Buying a house at auction in Australia can be as dramatic as it gets on the television.
For first home buyers, however, buying a house at auctions can be pretty unnerving given the bidding speed, the auctioneer’s rhythmic monotone and the competition among potential buyers.
So many first home buyers simply refrain from trying to buy homes at auctions thinking they won’t stand a chance against professional property investors.
But auctions need not be intimidating.
Actually, auctions can very well prove to be the right place to seal a sweet deal on a property for many first home buyers, provided they’re well-informed about how to buy properties at auctions.
Due to COVID-19, online auctions have become the norm due to social distancing measures. Learn more about how you can go through an online auction.
How does a real estate auction work in Australia?
A real estate auction involves public bidding for a property wherein that property is sold to the highest bidder. It’s a public trading event that is subject to strict rules, and typically carried out by a real estate agent, who acts as an auctioneer.
An advertisement campaign usually precedes a housing auction, followed by open house inspections.
For first home buyers, a housing auction usually involves registering for the auction, bidding for the property and signing the contract of sale.
On the auction day, the terms and conditions of the contract are typically on display on the location for the auction participants to have a final look at them. Once they start bidding on the property, they’ve practically accepted the terms of the contract and there is usually no further room for renegotiation.
How is an auction conducted in Australia?
Here is the step by step auction process in Australia:
- The house is marketed and advertised with the date and time of the auction. In Australia, property auctions are a public event that’s , typically, held on site.
- Marketing campaigns are soon followed by open house inspections. Generally, the house being auctioned is open for around four weeks for inspections. But the timeline may vary depending on the seller.
- An auctioneer, usually hired by the vendor, conducts the auction on the auction day.
- To participate or bid at an auction, potential buyers must register with the seller’s agent and receive a unique bidder’s number.
- At an auction, prospective buyers bid increasingly high price, competing against one another, until the highest bidder emerges at the end.
- The highest bidder, then, buys the house at the auction provided the highest bid exceeds or reaches the reserve price. Otherwise the house is ‘passed in’.
- If the house is ’passed in’, the highest bidder then has the right to make the first offer on that house.
*These are the general steps for auctioning a property in Australia. However, individual state law may slightly vary and require additional steps for the auction.
Are you familiar with common auction terms?
There are several jargons associated with property auctions.
Understanding these auction terms will make your life a lot easier, if you are planning to buy a property at auctions.
Some of the commonly used auction terms are:
- Bidder’s guide: It’s a document that the auctioneer provides potential buyers before the auction. A bidder’s guide contains details about registration, necessary paperworks, the rules and bylaws of the auction and privacy laws.
- Reserve price: Set by the vendor or seller prior to the auction, reserve price refers to the minimum price that the vendor is willing to accept for the property. When the bidding fails to meet the reserve price, the property is ‘passed in’, and the vendor has the right to either decrease the reserve price or pull the property off the auction.
- Vendor bid: It’s the bid placed by the auctioneer on behalf of the vendor, usually, before the property reaches its reserve price. A vendor’s bid can only be made once and must be announced by the auctioneer.
- Dummy bid: It’s a dishonest bid made by a non-genuine buyer aimed at pushing the bid price up. If proven, dummy bids attract severe legal penalties to the vendor, the bidder or the agent, whoever is deemed responsible.
- Rises and advances: Generally decided by the auctioneer, it is the amount of money by which the biddings increase at the auction.
- On the market: It’s that point during the auction when the bids reach the reserve price, and the auctioneer formally announces that the auction is ‘live’ or the property is ‘on the market’.
- Passed in: It refers to the situation where price bids fail to reach the reserve price. As a result, the vendor or auctioneer either withdraws the property from the auction or gives the highest bidder a chance to negotiate the sale of that property.
- Successful bidder: A successful bidder is the one who has placed the highest bid at the ‘fall of the hammer’, and is then obliged to sign the contract of sale.
- Fall of the hammer: The auctioneer will call for final bids at the end of the auction. When potential buyers stop bidding, the auctioneer will count down the ‘fall of the hammer’, after which the no further bids can be accepted, and the highest bidder gets to buy the property.
Do you know auction rules?
How a real estate auction is conducted may differ from state to state in Australia.
