How does buying a home at auction work?
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How to win a house auction
In Australia, buying at auction is a common way to purchase property – particularly in capital cities such as Melbourne and Sydney. Auctions are governed by strict rules and the bidding process is public – meaning spectators not interested in purchasing the property are legally allowed to bear witness to the sale.
A garrulous real estate agent or auctioneer will usually conduct the auction and attempt to rally registered parties into a sort of wild, spending frenzy, aimed at advancing the sale price. If you are the successful bidder when “the hammer” falls (often a paddle or brochure held by the auctioneer) you win the property: you’ll be expected to sign the contract of sale and pay a 10% deposit on the spot.
Unlike private treaty sales, there’s no cooling off period, which means the highest bidder takes the property. This is why it is especially important to have pre-approval for your home loan prior to bidding.
Auction phrases to know:
- Reserve price
- Passed in
- Fall of the hammer
- Dummy bid
- Vendor’s bid
How does a real estate auction work?
The process may vary from state to state so it’s best to ask the real estate agent selling the property for guidelines on how to bid. The office of fair trading in your state will also have general information on the process.
According to the NSW office of fair trading, you will not be able to bid at an auction of residential and rural property in NSW unless you give the selling agent your name and address and show proof of your identity. Your details will be recorded by the agent in the Bidders Record and you will be given a bidder’s number. If you register early enough, you usually have the option to choose your own number. Hey, whatever works for you, although we all know the winning bidder is going to be the person with the most money – not the one who chose lucky number 13.
Also note that registering for an auction does not mean you must bid. Registering simply gives you the right to bid. Plenty of people register on the off chance the place won’t sell for as much as the seller is expecting it to, then fail to raise a single finger.
If you wish to bid but are unable to attend the auction on the day, you will need to register someone to bid on your behalf. This can be arranged via the seller’s agent prior to auction and usually involves signing a form giving someone else the authority to bid on your behalf (a friend or family member, the seller’s agent or a buyers agent). You will have to supply a copy of your driver’s licence and the person bidding on your behalf will have to have your deposit cheque with them on the day.
Many auctions are held at the property being sold – usually in the backyard (if there is one) or on the street out the front of the property – usually to entice nosy neighbours to the auction in order to make the property look more desirable than it is. Auctions on the premises usually secede a final inspection of the home, so you can do any last minute cupboard and water pressure checks and think about how much you’re willing to bid. Sometimes auctions are held in the evenings at the real estate agent’s premises. In this case, you’ll be seated in a room with a photo or photos of the property projected on a screen. The seller will often be hidden in a back room watching a screen of the action taking place. It’s like a big night out at the movies for everyone.
An auction tends to be an emotionally-charged event driven by an auctioneer whose purpose is to drive up the sale price as high as they can for the seller. The auctioneer will usually introduce themselves and talk about what a great property the one being sold is, and remind everyone there why they want to buy it. Some real estate agents will offer a bottle of champagne to the person who makes the opening bid, in order to kickstart proceedings. From there, registered bidders are encouraged to raise their paddle and call out a number they are willing to pay for the price. If the first number to be called is deemed too low by the auctioneer, they will ask for a higher bid. Similarly, if the price is going up in increments deemed too small for the auctioneer, they may ask for bids to only be made in certain increments, such as $10,000, $20,000 or $50,000. The auctioneer will make a final call for bids and count down the ‘fall of the hammer’. Once they yell out something like, “sold to the gentleman in the green fur coat”, no other bids can be made. The highest bidder is legally obliged to sign and exchange contracts and pay a deposit (usually 10%) immediately.
For a look at what the actual process can look like, here’s a video: https://www.youtube.com/watch?v=fWzeT06CNhE.
- Reserve price – the reserve price is set by the vendor (seller) before the auction and refers to the minimum price the vendor will accept by a bidder. If the property fails to reach the reserve price, the vendor has the option to lower the reserve price, or withdraw the property from auction.
- Passed in – if the vendor’s reserve price isn’t met, the auctioneer will do all they can to drum up more bids and raise the price. If this fails, the property may be ‘passed in’ or ‘withdrawn from auction’. The highest bidder is allowed to negotiate with the seller but both parties have to come to an agreement in order for the property to sell.
- Fall of the hammer – When it’s clear most parties have dropped out of the auction, the auctioneer will make a final call for bids, before counting down the ‘fall of the hammer’. This is when he or she will say things like, “going once, going twice” although auctioneers tend to drag out this process for as long as possible so it’s never really as urgent as you might think. Once the hammer has fallen, no bids can be made and the highest bidder is legally obliged to sign and exchange contracts.
- Dummy bid – a dummy bid is a false bid made by someone to create the impression there is more interest in the property than there actually is. It is illegal to make dummy bids.
- Vendor’s bid – The auctioneer is entitled to make one bid on behalf of the vendor (seller) which is known as the vendor’s bid. It is usually made to keep the auction moving, to up the price to persuade buyers to pay more, or, if the property is passed in, to end the auction on a higher price for the records.
Tips for buying property at auction
When it comes to buying property at auction, there are a number of things you can do to ensure you’re ready.
Do your research on the property and comparable sales. Don’t turn up expecting to grab a deal because you might not! By the same token, know your limit and stick to it.
Know how you will pay the deposit if you are successful. Speak to uno about Deposit Bonds.
Visit other auctions in the lead up to watch how it all works. It can be a daunting process.
