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, buying a house at an auction can be scary for both seasoned investors and first home buyers. That is why you need to be well-versed in everything related to auctions, such as the rules, procedures, online auction bidding, and different strategies.
Top 6 Negotiating Tips For Home Buyers
How to negotiate at an auction? Learn with this strategy guide from an experienced property investor and founder of Home Loan Experts, Otto Dargan. Download it now.
How to Bid At An Auction?
Be Prepared
You must prepare your finances and obtain pre-approval before you bid at an auction. By doing so, you enter knowing what you can afford (and what you can’t). There is no cooling-off period at an auction, so you need to make sure you don’t overbid. If you do overbid, you might be compelled to break the contract of sale, for which you could incur financial or legal penalties. On the other hand, if you underestimate the property’s value and underbid, you might risk dropping out of the competition early.That is why you need to understand two crucial things from the beginning:your budget and the market.
Know Your Budget And Set Your Maximum
The primary purpose of an auction is to secure the highest price possible for the vendor. That is why you need to figure out your maximum and stick to it. By doing so, you can bid confidently and avoid falling into the trap of overbidding.If you need help to determine your full borrowing power, our expert brokers can help. Call Home Loan Experts on 1300 889 743 or fill in our free online assessment form today.
Know The Market Where You’re Bidding
The other crucial thing you need to understand is the market you’re targeting, so you have a good idea of what the property is worth relative to others in the same market. You can evaluate the market using various resources on the web to search for how much properties in the area have sold for in the past. You can also do your due diligence by ordering a building and pest inspection of the property. We can help by offering property or suburb reports, which provide crucial information.
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SIGN UP FOR FREEVisit Auctions As A Participant
Bidding at auctions is a skill. That’s why you need to attend as many as you can to build up your experience. Auctioneers set traps. They get buyers to bid faster and more by creating a highly competitive environment. You need to learn to resist temptation and stick to your budget and your strategy.By observing several auctions without participating, you can get a feel for auctioneers’ techniques. Then you should practise being logical and emotionally reserved during bidding.You can read about case studies of two auctions from early 2021 here.
Register to Bid and Arrive Early
You are legally required to register to bid at an auction. The procedure for this may vary from state to state. You may need to bring along a valid photo ID and proof of residency. After completing registration, you will receive a unique bidding number, which will be used to identify you and your bids during the auction. Arrive at least half an hour before the auction begins. During this time, you could perform a final inspection of the property and evaluate the environment, scouting your competitors, the auctioneer and the sellers. Remember to stay calm and organised.Bonus tip: Online auctions are becoming more common, especially as the COVID-19 pandemic continues. Read all about them here.
Keep Your Budget A Secret
Although you want to show the selling agent that you’re a serious buyer, you should remember to remain tight-lipped about your budget. If the selling agent or a competitor finds out your maximum, they can take advantage of that information.
Check if Sellers Are Accepting Offers Before Auction
Making a pre-auction offer gives you the chance to seal the deal before anyone else has an opportunity to bid. If a seller is accepting pre-auction offers, you can evaluate the reserve price and make an offer. If the seller agrees to it, they’ll invite you for further negotiation or to sign the contract. Here are some steps you can take to make sure the seller considers your offer:
- 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 sale
- Have your deposit ready
- Set a time limit
Keep in mind that you need to make sure the price you offer is close to the property’s reserve price. Also, get in early with your offer to avoid the competition.
Learn Your Competitors’ Bidding Style
As in any competition, being able to understand your competitors better will give you an advantage at an auction. Typically, there are three types of bidding styles that might help you read your competitors and adjust your bidding strategies:
| Auction Stereotype | Common behaviour | Pitfalls |
|---|---|---|
| The high roller | Raises the bids early to scare off other bidders. | May end up stretching their limit, and either run out of money or pay more than they should. |
| The waiter | Follows slow and steady strategy, and waits to see other bids 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. |
But before you can be wary of your competition, you need to be aware of yourself: practice your best ‘poker face’ to appear composed to your competitors, even if you are not.
An auction is more like a chess match than a Formula 1 race. You need to be strategic with your bids.The goal is to be the last one standing, with a final price that is low or at least reasonable. Here are a few bidding strategies that may help you:
| Strategy | Possible outcome | Best to use |
|---|---|---|
| Bid early and go strong | You will clear out some of your competitors quickly. | When there are many bidders. |
| Bid early and go slow | You will control the process more than the auctioneer, and exert some pressure on the seller. | When the number of bidders is low. |
| 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. | When you want to scare off another determined bidder with a big bid. |
| Bid in odd increments | You will slow the auction down a bit and throw a few bidders off their game. | When the price is climbing too quickly. |
Whatever strategy you employ, stay within your budget. The right bidding strategy will depend on the auction’s environment. For example, the auctioneer will try to create urgency and a buyer wanting to purchase at a lower price should attempt to counteract this by slowing the pace of the auction. Bidding in odd increments can accomplish this, as it takes time for the auctioneer to add up the numbers. That’s why it takes experience to know which strategy would work best for when. If you’re not confident to bid, you can also use a buyer’s agent who’ll bid for you.
Use A Buyer’s Agent
If you don’t feel confident bidding for yourself, or you want to remain anonymous, employ a buyer’s agent. They’re licensed professionals who purchase properties on a buyer’s behalf. You can read more about the pros and cons of a buyer’s agent here.Alternatively, you could ask a family member or friend you trust to bid on your behalf. Just remember to inform the auctioneer about it before the bidding starts.
Keep Calm and Bid Confidently
No amount of strategy or knowledge will matter if you get caught up in the urgency the auctioneer will create. Remember to be calm, controlled and call out your bid with confidence. It is not only the amount that you bid but how confidently you bid it that will matter.
Be Prepared To Walk Away
Sometimes the price just isn’t right for you at an auction. On those occasions, you must be prepared to walk away. Let a property go if you feel like the price has gone beyond good value or is out of your budget. This requires discipline but it is essential to success. There will always be another property.You can find more tips for negotiating on property here.
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 prices, 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 paperwork, 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 increases 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 no further bids can be accepted, and the highest bidder gets to buy the property.
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:
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.
After exchanging the signed contract and paying the deposit, you will have to:
Get a formal approval
Sit down with your mortgage broker and get 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.
We Can Help You Get Pre-approval Before The Auction
Secure pre-approval so you can bid with confidence. Our specialist mortgage brokers will show you the best lender for your situation. Just give us a call on 1300 889 743 or fill in our free online assessment form today.