So what’s a commonly accepted rule in one state may actually be illegal in another state. It is, thus, a wise idea to consult the auctioneer or your solicitor for the specific rules and bylaws prior to bidding.
The other thing you could do is refer to the website of the office of fair trading in your state as they also provide general information about the auction process.
Some of the basic rules that govern the property auctions in all Australian states are:
- Auctions are unconditional and legally binding. What that means is the successful bidder is legally mandated to buy the property at auction and the terms on the contract of sale cannot be changed.
- Auctions never offer a cooling-off period to the successful bidder . So the highest bidder must make the 10% deposit and doesn’t have time to reconsider the house purchase after the exchange of contracts.
What is the difference between an auction and a private sale?
While housing auctions are a big thing in the capital cities across Australia, most properties sales occur via a private sale. For a quick comparison, private sale accounts for almost 80% of all property sales in Australia whereas auction only accounts for about 20% of the total property sales.
But, if you’re buying a property somewhere in the capital cities like Sydney and Melbourne, you may have no other way but attend an auction to buy your dream home as almost all properties there are sold at auctions.
The key differences between an auction and a private sale are:
|Auction has a fixed time limit for the sale of property. If you’re the successful bidder, you will sign and exchange contracts on the auction date, soon followed by settlement on a later date.||Private sale may not have a fixed time limit for the sale of property. As a first home buyer, you may find this way of buying a house quite time-consuming, bureaucratic and frustrating.|
|Once signed and exchanged, the contract of sale is legally binding and enforceable. It means you cannot withdraw from the purchase for any reason, if you win at auction. There is, thus, no such thing as a cooling off period or a finance clause.||Private sales offer a cooling-off period, usually 5-days, after the exchange of the contract, which allows you, as a buyer, to withdraw from the purchase for any reason. The cooling-off period may also be slightly longer in certain cases.
It also has an option for a finance clause, which allows you to cancel the purchase, if you can’t get loan approval.
|Auction takes place in a public place and offers less privacy for both parties involved.||Private sale occurs between a seller and a buyer through private negotiation, thus, offering much privacy.|
|Auction creates a sense of urgency in buyers’ minds, which makes them more competitive and emotional. That, in turn, leads to fuzzy thinking and reckless decisions at auction.||Private sale allows you all the time in the world to carefully go through every step of the home buying process. That is quite important for most first home buyers with little property buying experience.|
|Competition fuelled by high property demand can easily, and significantly, drive the property auction price up.||The property price may rise or decline depending on the broader market trends, and the number of offers they recieve.|
|Auction has a reserve price, which is the minimum price that the seller will accept. It is not subject to any negotiation with the buyer.||Private sale has an asking price, which is the ideal price that the seller will accept for the property. It is subject to negotiation with the buyer.|
|A successful auction generally requires a good, expensive marketing campaign.||A modest marketing campaign may suffice for a private sale.|
What are the pros and cons of auction?
Despite its rising popularity in the capital cities, an auction does come with its own set of benefits and risks.
Here are some of the pros and cons of auction in Australia:
|Pros of auction||Cons of auction|
|Sellers cannot gazump you. Gazumping is when sellers accept a higher offer from another buyer after having accepted your offer first.||If you are the successful bidder, you are legally bound to buy the auctioned house. There is no cooling-off period at auctions.|
|Although you’re unaware of the reserve price, buyers may still have a good chance of winning an auction and buying your first home at a price below or slightly above the reserve price.
It happens when the biddings are slow or the demand for that house is low on the auction day.
Also when the property is ‘passed in’, i.e. bids fail to reach the reserve price, buyers can end up with a bargain.
|It offers sellers a lot of leverage as they can set a secret minimum acceptable price at their own discretion.
As a first home buyer, you have less experience and little resource to make an estimate of the reserve price, which could affect your budget calculations for auction.
