Going to auction is a popular method of selling property, especially if you’re looking for a quick result. This is because there are certain rules that make the process of buying and selling at auction a much faster process.
Auctions can be exciting or intimidating, as anticipation builds in the lead up to the big day, with both buyers and sellers wondering exactly how much the property will sell for.
If you’re thinking about going to auction as a seller or looking to put in a bid as a buyer, there are a few things you need to know about how an auction works, so that you’re prepared when the day arrives.
There is NO cooling off period
One of the main differences between buying and selling property via an auction, rather than by private sale, is that when you buy at auction there is no cooling off period.
A cooling off period is something that usually applies when you sell property, and gives a buyer between two to five business days to back out of the purchase, varying from state to state. Backing out within the cooling off period will typically mean forfeiting a small percentage of the deposit, however with auctions, you forfeit 100%.
As there is no chance for you to back out of the sale after an auction, it’s important you have all your ducks in a row before raising your paddle. Consider pre-purchasing trade and building inspections, building and pest reports, and organising unconditional home loan approval before you bid at auctions, as you won’t get the chance to organise these within a cooling off period.
You must have proof of your deposit to bid
As there is no cooling off period at an auction, buyers must be ready to purchase the property there and then. If you’re the highest bidder, you need to have proof of your deposit on auction day.
Proof of the deposit is typically around 10%, which can be paid by a personal or bank cheque, cash, or by what is known as a “deposit bond”.
A deposit bond can be used instead of a cash deposit or a bank cheque when purchasing property, and may be used for a number of reasons, including:
- You have no immediate access to a cash deposit as your funds are tied up in existing property or existing long-term investments
- You are buying a property at the same time as you are selling your existing property, that is either listed and not sold, or not listed as yet.
- You are a first home buyer, and your loan is supported by a parental guarantee, as your parents have agreed to use equity in their property to guarantee your loan
- You have already been approved for finance based on your genuine savings for guarantee terms of maximum 6 months, yet do not have the ‘cash’ in your possession
Deposit bonds can be cost-effective in longer-term settlements, providing a secure alternative to cash deposits. They are often unsecured and therefore not tied to other assets, and can simplify the buying process, especially at an auction.
Auctions can cost thousands of dollars more
When you consider agent fees and bonuses, plus photography and marketing, selling a property can end up costing you thousands to tens of thousands of dollars. Going to auction can add extra costs to an already-expensive process.
Hiring an auctioneer could cost between $400 and $1000, with more experienced auctioneers typically charging higher fees. If your auction is to be held somewhere other than on-site at the property, you may also need to pay for venue hire.
Some auctioneers are also offered “additional bonuses” to motivate them to reach a higher sale price. Let’s say your auctioneer was offered a 1.3% bonus to sell above your reserve price. Your property reserve price is $1.2 million, and they manage to secure $1.3 million, you could owe the auctioneer $1,300 on top of the real estate agent’s commission.
If you sell your property at auction, the result may be worth these extra costs. However, there is always a risk with auctions that your property will be ‘passed in’ instead of selling under the hammer, meaning you may not have much to show for the extra money you’ve spent on auction fees.
The property may be ‘passed in’
One of the scariest things about hosting an auction as a buyer is the risk that your property does not sell under the hammer, which is known in the industry as being “passed in”. This can occur when the bids received do not reach the reserve price.
The reserve price is the minimum amount that a seller will accept as the winning bid, and can either be made public to potential buyers or kept secret between a seller and auctioneer.
If there are no bids that meet the reserve price, there is still an opportunity for the buyer to sell. Generally, the highest bidder is given first preference to negotiate one on one with the seller’s agent, and are often invited into the property to start negotiations.
At the same time, other agents will typically approach other bidders to see how interested they are in the property, and keep them ‘warm’, in case negotiations with the highest bidder do not work out.
If you are going to bid at an auction, it’s often a good idea to get a buyer’s agent to help you with these negotiations if the property is passed in. If you’re selling, it’s important to consider the costs of hosting another auction, making a private sale, or the ramifications of selling below your reserve price.
Auctions can be highly emotional, fast-paced events, and the competitive environment can lead to hasty decisions. Remember that there is no cooling off period at an auction, so it’s important to be 100% confident in your offer, or in your decision to accept the offer provided.