Purchasing at auction is on an unconditional basis, which means you cannot include any conditions to protect yourself from the unforeseen, such as:
- subject to finance
- subject to pest and building inspections
- subject to searches
There is no cooling-off period so if you are the successful bidder, you will have to settle the contract even if:
- you can’t raise your finance ( more on this below)
- you discover issues with zoning, potential transport corridors or issues
- you discover issues with the building itself, be they structural or cosmetic, or even the presence of termites
If you’re unable to complete your purchase, you could lose your 10% deposit and possibly face further legal action from the vendor for failure to complete the contract. This can include the cost of re-auctioning the property and any shortfall between your contract price and the winning bid at the next auction, or even your being forced to pay the full purchase price for the property, regardless of whether you have access to the funds to do so.
From a buyer’s perspective, a purchase by private treaty with clauses such as finance and pest and building to protect you is always a preferable method of buying a property.
All of the above said, if the home of your dreams is for sale by auction and you haven’t been able to negotiate a contract (with clauses) prior to auction, then there are some key steps to try to minimise your risk.
Before bidding at auction
Before the auction, you should do all of, or as many as possible, of the following:
- Get your finance pre-approved. Remember this approves you as a buyer, the bank still needs to
value the property and confirm it is acceptable as security for the loan. For a pre-approval to be
worth anything at all, it needs to be fully assessed. Many lender’s will issue a (worthless) system
generated pre-approval and only actually assess your eligibility once you submit a contract. To bid
at auction you need a fully assessed pre-approval at a minimum.
- Get a valuation done of the property. This will likely cost you in the region of $ 600 but will at least
give you some comfort that you are not paying more than market value for the property.
Unfortunately valuations can no longer be ordered through banks prior to auction and the bank will
not rely on this valuation but having one may help minimise the risk that there will be a substantial
difference between what you pay for the property and what the bank values it at.
- Inspect the property prior to auction to make sure it really is what you’re looking for
- Arrange for a professional pest and building inspection to be done. This will cost you in the region of
$600, but will allow you to pick up any potential issues before you are committed. Some agents will
have had a pest and building inspection report available, but I would always recommend having your
own inspection done independent of the seller and agent.
- Get a copy of the draft contract ahead of the auction and get legal advice about the terms and
conditions in case you’re the successful bidder. Make sure you ask about title searches and other
searches that can be done to ensure that there are no zoning, easement, use restrictions on the
property etc that may change your mind about purchasing it.
- Ask the Agent what % deposit they will ask for and how you’ll need to pay it (eg bank cheque). This
is typically 10% and usually needs to be paid on the day or the next business day after.
- Set a budget before the auction and stick to it.
Getting your finance approved after the auction
Once you have a contract, this will need to be submitted to the lender with confirmation that none of your personal financial circumstances have changed since the pre-approval was issued.
The lender needs to accept the property as security. If it’s not the correct zoning, the correct size (for apartments – not too small, for land – not too big), an acceptable postcode and in good lieveable condition then they may reject it regardless of the value on the bank valuation.
The bank ordered valuation needs to be at least the contract amount or higher. If it comes in lower, the bank will base the % they provisionally agreed to lend you on the lower amount.
If you’re purchasing an apartment, the lender can’t be too exposed to a higher percentage of units in the block (if applicable). ie. if the buyer purchases a high rise apartment and the lender has determined that they do not wish to be exposed to more than (say) 30% of properties in the block, the buyer may find themselves with a declined application despite a solid valuation.
If the bank or lender’s mortgage insurer doesn’t like a particular property, it means that you may not be able to finance it. By the time the lender has rejected the loan application (and presumably subsequent lenders have also rejected the loan application), your 10% deposit is at-risk and you may be up for the vendor’s costs to re-auction. If the vendor cannot re-sell the property at the same price, you may find yourselves in a position where you are not only sued for damages and costs, but also sued for the differential.
So while this sounds quite melodramatic, the best way to avoid the drama, if you can’t avoid an auction is to be as prepared as you possibly can be.