Also, competitive bidding and high housing demand may unnecessarily drive up the property price at auctions.
|Buyers can purchase the property at a price that is determined at auction by the intensity of demand and competitive biddings on the auction day.||Buyers cannot keep the details of the sale private since property auctions in Australia are public events.|
|It really helps if you’re looking to buy a house quickly because auctions are a time-bound process. Contracts are signed on the same day and even the settlement takes around six weeks on average.||If you win the auction, you need to pay the deposit right away. So, make sure you have enough money for the deposit. And, going over your budget can spell big financial trouble for you.|
|You may buy a house at auction with finance pre-approval. If you’re a successful bidder, you still have some time to get a formal approval.||If you walk into an auction without a pre-approval, you are unnecessarily taking a high risk. And, if you win the auction, you will find yourself in significant legal and financial trouble.
Even with a pre-approval, failing to secure a formal approval means you will end up losing your 10% deposit. The contract of sale at auction is unconditional on finance approval.
|Sellers allow for the physical inspection of the house weeks prior to auction. Even on the auction date, inspections may be allowed at least half an hour prior to the start of the auction.
So, you have ample time and opportunity to change your mind based on the unsatisfactory building and pest reports before the auction.
|Ordering building and pest reports may cost several hundred dollars and take upwards of one week to complete. Some first home buyers, with no experience of buying at auction, may even forget or delay ordering these reports.
You cannot change or decline the contract based on the post-auction inspections. Also, for unsuccessful bidders, the cost of these inspections will be a loss.
How to prepare for an auction?
An auction can be a lot more stressful and riskier than a private sale.
Walk into an auction confidently by following these steps:
Step 1: Research
Buying your first home at an auction without prior research is like trying to cross a road blindfolded; you may succeed at crossing the road safely but will you take that chance?
So, do thorough research about the property. Since you will not know the exact reserve price, you will need to check and compare the past sales report for that property. You may also want to check out the neighborhood and the suburb, not just to calculate the possible property value but also to ensure that you’ve found the right property that suits your living standards.
Keep track of recent sales activity, clearance rates and price trends around that area. The upward trend in property sales and listings, price and clearance rate may be an indication of higher housing demand, and, thus, higher property value.
For instance, in the last week of February 2020, there were 2,444 properties listed for auction across all the capital cities in Australia with a preliminary clearance rate of 77.7%, according to CoreLogic data. In comparison, over the same week in 2019, auction listings were lower with only 2,293 properties going up for auction with a final auction clearance rate of merely 49.4%.
We recommend you refer to CoreLogic since they are the leading authority on property data. However, accessing those requires a fee. So, why not start with other sites like Realstate or Domain that also refer to the CoreLogic data.
A good way to go about researching properties is to go through property and suburb reports. We have subscribed to several property market and suburb reports. So we may be able to provide you free reports on a specific property and suburb. Please give us a call on 1300 889 743 or fill in our online enquiry form today in order to get your hands on one of those free reports.
Step 2: Get a feel for the auction
Before you even intend to bid at an auction, you may want to have a good sense of what actually happens at auctions.
Auctioneers often play with the psychology of the potential buyers to raise the stake as high as possible. They create a highly competitive atmosphere and most bidders succumb to it, thereby, bidding more and fast, pushing the property price up.
By observing several auctions, you will see through the hypnotic monotone of the auctioneer and the ego-fuelled biddings of the buyers. That way, you can be more objective and practical about buying a house at an auction.
Step 3: Assemble your team
Experienced property investors usually have a team of professionals guiding them.
Chances are you will be up against these investors at an auction. So, it is advisable that you also set up your own team of professionals.
Hiring their services will cost you additional money but they will ensure that you will buy your first home without any hassle at an auction.
The people that you ideally want to hire to help you out with an auction are:
- Solicitor or conveyancer: A solicitor is a legal practitioner who handles all your legal matters, including reviewing and filling up paperwork, when buying a house. A conveyancer, on the other hand, is a licensed professional who explicitly deals with the formal process of transferring title deeds along with ensuring the accuracy and feasibility of contractual terms of housing sale. You may want one of them to review the contract of sale, terms and conditions of the auction, and check the title deed of the house.
- A building and pest inspector: A professional who will provide you with detailed and accurate reports on the structural safety and any pest issues related to the house. You would want to have them inspect the house and send you the building and pest reports prior to the auction.
- Buyer’s agent: A real estate professional who specialises on buying houses on behalf of other buyers based on the latter’s needs. You can use a buyer’s agent, if you are reluctant to directly bid at an auction.
