When it comes to buying real estate, there are two main options available to potential buyers: auction or private treaty. While both methods have their own pros and cons, it can be important for buyers to understand the differences between the two in order to make an informed decision.
Here's a comparison of auction versus private treaty, and how to work out which option you'd prefer.
Buying a home through private treaty
Private treaty is a more traditional method of buying real estate, where the seller sets the sale price and the real estate agent negotiates with interested buyers to achieve the best possible price. For example, if a property is listed for sale at $599,000, the agent will try to secure a sale contract close to that price or as high as they can.
This method allows for pre-sale inspections, negotiations (regarding price and terms), and gives the buyer the opportunity to make an informed decision about the property.
Private treaties tend to be a slower, and less emotional process than buying at auction as there is usually no deadline for the sale to be completed.
The pros of private treaty
- Opportunity for pre-sale inspections and negotiation.
- Ability to acquire a property at a fair market value.
- Can make a conditional offer - this means you agree to buy the property, but your offer is subject to certain conditions e.g. building and pest inspection.
- Less risk of overpaying as buyers have more time to consider their options and the local market.
- May have the benefit of a cooling-off period - back out of the purchase even after you’ve signed the contract.
- You’re less likely to be adversely influenced by the auction environment and make offers beyond what you can afford.
The cons of private treaty
- As a private treaty tends to be a slow process, it means the sale may not be completed for several weeks or months.
- You can be at risk of being ‘gazumped’ - this is where the vendor accepts a better offer and sells the property to another party. No sale is a done deal until the contract is signed and deposit paid.
Buying a home at auction
A property auction is a fast-paced process where the property is sold to the highest bidder. The speed of the process makes it an attractive option for those who want to acquire a property quickly and without delay. This can be especially appealing to buyers who are looking to avoid lengthy negotiations or the risk of the sale falling through.
The auction process is typically less complicated than private treaty and the sale is usually completed on the day of the auction. When the hammer falls, there is no option for a cooling-off period. If you are the successful bidder, you will have to settle the contract even if:
- The house doesn’t pass inspections
- You change your mind
- You can’t afford it
The nature of auctions also means that the price is gauged by the crowd, rather than dictated by a seller.
If you are considering buying at auction, it can be beneficial to see some auctions yourself to learn the ropes.
The pros of an auction
- The speed and certainty of the sale - if that’s something you’re looking for.
- You get to see your competition and really gauge what the property is worth.
- Transparent way of securing a property - everything is laid on the table on the day.
The cons of an auction
- There is a risk of overpaying if you don’t do your own research on the recent sales in the area.
- No opportunity for pre-sale inspection or negotiation.
- The frantic nature of an auction could throw a bidder off.
- If a bidder is successful, they are committed to purchasing the property, regardless of any issues that may arise.
How to prepare for an auction
Here are some tips to keep in mind to prepare you for buying a property at auction:
Research the market
Start by researching the real estate market in the area where the property is located. Look at the current market trends, recent sales prices, and the demand for properties in that area. It’s no guarantee, but doing some of your own due-diligence can help you avoid lining up for a home that’s beyond your budget.
Familiarise yourself with the auction process
Understand the rules and regulations of the auction, including:
- The bidding process
- Vendor bids
- Rises and advances
- Reserves
- Payment and closing procedures
Get a pre-auction inspection
Before the auction, it’s advisable to have a professional inspector assess the property - especially if you’re seriously considering purchasing the home. This will give you a better understanding of its condition and any potential repairs that may be required.
Set a bidding limit
Determine how much you are willing to spend and stick to it - you want to avoid overpaying. Make sure to factor in the cost of repairs, renovations, and any other expenses that may arise after the purchase.
Get your finances in check
If you plan to finance your purchase with a mortgage, it’s important to get pre-approved before the auction. This will give you a better idea of how much you can afford to spend and will also help you to bid with confidence.
Attend other auctions
Attend a few other property auctions before the one you plan to bid on. This will give you a better understanding of the bidding process and the type of properties that are typically sold at auctions.
It will also help you identify and understand how auctioneers work and the tricks they use to play in bidder emotions.
Have the contract reviewed
Before auction day, ensure the contract of sale is reviewed by your solicitor or conveyancer. It gives you a chance to ensure everything is in order and whether there are any conditions that may not be in your favour.
If you’re the successful bidder at an auction, you’ll have to sign the sale contract and typically provide a 10% deposit on the spot. Your solicitor or conveyancer will then carry out the research needed on the property and arrange the settlement date.
Tips for a successful private treaty purchase
If you’re going to buy through private treaty, consider the following:
- Do your research: Have a look at recent, comparable sales in the area so you can get an idea of what you really should be paying. Also consider researching the neighbourhoods surrounding amenities and whether it appeals to your needs.
- Negotiate the price: Private treaty purchases often involve negotiations, so it's important to understand the market and be prepared to negotiate to get the best deal possible.
- Get your finances in order: Obtaining pre-approval prior to purchasing a home ensures you’ll likely be accepted by the lender and also helps you buy with confidence.
- Stick to your guns: While you need to be prepared to go back and forth on some elements of the contract, stick to your plan and don’t settle for less.
- Set terms and conditions: When you submit an offer, you can include conditions for the sale. For instance, it could be a subject to finance clause, or it could be that the owner needs to fix a specific part of the home e.g. shower. Get these put in writing to avoid any hassles on the settlement date.
If you’re in need of conditional approval for a low rate home loan, so you can make an offer with confidence, have a chat with our friendly lending specialists to get the ball rolling.
