Co-author: TJ Ryan
Real estate auctions can be go either way for the homebuyer, however it’s an unfortunate truth that it’s much easier for an auction to go poorly than for it to go well. Practices such as under-quoting are making it increasingly harder for home buyers to understand current values and find homes that are truly within their price range.
EPS Property Search director Patrick Bright has warned that homebuyers need to put in the effort and do “the research that’s needed just to get the process over and done with”, also saying that people who don’t do this research are “more than likely to overpay”.
“You should be asking yourself well before auction day, ‘Have I inspected enough properties and compiled enough comparable research to know what the fair value of the property is?’
“If the answer is not a confident yes, then you have more research to do.”
In fact, the inspections alone that must be done before auction day can rack up a few hundred dollars, so if you’re an inexperienced house buyer or you’re just not sure, then bidding at auction could be a waste of money and a waste of a good Saturday. Buying at auction is a big decision and should not be done lightly.
So how do you prepare to buy a house at auction?
Observe first: Auction can be quite intimidating, so it’s worth attending a few auctions without bidding, just to see what it’s like.
Research: Then, when you feel ready, make a shortlist of properties, and remind yourself that if you miss out on one, there are plenty of other properties. Find out what the properties are worth – this can be done through online websites or through an independent property valuer.
Budget: Figure out your absolute price limit and if you’re buying with a partner, you both need to agree to stick to that limit.
Legal: Once you start attending auctions, have a property and conveyancing lawyer look over the contract of sale before each auction. Don’t waste thousands of dollars on a bad contract because you didn’t want to spend a hundred dollars on getting a qualified lawyer to read the contract first.
Inspections: You will also need to have all the usual pest, building, and council zoning inspections done before auction day. There is no cooling-off period with an unconditional sale done at auction, so you need to be 100% certain of a decision before you begin bidding.
Identification: You will need to bring identification with you in order to register to bid at an auction.
Deposit: If your bid is successful in winning the home sale contract, you will need to have a personal or bank cheque on the day to cover the deposit required (usually 10%).
Finance: Get your finance (your home loan) pre-approved nice and early before the auction. CANSTAR can help you choose a home loan with the interest rate, fees, and features to suit your budget:
You will need to work out how much money you might be able to borrow before applying for a home loan, of course. You can use our Borrowing Power Calculator to help you work that out:
How do you research property prices?
The one most important rules to follow before going into an auction is to do your research. Look at what similar houses in the same area have sold for – not just what they have been listed for. You can conduct a property’s sales history search with organisations such as Property Value by Corelogic RP Data, Domain, or Realestate.com.au.
Then talk to a professional valuer (not the real estate agent) who can conduct a fair market evaluation based on what the home and the area is worth now. Their evaluation will be much more useful than a real estate’s estimation based on sales data.
Make use of all this information to make a reasonable guess at what the property in question is worth in today’s market. Its potential future value (and for that matter, past value) is irrelevant. Knowing the true, current value of a property is the most important information you can have in this situation.
Auction terminology you should know
Reserve price: The minimum price the vendor (seller) is willing to accept for the property.
Passed in: The reserve price has not been reached, and the property is withdrawn from sale by the seller. The highest bidder then has the first right of negotiation with the seller for a private treaty sale (a private sale contract).
Fall of the hammer: The end of the auction. This does not require the auctioneer to use an actual hammer or gavel, but it will be signalled in some way.
Cooling-off period: A set number of days (varies from state to state) in which the buyer can change their mind and void the contract. The buyer will not lose their deposit but may have to pay a contract termination fee. Starts the day the buyer receives a copy of the contract that is signed by both them and the seller. Cooling-off periods do not apply to auction sales unless a private treaty sale is conducted after the auction is passed in.
Does it make a big difference if I bid too much?
When you get to the actual auction, there’s only one real rule to remember: Remember your budget.
While it can be tempting to stretch a little past your means in order to acquire a house, this can lead to a dangerously large bid, which could put you in serious financial trouble. Play it safe; there’ll be other houses.
When you’re looking to buy, it’s useful to understand how much your home loan could potentially cost you – both on a monthly basis and over the life of the loan. Based on a current average standard variable home loan interest rate of 4.47%, a home loan over 25 years could potentially cost you the following (as of August 2016):
|Loan size||Monthly repayment||Cost over 25 years|
Source: www.canstar.com.au. Based on a loan taken over 25 years excluding fees. The current interest rate is based on the average standard variable rate of 4.47% on the CANSTAR database.
For more information, read this article: How much will your mortgage cost?
Everyone’s situation is different – why not try our Mortgage Repayment Calculator to get a good estimation of home loan costs.
And back to auctions: keep a cool head at the auction house and even if you don’t walk away as a homeowner, you’ll walk away with your finances safe.
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