How does a property auction work?
Buying a house in Australia through a property auction can get very stressful especially if you don’t know how the system works.
There’s a lot you need to do when buying a house at auction, from familiarising yourself with the process to getting your finances ready. Here are some key things that you should know:
How does a property auction work?
An auction is where buyers can publicly bid for a property. Unlike a private sale, where the buyer and seller can go back and forth to negotiate the terms, auctions are more fast-paced and direct. Bidders compete with each other until the hammer falls. If you have the highest bid at the end, you need to sign the sale contract on the day.
Auctions are led by an auctioneer who is hired by the seller or their real estate agent. The auctioneer will give you a bidder’s number, and they will manage the bidding process where buyers or bidders compete against each other by increasing their offers until the property is sold to the highest bidder.
The seller of the house usually has a reserve price, which is the minimum price that they will sell the property for at auction. If the reserve price of the property has been reached, it is considered "on the market" and will be sold to the highest bidder.
After the bidding, the successful bidder is required to pay an immediate deposit, which is typically 5% to 10% of the purchase price. This is usually paid by cheque.
The balance of the purchase price will be paid at settlement. The sale is settled once both the buyer and the seller have signed the contract, and all relevant payments have been made.
Property auction terms you should know
There is a lot of jargon used during an auction. Novice buyers may feel overwhelmed by so many unknown words and phrases being thrown around. To avoid confusion, here are some auction terminologies you need to know:
- Reserve price - This is the minimum price set by the seller that they will accept.
- Passed in - If the bids failed to reach the reserve price set by the seller, then the auction is ‘passed in’. The highest bidder will then get to negotiate with the seller to conclude a sale.
- Hammer falls - When the auction is close to an end, the auctioneer will signal the ‘fall of the hammer’, calling for any final bids. After the fall of the hammer, no bids will be accepted.
- Bidder guide - Given before the auction, this contains information on how to register, the needed paperwork, rules and regulations, and privacy laws of the auction.
- Dummy bids - These are bids by false bidders hired by the vendor to inflate the price of the property. Dummy bidding is illegal in Australia.
- Vendor bids - This is a single bid made by the auctioneer on behalf of the seller to help reach the reserve price.
Buying a property at the auction in Australia for a fair price requires a lot of research. As each state and territory in Australia has its own set of auction rules and regulations, it’s best to familiarise yourself with these before bidding at the auction.
What to do before the auction?
Auctions are more than just showing up on the day of and outbidding everyone else. For a successful day at the auction, you need to come prepared. Here are a few things you need to do:
Do your research
At auctions, all sales are final. There’s no room for negotiations once that hammer falls. If yours is the highest bid, you can’t walk that price down or change your mind later. This is why you need to have a realistic understanding of average property values before you even set foot on the auction floor.
Look at previous sales in the area to get an idea of house prices. You can also get a suburb report or a property report for more information.
Inspect the property
Properties sold at auctions are bought as-is, where-is. It’s essential to visit the property beforehand to assess its condition and identify any potential issues. You should also check the building and pest report to avoid nasty surprises. Some agents prepare this before an auction, and if they haven't, ask them for one.
Arrange your finances
Properties are sold on an unconditional basis at auctions. If your finances don’t push through, you’re still on the hook for the property. To avoid any hiccups, it’s best to arrange your financing before the auction date. Speak with your property advisor or financial planner before the auction. Get your loan pre-approved, and make sure that you have enough in your bank account to write your deposit cheque.
You can ask your lender how much you can borrow so you can have a clear limit while bidding. Start arranging your finances today by reviewing your home loan options. Speak with our friendly lending specialists by calling 1300 528 731 to learn more. Or kick off the home loan application process by applying online today!
What to do on the day of the auction?
Using the right strategies can reduce the price you pay on auction day, but to bid with confidence, you need to be well prepared. Here are a few tips to help you at the auction:
Arrive early
Arriving early allows you to position yourself towards the front of the auction, giving you a better view of your competition, so you can see who you are bidding against. This also lets people know that you’re confident, experienced, and you’re prepared to bid.
Be Clear with your bids
Don’t call out your bids in increments, like "$1,000"; instead, you should state the full amount, "$501,000". This way, your competitors know the exact number they're bidding against. Be sure that you fully articulate your bids confidently.
Consider your bidding strategy
Slowing the bidding is a strategy often used to stay within the limit of your auction budget. If the auctioneer calls out for $5,000 bids, you can offer $1,000 or $2,500 so that the momentum is slowed.
Don't get emotional
If you know you can't handle the emotions and the stress of property auctions, you can have a buyer's agent, friend, or a family member who you can trust to do the bidding for you. You can advise them of your game plan and tell them your price limit. You can also use a professional buyer’s agent to bid on your behalf for a fee.
Know when to walk away
Set yourself a budget limit and stick to it. Don’t get caught up in the excitement and bid more than what you can comfortably afford. If the price is getting away from you, know when to step back and let the property go.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.
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