An auction is one of the legal processes of transferring ownership of a property from seller to buyer. An auction involves going to an auction setting, either in person or online, whereby people bid on the day, rather than by privately submitting bids to the real estate agent. It is a scheduled and structured process, instead of a lengthy private negotiation.
Buying at an auction can be a daunting process for first home buyers, it is fast-paced and you really need to be prepared with all of your due diligence before the auction day. This guide will give you a complete overlook of the process and how to be prepared for one in your home-buying journey.
Private Sale vs An Auction:
Almost every home for sale will be available via private treaty or auction. Understanding a private treaty sale vs. a property proceeding to the auction will help inform your bidding strategy.
A private treaty sale is where the vendor sets the price they list the property, with no intention to run a formal auction.
- Generally, this is after research into the market and discussions with their agent to determine a realistic outcome. The vendor then starts negotiating with potential buyers via their agent. The property will stay on the market until it sells.
An auction sale is where buyers compete for a property by placing bids. The sale price is decided upon the fall of the hammer and sold immediately to the successful bidder. Auctions can be both live and online.
- An auction has a reserve price, which won’t be disclosed prior. This is the minimum price that the seller will accept as the winning bidder. If the reserve isn’t met at the auction, the property can pass in, meaning the vendor's price wasn’t satisfied.
- At this point, the agent will often negotiate with the highest bidder. It is essential to refrain from bidding against yourself here - buyers are in a great spot if the home passes in. Properties that are passed in, and don’t sell in subsequent negotiations on the day, will often end up back on the market, offered via private treaty.
What are auction clearance rates:
The rule of thumb is that lower clearance rates imply the vendor’s expectation is not being met, which implies a mismatch between vendor pricing expectations and a buyer's willingness to pay. This lower clearance rate means fewer properties are selling - indicating a slowing property market.
Domain Auction Reports for July 2022 and July 2023 show that the auction clearance rates increased in Sydney from 47% in July 22 to 70% in July 2023, representing an 23% increase in sold homes at auction in the period.
What does scheduled for auction mean?
Understanding a real estate listing will give you some great insight into the sales process when buying a home. Here are some things you can think about when looking to make an offer on a home, and whether you should wait for the auction (if it is scheduled) or put in an offer prior to auction.
- Are they in a rush or if they are happy to wait for the right offer?
- If they are in a rush, then you may be able to work quickly with the agent to achieve a great outcome.
- If the property is going to auction you can ask if the vendor will be looking at offers prior. This will indicate if the vendor is committed to going to auction, or if this property has the potential to sell before.
- If you are to make a pre-auction offer, you should look into making an offer that is competitive but ensures you aren’t overpaying. In some instances, if the property isn't popular, there can be a benefit to going through the auction process. This is because if you are the only bidder, you could buy the home for a great sale price. You can check out our blog on how to secure a great purchase price.
Getting Conditional Approval
When you apply for a home loan, your lender or mortgage broker will provide you with a letter outlining your conditional approval. That is the amount that you’ll likely be able to borrow following the verification of some of the preliminary information you have provided to your lender, plus a credit check. The letter will include a list of things you will need to provide to your lender to obtain unconditional approval, such as a contract of sale for the property, this is when your loan will be fully approved.
Conditional approval is what you will need in place to attend an auction. This is because if you are bidding at an auction, there is an immediate no-finance clause, which means you can’t back out if you fail to get a loan. If this does occur, you would be in breach of contract and lose your entire deposit and have legal ramifications.
What is a 66w Certificate and why does an agent ask for one?
A 66w certificate waives the cooling off period on a home, making the contract to purchase immediately binding. During a cooling-off period, a buyer can withdraw from a property contract of sale without any legal repercussions even after signing. Cooling-off periods are only available for property sales by private treaty (not an auction) and can vary between states and territories. A typical cooling-off period is 5 business days.
An agent will often ask for a signed 66w certificate for offers prior to auction, meaning that the offer would be immediately binding, much like it would be on auction day. Your conveyancer or legal team will be able to support you through this process.
Know your local laws: Queensland Tip
If the property is going to auction in QLD, a price guide isn’t legally able to be given. So instead, ask the agent for a list of comparable sales.
Of course, you should do your research as it is in the agent's best interest to give you the most expensive sales in the area!
There will be different laws that are state and territory dependent for property auctions and sales. Australian’s can expect different laws across the country, with a few laws that are country agnostic. Your buyer’s agent, lender and legal team will support you to understand local laws.
Remember: You can make an offer prior to auction
Even if a property is going to auction, agents legally have to present all offers to their vendors. This means if the auction is weeks away, but you would like to make an offer, you absolutely can.
In this circumstance, the terms and negotiations all work like a private treaty and are known as ‘offers prior’ meaning offers prior to a scheduled auction. If the auction is approaching, the agent may expect an unconditional offer. You can read more about negotiating a sale in our blog.
Things to know about Auctions:
- If you put in the winning bid at an auction, you will pay the 5% or 10% deposit on the day of the auction, immediately after successfully winning. There is no cooling-off period.
- In some states (like NSW), selling agents or auctioneers are allowed to make vendor bids. The auctioneer is able to make one single bid on behalf of the seller. Before the auction, the auctioneer must make it known that they are able to make a vendor bid. The auctioneer must announce that he/she is making a vendor bid before or during the bid process.
- Registered bidders can then choose the continuing bidding after the vendor bid.
- Auctioneers will set increments that they would like the auction to move with, but you are able to increase your increments in line with your strategy. E.g. $10,000 at a time, or if the auction is slowing you can choose $1000 increments.
- Home buyers need to complete all due diligence including building inspections and pest inspections prior to the auction date. There is no cooling-off period to complete this in an auction sale.
- Prospective buyers should know the value of the property, the repayments they are in for and the process of a post-auction sale prior to bidding. It can be an emotional journey buying your dream home and it is important to do your legal and financial research.
- The auctioneer will run through the auction rules at the start of the auction and the highest bid will win on the day, as long as the bid meets the reserve price. A reserve price is set prior to auction and is the minimum price a seller would be willing to accept on the day.
- Dummy bids are illegal for sellers to partake in, and result in large fines. That means they can’t have a family member bidding on a home to drive up the prices.
- Know your bidding limit prior to auction and stick to it, also make sure you are aware of your loan pre-approval limits and that they are still up to date (usually valid for 3-6 months).
It is important to note that for an auction, you will need to complete all of your contract reviews and due diligence before the day, as there is no chance to do your digging later and come back to the negotiation table on price. Make sure you have completed the building and pest report before the big day. Auction terms don’t allow you to pull out after you have won. You are committed to the purchase as it is an unconditional sale.
At OwnHome, our dedicated Buyer's Agents help all customers navigate home purchases and get onto the property ladder, including attending auctions and negotiating asking price. We support homeowners to get into the market without needing hundreds of thousands up front in deposit savings. You can use the buying power calculator online.
