Seven rules for buying at auction
If you want to take the risk, here are seven rules to protect yourself and minimize the damage.
Rule 1. Believe nothing and check everything
With auctions, always assume the agents are lying to you. Sure, some may tell you the truth, but if you treat everything they say with suspicion, you won’t be as easily hurt. There are so many lies told that you can’t afford to believe anything until you have checked it out thoroughly.
Rule 2. Understand the ‘quoting’ lies
Experienced buyers know that agents under-quote the selling price by about 20 percent. So, if the agent says “Bidding to start from $300,000”, the price is likely to be somewhere around $360,000. If your maximum price is $320,000, be careful. You could spend money on inspections, get your heart set on buying the home and all to no avail.
If you cannot get a straight answer from an agent about the price, or if you are certain you are being misled, you can – as a last resort – ask the sellers about the price.
Unlike many agents, most sellers are not interested in deceiving you. They just want you to buy their home. They do not want you to be misled or to lose money.
You can write to the sellers at the home. If the home is vacant, you can write to them care of their lawyer. Ask the agent for a copy of the contract of sale. The owners’ details will be displayed. There is a sample letter for this purpose in the Appendix. If you receive no reply do not attend the auction.
Rule 3. Tell the agent nothing of importance
If you don’t feel comfortable with the agent – and the chances are that you will never feel comfortable with an auction agent – tell them almost nothing. Just ask questions. Be strong. Answer any questions by saying, “We are not sure what we intend to do.” Be vague. Use expressions such as ‘maybe’ or ‘might’ or ‘perhaps’ or ‘we are unsure’.
Just remember that this is the person who will deliberately mislead you before the auction with the quote, at the auction with fraudulent bids and after the auction by telling you how ‘lucky’ you are. You can’t afford to trust such agents.
Rule 4. Know the true value
The time and cost of basic research can pay handsomely. Obtain the sales details of similar homes in the area. In Melbourne and Sydney you can purchase inexpensive ‘post-code’ price guides Similar information is also available in most areas through local councils.
If you feel you have a good chance of buying the home, you should consider contacting a registered valuer for an accurate and unbiased opinion. The money spent on a valuation is well worth the risk. Contact the Australian Property Institute (details in Appendix).
It would be far easier for everyone if all homes had an independent valuation before they were sold. Both sellers and buyers would have the benefit of independent and unbiased information.
However, a valuation, while unbiased, is still only a guide. If you love the home you might willingly pay more than the ‘value’. But at least you have the benefit of a valuation on which to base your decision.
Rule 5. Get legal advice
Some homebuyers try to save hundreds of dollars and in doing so they risk thousands. Don’t let this happen to you. If you are keen to buy a home at auction, consult a lawyer before you sign anything or spend any money. A home costs hundreds of thousands and a lawyer costs hundreds. And remember, the last person to take advice from about a real estate auction is the auction agent. You can have your lawyer speak to the agent on your behalf. Some lawyers will even accompany you to the auction. Good lawyers are great value when buying a home.
Rule 6. Do not bid too soon
The most important rule at an auction is NEVER BID UNTIL THE PROPERTY REACHES RESERVE. Until then, it is not for sale and it makes no sense to bid on anything that is not for sale. No matter how much pressure you receive, do not play into the agent’s hands by bidding too soon.
Agents are so desperate for early bidders, they will do anything to get the bidding up from its low beginning.
Some will plant dummy bidders in the crowd. Or pay ‘dummy bidders’ to pretend to be buyers. Others will just ‘pull’ bids from walls or trees. This is fraud. It is justified by the use of a thin legal line known as ‘the vendor’s bid’, which means that a seller has the right to bid on their own home provided that the auctioneer declares this – which is almost never done. Even if the auctioneer does declare the vendor bid, ‘dummy bids’ are never declared.
The television program, Money, once did an expose` on dummy bidding. Hidden cameras filmed an agent boasting how he paid dummy bidders. Later, a reporter asked him if he ever paid dummy bidders. His answer was “No. Never”. The TV program showed two scenes – one with him proudly describing his deceit and the other with him denying it publicly.
Dummy bids are a central part of the auction system, despite the denials of agents and Real Estate Institutes.
But dummy bidding stops once the home reaches the reserve price and is ‘officially’ for sale. And that is the only time you should bid.
The Reserve Price
The reserve price is the lowest price the agents have been able to ‘crunch’ sellers into accepting.
And this is where auctions really favour you as a buyer. You will know the sellers’ lowest price, but no-one knows your highest price.
With the attention on the sellers’ lowest price, buyers save thousands at auctions.
Rule 7. Keep your highest price a secret
Once the home reaches the sellers’ lowest price (the reserve), it is going to be sold to the highest bidder. Let’s say $320,000 is the reserve and your highest buy price is $350,000. Under
no circumstances will you exceed your highest price (you can’t afford to).
But you are very likely to be the highest bidder long before you reach your highest price. If there is another bidder whose highest price is $330,000, then you will buy the home at the next bid above $330,000 which will most likely be $331,000. And you will save $19,000.