- Mortgage broker: An intermediary between buyers and lenders when choosing and applying for a home loan. A mortgage broker can be your best friend when it comes to buying a house in Australia.
We are specialist mortgage brokers with years of experience and proven track record in applying and settling tough home loans. If you would like us to help you with your home loan application, please give us a call on 1300 889 743 or complete our free, no obligation enquiry form, and one of our senior mortgage brokers will soon be in touch with you.
Step 4: Get your pre-approval
A pre-approval is a free, conditional approval, which is an indication from your lender that they will approve your loan when you formally apply for a mortgage. It’s based on your income, assets, debts and liabilities.
If you want to bid for a house at an auction, you may want to get a written pre-approval first. It will tell you how much you can afford to spend so you can make an informed decision when bidding at an auction.
Also, it will make things easier when applying for a full mortgage later, if you’re the successful bidder.
Many buyers attending auction simply ignore getting a pre-approval, which may cause unwanted frustrations when it comes to securing the additional finance for the property. As a result, many of them end up forfeiting their 10% deposit.
Don’t risk losing your deposit at auction!
Our mortgage brokers have worked in the credit department for major lenders. They know very well which banks offer a reliable pre-approval and how to get them to fully assess your application.
Please complete our free assessment form or call us on 1300 889 743 and one of our mortgage brokers can make sure you get the finance you need to purchase a property.
Step 5: Order building and pest inspections
A major risk of buying at housing auctions is the uncertainty of the physical condition of the property.
To avoid unwanted hassle of repairs and pests, you need to arrange for building and pest inspections well before the auction date to ensure you have completed your due diligence.
While building reports cost several hundred dollars depending on the charm of the neighborhood, pest reports only cost a couple of hundred dollars.
But both might take around a week before you can get your hands on them so you might want to expedite all necessary inspections.
Ensuring everything is in the right order will help you save money on repairs and installation of unavailable utilities.
Finding safety hazards and missing utilities post-auction means you will be liable for them, not the seller.
Step 6: Get your minimum deposit ready
At the end of the auction, the successful bidder is promptly required to sign and exchange the contract of sale, and also pay a 10% of the property price as a deposit.
But before the fall of the hammer, it is quite impossible to predict the exact property value.
So, if you’re serious about bidding at an auction, you need to secure enough funds for the deposit. And, by enough, we mean more than 10% of the average median house price around the auction area.
The seller may agree to a partial-deposit, usually 5%, but that’s very rare, and needs a change in the contract of sale, which most sellers don’t normally prefer to do.
So, the only sure-shot way of securing your first home after winning an auction is to be able to make the deposit required by the contract.
You can make the deposit at an auction by:
- Personal or bank cheque.
- Electronic funds transfer (EFT), if permitted by the seller, followed by an email confirmation to the auctioneer and the seller.
- Deposit bonds But not all sellers will accept a deposit bond so you will have to confirm with the auctioneer about that.
- Cold hard cash, which is what many sellers and agents prefer.
You may want to have a conversation regarding this with the solicitor or the agent of the seller prior to the auction day.
What to do during an auction?
The air at an auction may be full of competition, urgency and stress — a trifecta that may very well lead to a misjudged decision on your part. The buyers prone to this are usually the first home buyers with little or no real experience of buying a house at auction.
If you want to have an exciting, stress-free auction experience, and increase the odds of you winning, consider following these tips:
Tip 1: Arrive early
The bidders guide will have the information about where and when an auction will take place.
Try to reach, at least, half an hour before an auction begins. That way, you will have ample time for final inspection of the property and to complete any paperworks, if necessary.
It will also help you scan your competitors, the auctioneer and the sellers, if you’re good at reading faces. Most importantly, you will have some time to settle down, organise yourself and gather your thoughts.
Tip 2: Register to bid
Although the rules for registration may vary from state to state, all auctions require you to register to bid. You may need to bring along a valid photo-id for identification purposes, and register with the auctioneer before the auction because only the registered bidders are allowed to bid at an auction.
It’s a legal requirement that you cannot escape.
You will then receive a unique bidding number, which will be used to identify you and your bids during the auction.
Tip 3: Make a pre-auction offer
Some sellers tend to consider pre-auction offers.