Ask for a copy of the draft Contract of Sale and show it to your conveyancer/solicitor.
Obtain pest/building/strata reports as advised by your conveyancer/solicitor.If you are serious about the property you need to do all investigations about the state of the property prior to the auction.
Don’t just look at the property at the time of open inspections; scope out the neighbourhood. Take a walk around, gauge noise levels, traffic volumes and light conditions. Visit at different times of the day to really get a feel for the area.
Consider making an offer prior to the auction if you would prefer to avoid the competition. If the Vendor wants a fast sale they may consider this.
Understand that buying at auction means you are locked into a binding contract on the fall of the hammer. Not cooling off periods apply.
Set yourself a limit – how much is your pre-approval? Don’t go over the approved amount.
Take proper identification documents with you to register to bid at the auction.
Bid with confidence. The competition needs to believe you want the place and are prepared to keep bidding.
One strategy is to bid early and start low. The other is to wait to see who else is interested and how the bidding is proceeding. As long as it is still within your budget, coming in late with a confident surprise bid can put others off who may think you are just getting started.
One way to avoid the stress of an auction and try to secure the property prior to auction is to make a pre-auction offer. If you offer your maximum amount as a pre-offer and it gets rejected, you’ll also be able to forego the auction as you can assume the vendor wants more than you can afford. There are a few different ways to make an offer:
Make a verbal offer. You can make a verbal offer at an inspection, or over the phone to the agent representing the property you want to buy. When you make a verbal offer, the agent does not legally have to take it to the vendor, so if he/she deems your offer too low to be accepted, they may not even tell the seller.
Make a written offer. Agents are legally required to take written offers to the vendor. You don’t have to type your offer onto a piece of parchment paper with an Olivetti typewriter; you can write a letter or even an email addressed to the vendor, and send it via the seller’s agent. They will pass it on and get back to you if the vendor accepts (some people like to include a time limit on their offer, saying something along the lines of: ‘this offer expires in 24 hours’). Sometimes this leads to a negotiation phase, and oftentimes the agent will bring in other interested parties at this point to see if they also want to make an offer.
Make a written offer with a downpayment. Adding a cheque for 10% of the value of the property along with your offer shows the vendor you are serious. Of course, they may still reject your offer, but it’s worth a try!
Make a written offer on perfumed paper. This one isn’t actually a thing but hey, go for it.
How do you win an auction?
Despite what agents might tell you, there’s no real trick to winning an auction. It usually comes down to who is willing to bid the highest on the day – and this is often who has the most money. There are, however, a few things that might stand you in good stead if you want to win:
1. Be confident
Speaking confidently whenever you bid is better than calling out a number meekly. Making the first bid confidently – and coming in with a strong bid – might intimidate some other bidders. Or, if you’re coming in with a later bid, coming in at a much higher amount than the previous bid will knock some players out of the park and show other bidders you mean business.
2. Play your cards close to your chest
Never tell a selling agent how much you have to bid with, or what you’re willing to pay for a property. You want to give the impression that you have lots of money to spend, but aren’t too interested in the property.
3. Check the clearance rate
Knowing your auction house’s clearance rate lets you work out if it’s a buyer’s market before you head to an auction. Offered as a percentage, the clearance rate tells you how many properties an auction house has sold during the previous week or month. A clearance rate below 60% indicates low interest from buyers, meaning you might walk away with a better-priced home if the agent is keen to sell to get a sale on their books.
4. Hire a buyer’s agent to bid for you
Buyer’s agents come with years of experience in securing properties for buyers. Unlike selling agents, they are on your side and have experience bidding – and winning – at auctions. Read: How buyer’s agents can tilt the odds in your favour.
** Some info supplied by the NSW Office of Fair Trading
Can I get a home loan to buy at auction?
Before you bid at auction, it’s important that you have pre-approval for a home loan. Getting pre-approval requires the submission of a mortgage application, which can take as little as 20 minutes to complete. uno can help you get started over the phone for you or send you a link to complete an online form. You must also provide any supporting documentation your lender asks for, such as:
- Payslips, or if you’re self-employed, tax returns;
- Evidence of savings or deposit in the form of bank statements;
- Photo ID;
- Statements showing any debt you currently possess, such as credit card bills.
How much does it cost to have an auction?
The auction itself – or the services of an auctioneer, at least – don’t actually cost the seller as much as you might think. If carried out by the real estate agent they may even be free, or up to about $1000 depending on the auctioneer. The main costs are in the marketing of the auction – signage, advertising in newspapers and online, flyers etc. – which can range between $10,000 and $20,000, depending on which agent the seller has used and how much the house is valued at.
What happens to a house that doesn’t sell at auction?
If a house doesn’t sell at auction, it can be incredibly disappointing for the seller, but may be good news for a potential buyer as the seller may reconsider their reserve price. Many sellers just want the house sold and you may be able to negotiate a price post-auction that suits you both. If the seller is set on getting the price they’ve set in their minds, however, they may not budge on the price and simply leave the house on-market and wait for a potential buyer to express interest.
Why do auctioneers talk so fast?
According to an article in Slate, auctioneers – of art, jewellery, clothing etc – speak quickly to hypnotize the bidders. They don’t just talk fast – “they chant in a rhythmic monotone so as to lull onlookers into a conditioned pattern of call and response, as if they were playing a game of ‘Simon says’. The speed is also intended to give the buyers a sense of urgency: Bid now or lose out.”
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