Thousands of buyers are paying thousands of dollars below their highest prices at auctions. All because the agents do not understand the principles of negotiation. As one buyer said, “It is like stealing money from the sellers. Why do the agents let this happen?”
The losses for sellers and the wins for buyers are caused because the auctions start at a low price instead of a high price. And when something starts low, the chances are that it will finish low – or at least lower than it would have finished if it had started high.
If you don’t know the tricks used at auctions, you are certain to get hurt. Most auction agents have no regard for your
feelings. They want a sale and they don’t care who they hurt.
Buying property at auction
You need to prepare before buying a home at auction. Try to go to a few auctions first to see how they work.
There is no cooling-off period for buying at auction. If you are the successful bidder at the auction, you will have to settle the contract even if:
- the house doesn’t pass inspections
- you change your mind
- you can’t afford it.
The cooling-off period also does not apply to a private treaty contract:
- entered into within 2 days of an unsuccessful auction of that property
- in which the buyer was a registered bidder at the auction.
The terms of sale usually require you to bid on an unconditional basis. This means you cannot have any conditions, such as:
- subject to finance
- subject to the completion of another sale.
Before the auction
Before the auction, make sure you:
- inspect the property
- arrange your finance
- get a property valuation
- do your own research of the market
- get a copy of the contract
- get legal advice about the terms and conditions in case you’re the successful bidder.
Make sure you ask the agent about:
- how much deposit they will ask for (as a percentage of the winning bid)
- how you’ll need to pay it (a personal cheque, bank cheque or deposit bond is usually okay).
It’s illegal for a seller or their agent to give you a price guide for an auction property. This is because they cannot know how high the bidding will go.
A property may appear on a listing website when you search by price. This is only for the purposes of the web search, and is not designed as a price guide. The website should give you a statement that explains this.
Sometimes, an auctioneer may offer you a comparative market analysis (CMA). This is a document that offers you information about what similar properties have sold for in the same area. They can only give you this document with the seller’s approval.
Remember to do all the necessary checks, such as a:
- a title search
- a building inspection
- a pest inspection
- a land tax clearance search
- a swimming pool inspection (if relevant).
At the auction
Set a budget before the auction and stick to it.
If you are the successful bidder, you will have to settle the contract, even if you can’t afford it.
If you want to bid:
- ask the auctioneer if there have been late changes to the contract (they must announce the terms at the start of the auction too)
- ask any questions you have about the property
- register with the auctioneer.
Only registered bidders can bid on the day. The auctioneer will give you a unique identifier such as a numbered paddle.
An auctioneer must have a current and valid licence. An auctioneer licence is the only type of licence that permits a person to auction real estate (not a real estate agent or chattel auctioneer licence). However, it is possible that a person has more than one type of licence.
They will need to either:
- display their name prominently at the site of the auction
- announce their name at the start of the auction (but only if displaying would be impractical).
It might be impractical to display a sign if, for instance:
- you are outdoors in inclement weather, such as in heavy wind
- the auctioneer is moving around a large outdoor area.
You can do a free online search to make sure they have a valid licence.
They need to announce the conditions of sale. These might include:
- the required deposit
- inspection details
- any other relevant details.
They may use the unsigned sale contract to disclose the conditions of sale.
The reserve price is the minimum sale price that the seller will accept. The seller sets the reserve price in writing with their agent before the auction. A seller doesn’t have to set a reserve price, but most will choose to have one.
The auctioneer is allowed to tell you whether or not the seller has set a reserve price. However, the auctioneer must not tell you the reserve price itself.
Once the reserve price is reached during bidding (or no reserve price is set), the property will be ‘on the market’. The auctioneer does not have to announce when a property is on the market, but they are allowed to do so if they wish. If an announcement is made, it must be truthful.
Once a property is on the market, it means the auction must result in a sale. The winning bidder must purchase the property, and the seller must sell.
If the property doesn’t reach the reserve price, you can negotiate with the seller after the auction. If this leads to a sale within 2 days of the auction, you will not get a cooling-off period
If you reach an agreement more than 2 days after the auction, you will have access to a cooling-off period.
The successful bidder
If you are the successful bidder, you must sign a contract immediately.
There are very serious legal consequences if you cannot settle the sale on time. You may be forced to pay:
- the amount of your winning bid, regardless of whether you had access to the money
- the cost of re-auctioning the property
- any shortfall between your offer and the winning bid at the next auction.
In Queensland, auctioneers can accept ‘vendor’ (seller) bids, but only up to the reserve price.
Before the bid reaches the reserve price, the auctioneer can:
- bid on behalf of the seller
- accept bids from the seller (or their representative).
The auctioneer must announce if a bid is a vendor bid.
If a vendor bid is announced, you know that a reserve price has been set, and that it has not yet been reached.
Once you reach the reserve price, any more vendor bids will become ‘false bids’.
False bids are illegal.
A dummy bid is an attempt to raise the bidding, after the reserve price has been reached, by:
- the seller
- their family or friends
- the auctioneer
- any other ‘planted’ individual.
Dummy bids are illegal.