Check if the sellers are accepting offers before the auction. If they are, it could be worthwhile to make such offers because when your pre-auction offer is above the reserve price, the sellers may sometimes agree to it, and invite you for further negotiation or signing the contract.
To make a strong, to-the-point pre-auction offer, follow these steps:
- Submit your pre-auction offer in writing with details such as purchase price, deposit amount, mortgage amount, settlement date and other relevant information.
- Draft and sign the contract for the same.
- Have your deposit ready.
- Set a time limit.
The common reason why some buyers make a pre-auction offer is because they absolutely want to buy a particular property before anyone else has a chance to even bid on it during the auction.
When you’re sure about making a pre-auction offer, you need to:
- Make sure the price is right: Do your research and figure out a tentative market value of the property. This will allow you to make an offer that is close to the reserve price of the property. Don’t make a mistake of offering a price that is either way below or way above the reserve price. If your pre-auction offer is too low, the seller will not take your offer seriously. And, if your offer is too high, the seller may jump right in and you might get ripped off.
- Get your timing right: If you make a strong pre-auction offer too early, you can dodge most the competition and land the property of your dreams. But you need strong research in order to do that. Alternatively, you can also make a pre-auction offer at the eleventh hour by figuring out what other pre-auction offers for that property have been rejected. Although the selling agent will not reveal the exact reserve price, they may just be able to tell you what offers were rejected.
- Sign and exchange the contract of sale with the seller.
You may want to take a final look at the contract before you sign it. Generally, you may not make additional changes to the terms on the contract. But, say, you want a slightly longer settlement period. This is the time when you want to make that request to the seller. Usually, the sellers don’t accept last minute changes but you never know when it’s your lucky day.
- Pay the deposit amount.
It’s typically 10% of the final property value, which you can pay with a cheque or a deposit bond. Some may even prefer cash payment.
- Get your new property insured immediately.
You may want to check with the seller if they are willing to continue the insurance title on the property. If they don’t, you might want to get your new house insured right away.
- Get a formal approval
Sit down with your mortgage broker and get a formal approval from your lender as soon as possible. You normally have 28 days from the auction date to settle your new house.
- Settle the property
On the day of settlement, you will need to pay the balance of the purchase, stamp duty and legal fees, after which the property is formally, and finally, yours.
If the seller accepts your pre-auction offer, what unfolds next is a home buying process much similar to a private treaty.
Tip 4: Know your budget
Assuming you have your pre-approval, you know how much you can afford to pay for a property.
However, it is also a good idea to calculate what the property is actually worth in the market so that you don’t end up paying more than what you need to. It is always better to decide on a price ceiling for the property based on the market value of similar properties in that neighborhood.
Once you figure out your maximum limit, you need to stick to it. Auctions can be emotionally charged and the auctioneer may toy around with your psychology, so knowing your limit not only makes your bids sound more confident but also keeps you from getting carried away, and bidding more than you can actually pay.
As the contract of sale during an auction is legally binding, going over your budget may put you on a difficult spot wherein you won’t be able to purchase the property and, hence, end up losing your deposit.
Pro tip for first home buyers
Keep your budget a secret. If you reveal an auctioneer or a sellers agent your maximum limit, they may try to push the property price as high as your upper limit.
Tip 5: Read your competition
If you’re bidding to win, you need to be aware of your competition as well as their every move will collectively determine the final price of the property. Knowing them and their weakness will put you on a higher ground.
Typically, you will spot three types of auction stereotypes for your competitors at any auction:
|Auction Stereotype||Common behaviour||Pitfalls|
|The high roller||Raises the bids too early to scare off other bidders.||May end up overstretching their limit, and either run out of money or end up paying more than they should.|
|The waiter||Follows slow and steady strategy, and waits and sees other bid first.||More likely to exhaust themselves by having to make higher bids towards the end of an auction.|
|The rookie||Makes random bids too frequently.||Often frustrates and confuses everyone at the auction, and doesn’t succeed at buying the house at an auction.|
For a better odds at winning an auction, reading the body language of other registered bidders is quite important.
Seeing right through their strategies comes in handy but it’s an ability that comes only with experience.
Pro tip for first home buyers
First home buyers can adopt a combination of a high-roller strategy and a waiter strategy.
