With the seemingly increasing popularity of selling by auction at the moment, we thought it would be handy to give you some tips if you are thinking about buying a property this way. Auctions are nerve-racking for sellers and prospective buyers alike so here are some useful tips for buyers:
1. Make sure that you have thoroughly reviewed the contract for sale and understand your legal obligations should you be the winner of the auction. Any amendments you wish to have made to the contract (such as the amount of deposit, settlement period, inclusions, etc.) need to be agreed between both parties’ legal representatives prior to the commencement of the auction. These changes need not apply other bidders, so various bidders may actually be bidding on differing terms.
2. Make sure that your financing is in order and that you are comfortable that your maximum purchase price is in line with the market. The auction sale is unconditional and you will be contractually obligated to come up with the full purchase price even if your lender withdraws financing or comes in with a valuation lower than the auction sale price.
3. Fully understand the rules of auction. Do you know the difference between a reserve and a vendor bid? Do you know who, when and how the reserve is decided? Are you aware that a reserve can be changed at any point in time during the course of the auction so long as instructions are given to the auctioneer in writing (or even in some cases verbally)? These are just some of the very basic auction procedures that many buyers are not aware of.
4. This may sound basic, but have a personal cheque book ready if you intend to bid. If you win an auction, you will be expected to pay the deposit immediately. Many people these days don’t have cheque books and it can be quite time consuming and costly to arrange for a bank cheque each time you want to bid at an auction. In addition, you will not know the amount required for the deposit (usually 10% of sales price) prior to the conclusion of the auction, and most banks will be closed evening and Saturdays (when most auctions are held).
5. Having watched just a couple of auctions is not sufficient to become an expert on the auction process. As no two auctions (or auctioneers/selling agents) are ever alike, you need to really watch at least 15 to 20 auctions in your target area in order to be fully exposed to the workings of the different “actors” and possible scenarios that can unfold during an auction.
6. If you have observed many different auctions, you will become familiar with the style of the various auctioneers. This will enable you to better gauge how they like to control an auction and how serious they are when they say “first call” or “second call”, for example.
7. Although it may sound obvious, it is vital that every prospective buyer pre-determines the maximum price they would be willing to pay for the property. This price should be set the night before the auction and should be entirely independent of the likely level of competition on auction day or what other buyers may possibly bid. These are things which you have no control over and should not influence the price you are prepared to pay. The maximum price should only be linked to the market or appraised value of the property.
8. The maximum price you set should be the price that you would not regret, even if you were to lose the property for just $1,000, for example. This is your “walk away” price.
9. Once you have set your maximum price, don’t hesitate to bid. Many bidders try to play coy and shake their heads vigorously when they should actually be bidding confidently with each bid. If there are several other registered bidders you are likely to get the best outcome through the transparency of the auction bidding process, rather than behind closed doors and having to rely on the selling agent’s representations about the competition in the hours or days following auction. Note, however, that if there are few genuine parties registered, it may still be in your interest to let the auction fail to lower the vendor’s expectations.
10. Don’t go into an auction by treating the auctioneer as an adversary. He or she represents the seller and it is their job to extract the maximum bids. By all means stand your ground, but there is never any need to be rude during an auction.
11. Have an action plan in mind should the property be passed in. Many properties sell shortly after the auction behind closed doors, and this process is far less transparent.
12. Don’t be afraid of auctions. It is not as daunting as it seems if you understand how it can work in your favour as well. If the pace is going too fast for you, you can always try to slow it down so that it does not overwhelm you. While auctions always seem like it favours the vendors, this is not always the case. An auction can also be a good way to send a signal to the vendor that their price is unrealistic relative to the level of demand or to ensure transparency amongst the prospective purchasers.
As always, if in doubt, you can always seek expert advice and guidance. Experienced buyers’ agents attend and bid at auctions on a weekly basis and their knowledge and experience is far superior to the average bidder. They understand the rules of the game and how to best maximise the likely outcome of the auction on your behalf, no matter the scenario.
(Article from Property Observer and written by Oliver Stier, director of OH Property Group, a Sydney-based buyers agency. )