don’t like the highest bid and therefore hold all the cards to make sure you’re paying as much as possible – are bound by the fall of the hammer – and have no chance to negotiate

  • So – you are walking into a lions’ den where you are the main course

We would maintain that, unless the property market where you intend to buy is strongly trending towards being a “buyers’ market”, there is absolutely no upside in buying at Auction.  Of course, when it is a genuine Buyers’ Market you won’t see many homes for sale by Auction.

Now – we know, we’ve heard it hundreds of times – “But in (insert your capital City) you have no choice – you have to buy at Auction”.   Without meaning to be blunt, you always have a choice and it is only because enough people are willing to act like sheep (or more accurately - lambs to the slaughter) that Auctioneers have it all their own way.

If you want the opinion of a Real Estate Agent who is willing to be brutally honest about his Industry’s propensity to screw purchasers over at Auctions, we have included an excerpt from Neil Jenman’s website at the end of this Fact Sheet.

It also makes very good reading if you are intent on buying at an Auction and you want to maximise your chances of buying wisely and well.


IF YOU ARE INTENDING TO BUY AT AUCTION


If we haven’t managed to scare you off yet – or if you are in a Capital City where you feel it is simply unavoidable to buy via an Auction – please take the following (and Neil Jenman’s advice) into consideration.


Make sure you can afford to buy

If you will be relying on finance – as most people will – then it is essential that you have a solid and conservative understanding of your maximum purchase price.

Please refer to our Pre-Approvals Fact Sheet to ensure you understand precisely what you have, and have not, been approved for.


Buying ahead of an Auction

If you want to negotiate on a property listed for Auction and buy it ahead of the Auction, you will almost certainly be required to waive any cooling-off period.  In some States and Territories this is a legislative requirement if the sale is within a certain time before the Auction. 

But in any State or Territory you can reasonably expect that you will be asked to waive the cooling off period if you want to take the property off the market and have the Auction cancelled.

So, other than having removed the need to bid at Auction you will need to take the same precautions – in terms of inspections, finance approval etc – as if you were bidding at Auction.


Buying after Auction – passed-in properties

A passed-in property is one where the reserve price was not achieved or, if allowed in that State or Territory, the Vendor rejected the highest bid.

Generally, the highest bidder will have first right to try and negotiate a purchase.  Failing that, anyone is entitled to enter into a purchase by private treaty.

However, be aware that your cooling-off rights may still be affected.  For example:

  • In Qld – there is no cooling off period if the contract is entered into within 48 hours of an Auction.

  • SA – there is no cooling off period for any sale entered into on the day of the Auction – even if the sale doesn’t happen ‘under the hammer’.


Conclusion

We hope that this Fact Sheet – and Neil Jenman’s sage advice below – will give you a better idea of the risks and processes involved with purchasing property via Auction.

We hope it will also assist you to maximise your chance of buying well should you choose to bid at an Auction.


The following is an Extract from the Jenman Website – published on 22 Mar 16 

Please Note:  This Article appears to have been written with NSW Auctions in mind.  Footnotes have been added by us to amplify certain points as they apply to other jurisdictions.  Some emphasis has been added.


SEVEN RULES FOR BUYING AT AUCTION

If you want to take the risk, here are seven rules to protect yourself and minimise the damage.

If you don’t know the tricks used at auctions, you are certain to get hurt. Most auction agents have no regard for your feelings. They want a sale and they don’t care who they hurt.

If you are inexperienced at home buying, you should avoid auctions altogether. The financial loss of a few hundred dollars on wasted inspections is bad enough, but it is nothing compared to the emotional damage of discovering that the home you love was never in your price range.

If you want to take the risk, here are seven rules to protect yourself and minimise the damage.

Rule 1. Believe nothing and check everything

With auctions, always assume the agents are lying to you. Sure, some may tell you the truth, but if you treat everything they say with suspicion, you won’t be as easily hurt. There are so many lies told that you can’t afford to believe anything until you have checked it out thoroughly.

Rule 2. Understand the ‘quoting’ lies

Experienced buyers know that agents under-quote the selling price by about 20 percent. So, if the agent says, “Bidding to start from $300,000”, the price is likely to be somewhere around $360,000. If your maximum price is $320,000, be careful. You could spend money on inspections, get your heart set on buying the home and all to no avail.

If you cannot get a straight answer from an agent about the price, or if you are certain you are being misled, you can – as a last resort – ask the sellers about the price.


Unlike many agents, most sellers are not interested in deceiving you. They just want you to buy their home. They do not want you to be misled or to lose money.

You can write to the sellers at the home. If the home is vacant, you can write to them care of their lawyer. Ask the agent for a copy of the contract of sale. The owners’ details will be displayed. If you receive no reply do not attend the auction.

Rule 3. Tell the agent nothing of importance

If you don’t feel comfortable with the agent – and the chances are that you will never feel comfortable with an auction agent – tell them almost nothing. Just ask questions. Be strong.

Answer any questions by saying, “We are not sure what we intend to do.” Be vague. Use expressions such as ‘maybe’ or ‘might’ or ‘perhaps’ or ‘we are unsure’.

