How does a property auction work?

When it comes to buying a house at auction 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 do property auctions 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If the reserve is not reached, then the property is ‘passed in’ or ‘withdrawn from auction’ and the highest bidder has the right to negotiate with the seller to make a private sale.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.

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.

Our Tips For Auction Day

1. Arrive early

Arriving early gives you an opportunity to position yourself towards the front of the auction, preferably near the auctioneer.

Being in front also gives 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.

2. Don't bid until the property is "on the market"

Never bid until the property reaches its reserve price. If the auctioneer hasn't said anything, don't be shy about asking mid-way through the auction "is the property on the market."

Until then, it is not for sale and you are just increasing the hype around the property and building the price. No matter how much pressure you receive from the auctioneer, do not play into their hands by bidding too soon.

3. Call out your bids in full numbers

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.

4. Slow the bidding

Slowing the bidding is a strategy you can use 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.

5. 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.

Final thoughts

Using the right strategies can reduce the price you pay on auction day but to bid with confidence you need to be well prepared.

Do your research, inspect the property, have your home loan pre-approved, and make sure you have enough money to supply the deposit on the day if you win.