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.
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There’s a lot to prepare, as you need to familiarise with the process and get your finance ready. Here are some key things that you should know about a property auction:

How does it work?

The auction is led by an auctioneer who is hired by the vendor or their real estate agent. You need to register with the auctioneer. They 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 gets 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 to be "on the market" and will be sold to the highest bidder. If the reserve is not reached, then the property is ‘passed in’ or ‘withdrawn from auction’ and the highest bidder has the right to negotiate with the seller to make a private sale.

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 the contract has been signed by both the buyer and the seller, and all relevant payments have been made.

What to do BEFORE the auction?

1. Inspect the property and do your research. This is imperative before going into an auction so you’ll get a realistic understanding of the value of the property.

2. Check the building and pest report. Some agents prepare this prior to an auction, and if they haven't, ask them for one.

3. Arrange your finances. Ask your lender how much you can borrow. Get your loan pre-approved, and make sure that you have enough in your bank account to write your deposit cheque.

4. Ask for legal advice. Have your solicitor review the contract of sale in case you’re the successful bidder.

Write down all the things your second home must have, or offer the potential to have, for example an ensuite or fourth bedroom. Writing down your must-haves will help you stay focused when it comes to finding a house to suit your needs.

What to do DURING the auction?

Set yourself a budget limit and stick to it. Don’t bid more than your budget. Be confident and clear, and don’t get too caught up in emotion.

Property auction terms you should 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, 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 but the practice still persists.
  • 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 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 auction. If you do not feel confident, consider using a professional buyer's agent to bid on your behalf for a fee.

Tags: buying home at auction

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