Just remember that this is the person who will deliberately mislead you before the auction with the quote, at the auction with fraudulent bids and after the auction by telling you how ‘lucky’ you are. You can’t afford to trust such agents.

Rule 4. Know the true value

The time and cost of basic research can pay handsomely. Obtain the sales details of similar homes in the area. In Melbourne and Sydney, you can purchase inexpensive ‘post-code’ price guides [Call (02) 8268 8200 in Sydney or 1800 817 616 in Melbourne]. Similar information is also available in most areas through local councils.

If you feel you have a good chance of buying the home, you should consider contacting a registered valuer for an accurate and unbiased opinion. The money spent on a valuation is well worth the risk [1]. Contact the Australian Property Institute.


It would be far easier for everyone if all homes had an independent valuation before they were sold. Both sellers and buyers would have the benefit of independent and unbiased information.

However, a valuation, while unbiased, is still only a guide. If you love the home, you might willingly pay more than the ‘value’. But at least you have the benefit of a valuation on which to base your decision.

Rule 5. Get legal advice

Some homebuyers try to save hundreds of dollars and in doing so they risk thousands. Don’t let this happen to you. If you are keen to buy a home at auction, consult a lawyer before you sign anything or spend any money. A home costs hundreds of thousands and a lawyer costs hundreds.

And remember, the last person to take advice from about a real estate auction is the auction agent. You can have your lawyer speak to the agent on your behalf. Some lawyers will even accompany you to the auction. Good lawyers are great value when buying a home.

Rule 6. Do not bid too soon

The most important rule at an auction is NEVER BID UNTIL THE PROPERTY REACHES RESERVE [2]. Until then, it is not for sale and it makes no sense to bid on anything that is not for sale. No matter how much pressure you receive, do not play into the agent’s hands by bidding too soon.

Dummy Bidding

Agents are so desperate for early bidders, they will do anything to get the bidding up from its low beginning.

Some will plant dummy bidders in the crowd. Or pay ‘dummy bidders’ to pretend to be buyers. Others will just ‘pull’ bids from walls or trees. This is fraud. It is justified by the use of a thin legal line known as ‘the vendor’s bid’ [3], which means that a seller has the right to bid on their own home provided that the auctioneer declares this – which is almost never done.


Even if the auctioneer does declare the vendor bid, ‘dummy bids’ are never declared.

The television program, Money, once did an expose` on dummy bidding. Hidden cameras filmed an agent boasting how he paid dummy bidders. Later, a reporter asked him if he ever paid dummy bidders. His answer was “No. Never”. The TV program showed two scenes – one with him proudly describing his deceit and the other with him denying it publicly.

Dummy bids are a central part of the auction system, despite the denials of agents and Real Estate Institutes.

But dummy bidding stops once the home reaches the reserve price and is ‘officially’ for sale. And that is the only time you should bid.

The Reserve Price

The reserve price is the lowest price the agents have been able to ‘crunch’ sellers into accepting.

And this is where auctions really favour you as a buyer. You will know the sellers’ lowest price, but no-one knows your highest price.

With the attention on the sellers’ lowest price, buyers save thousands at auctions.

Rule 7. Keep your highest price a secret

Once the home reaches the sellers’ lowest price (the reserve), it is going to be sold to the highest bidder. Let’s say $320,000 is the reserve and your highest buy price is $350,000.

Under no circumstances will you exceed your highest price (you can’t afford to).

But you are very likely to be the highest bidder long before you reach your highest price. If there is another bidder whose highest price is $330,000, then you will buy the home at the next bid above $330,000 which will most likely be $331,000. And you will save $19,000.


Thousands of buyers are paying thousands of dollars below their highest prices at auctions. All because the agents do not understand the principles of negotiation. As one buyer said, “It is like stealing money from the sellers. Why do the agents let this happen?”


The losses for sellers and the wins for buyers are caused because the auctions start at a low price instead of a high price. And when something starts low, the chances are that it will finish low – or at least lower than it would have finished if it had started high.



Footnotes

[1] Please note that even if you choose to pay for such a Valuation – it cannot be used for lending purposes and the Lender will instruct their own Valuation specifically for mortgage purposes.

[2] Note that in Qld a vendor does not have to set a reserve and, even if they do, the Auctioneer does not have to announce when bidding has reached this price.


[3] In NSW and the ACT only one vendor bid is allowed by law.  In Qld any number of vendor bids are allowed until such time as the property reaches its reserve price (but remember no reserve needs to be set or announced).  In SA vendors may make a maximum of three bids.  In WA up to 10 vendor bids are allowed.  In Vic, Tas and the NT unlimited vendor bids are allowed.




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If you have been directed to this Fact Sheet by your Independent Mortgage Planner it is in order to allow you to review some relatively detailed considerations in your own time and at your own pace. Only any specific advice subsequently, or previously, provided by your Independent Mortgage Planner constitutes personal advice. In all other circumstances, the information provided in this Fact Sheet is general in nature only and does not constitute personal advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this Fact Sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to speak to an Independent Mortgage Planner. We provide Credit Advice only. You may also wish to seek appropriate legal, tax, and other professional advice.

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