That way you can stay level-headed and gain more control of an auction. And, you will also keep yourself from going over your budget.
Tip 6: Come up with a bidding strategy
Once the bidding war starts, you may want to put yourself in a strong position.
Ideally, you want to more or less control the situation, know your competition, be comfortable and confident about your bids, and draw out the process to possibly create pressure on the seller.
The main idea is to keep the auction bid as low as possible and interrupt the strategies of the your competing bidders.
A few bidding strategies that you may help you are:
|Bid early and go strong||You will clear out some of your competitors early at the auction.|
|Bid early and go slow||You will control the process more than the auctioneer, and exert some pressure on the seller.|
|Bid late and go strong||You will be able to scan your competition, and bid decisively towards the end but you may overstretch your budget as the bids tend to get higher towards the end of the auction.|
|Bid in odd increments||You will slow the auction down a bit and throw a few bidders off their game.|
|Don’t go past your budget||You will spare yourself a huge financial setback by staying within your budget, even if you don’t win the property at the auction.|
Tip 7: Keep calm and bid confidently
The key focus of an auctioneer is to create a sense of urgency in the middle of an emotionally-charged, psychologically stressful process where, for most buyers, things do tend to get too overwhelming, too quickly.
So when push comes to shove, don’t get too excited or too intimidated by the speed of things and the way others bid. Instead of getting carried away, try to bid with a clear, commanding voice and show a firm, confident attitude at an auction.
Doing so will create a bold impression of you on to other bidders. It will also ensure that the auctioneer and the seller hear you loud and clear the first time no matter how closer or farther you’re standing from them.
What may help, other than remembering to stay calm, is carrying a bottle of chilled water and breathing deeply.
Tip 8: Use a buyer’s agent
While most buyers will eventually get the hang of it, for some, auctions may be utterly terrifying.
If you’re too squeamish about going head-to-head with experienced property investors, or want to keep your identity a secret for some reason, you may want to consider hiring a professional buyer’s agent.
A buyer’s agent is a licensed professional who buys properties on a buyer’s behalf.
With years of experience, they are pretty good at their game. They will understand your financial situation and stay on your budget. They are also resistant to the auction strategies that the bidders and auctioneers use.
But if you don’t want to pay for the services of a buyer’s agent, you can also ask a family member or a friend to bid on your behalf. But make sure you trust them and do let the auctioneer know before the biddings start.
Tip 9: Be prepared to walk away
Many times, you won’t be successful at landing the property. Sometimes, you will have second thoughts.
But don’t let that discourage you.
Remember, a good buyer always knows when to walk away from an auction.
There are plenty more fish in the sea, and it makes less sense giving into your primal instincts of outbidding the other humans.
What to do after an auction?
An auction, if there’s no dispute, ends with the fall of the hammer.
The highest bid when the hammer falls is considered the final value of the property, and the buyer who made that bid, now, has a legal obligation to purchase the auctioned property.
If you’re the successful bidder at an auction, you will immediately have to:
After exchanging the signed contract and paying the deposit, you will have to:
What happens when the property ‘passes in’?
Not all auctions end with a successful bidder buying the house.
When bids fail to reach reserve price, sellers may pull their property off auction. They will then approach the highest bidder to make an offer for the property.
With acceptable offers, sellers will continue with property sale.
Pro tip for first home buyers
This is when you can potentially land your first home at a bargain.
If you’re the highest bidder for a house that was passed in at auction, you may be able to negotiate a price that’s around or below the seller’s reserve price.
Are you buying your first home at auction?
Auctions can intimidate even seasoned property investors, let alone first home buyers. But if you’ve made up your mind about buying your first home at an auction, you would want to secure a reliable pre-approval from one of the major lenders.
Your pre-approval is your lender informally telling you how much money you can afford to borrow based on your situation. Trying to buy a property without a pre-approval, particularly at an auction, can be a major financial misstep that may ruin your future.
That’s where our specialist mortgage brokers come in with their years of experience and strong bargaining power. They know which lenders will best suit your situation and mortgage requirements. To speak with one of our senior mortgage brokers, give us a call on 1300 889 743 or simply fill in our free online assessment form today.