Buying a property? A property auction – how does it work?

A property auction is a way to sell or buy a property through a process of negotiation open to the public. The intention behind the process of publicly negotiating the price is to ensure the property is bought or sold at its true market value at the time of the auction.

Often, the reason for holding an auction is that the seller is not sure of the property’s market value. So, if there’s a chance there will be a fair bit of interest in the property, the seller may decide that holding an auction is a good way to get ‘the market’ to determine the value of the property. At the auction, the buyer is, in effect, ‘the market’.

If there are two or more people interested in it and they compete with one another for it, then the seller may even be able to get a better-than-market-value price for it.

Sometimes, however, even if the seller knows what their property is worth, they might simply want to get a quick, unconditional sale, and feel that an auction as the best way to make this happen.

Before the auction

A property for sale by auction is usually marketed, including open homes, for a number of weeks before the auction. The seller’s real estate agent will use this pre-auction period to get feedback from people who view the property about what they think it is worth. This information will be used to help the seller set a realistic reserve price for the property at the auction. The reserve price is the lowest price the seller is willing to accept for the property. Usually, only the seller and their estate agent and the auctioneer will know what the reserve price is.

Sometimes, the seller may be willing to take offers before the auction. This will be made clear in the marketing information about the property. If you’re interested in the property, make sure you register your interest with the property’s real estate agent. That way, if they do get any pre-auction offers, they will also give you a chance to make an offer.

Pre-auction offers

If you do want to make an offer before an auction is held, it will have to be an unconditional offer and be accompanied by a deposit, usually 10% of the full offer price. The deposit must be paid into the trust account of the seller’s lawyer. If the offer is successful, the lawyer will hold it ‘in trust’ until the property is transferred to the buyer, at which point it will become part of the settlement amount. If the offer is not successful, the deposit will be refunded in full.

If the seller is interested in your pre-auction offer, their real estate agent will contact all other potential buyers or people who have previously indicated they want to attend the auction to bid on the property, to tell them someone has made an offer on the property. If these people are also interested in making an offer, then the seller has two options:

  • The seller could arrange for the auction to be brought forward. The highest pre-auction offer received will then become the reserve price for the auction. The person who then makes the highest bid will win the auction.
  • The seller could decide they are willing to accept the highest pre-auction offer. Their agent will then begin a process of calling all the potential buyers who want to make an offer until they receive the highest unconditional cash offer.

An unconditional purchase

When you buy at a property auction you are buying unconditionally. If you are the highest bidder, and you’ve met the reserve price, then you have, in effect, made a cash offer. Once your bid is accepted and the auctioneer’s hammer has fallen, the sale is unconditional and is legally binding. You cannot attach conditions to an auction purchase, so you need to get all your ‘ducks in a row’ before the auction.

Do your homework beforehand

Buying a property at auction is an unconditional purchase which means that, when the auctioneer’s hammer falls, you have bought the property as it is. Therefore, you need to do all your research on the property before the auction.

Here are 5 essential things you need to work through together with your local conveyancing lawyer to get sorted before the auction.

  1. Arrange your finance: To bid at a property auction you need to have sorted your finance. Merely being ‘pre-approved’ for a loan is not sufficient, as this only means you are eligible for a loan. Your bank will still need to approve lending you the money for that specific property, so will probably require a property valuation for the property. As soon as the hammer falls at the property auction, you will have to hand over the required deposit (usually by cheque) and pay the balance of the purchase price on the settlement date, when you take possession of the property. So, you have to have your finance completely sorted before the property auction starts.
  2. Check the property title: Before the property auction, get your lawyer to check the property title to ensure there are no problems with the title. Ask your lawyer to carefully explain all aspects of the title to you.
  3. Check the ‘Particulars and Conditions of Auction’: Usually a set of Particulars and Conditions of Auction for the particular property will be made available to you prior to the property auction by the seller’s estate agent. Make sure you go through these carefully with your lawyer before the auction to ensure you understand everything, especially any conditions that might apply to the property.
  4. Get a builders report: Always get a building inspector to thoroughly check the property and provide you with a written report on it before the property auction. If you’re the successful bidder at the property auction, you cannot decide after the auction that you don’t like something about the property.
  5. Get an LIM report: Make sure you get an LIM or Land Information Management report before the property auction as this contains the local council’s records on the property.

Bidding at the property auction

Property auctions can be quite nerve-wracking and fast-moving events. Ask the estate agent who is marketing the property to explain the auction process to you. Even better, if you haven’t been to a property auction before, go to one to see how it works so you know what to expect.

If you want to bid on a house at a property auction you will need to register with the auctioneer. However, you do not have to be at the property auction in person if you can’t or don’t want to be there or you feel nervous about the whole process. You can arrange to bid over the phone or get someone else to bid on your behalf.

At the property auction, the auctioneer will usually explain the auction process and summarize the ‘Particulars and Conditions of Auction’. Then they will start the bidding by asking for an opening bid. To place your bid, you simply let the auctioneer know by raising your hand or catching their eye and nodding or calling out your bid.

When the bidding reaches the reserve price, the auctioneer will announce that the property is “on the market”, which means that, from that point, the property will sell to the highest bidder. Once the highest bidder is found, that person becomes the buyer and must sign the purchase contract and pay the deposit, usually 10%.

Vendor bids

Sometimes, the auctioneer or someone else working on behalf of the seller may make a bid on behalf of the seller. This is called ‘vendor bidding’ and may be used by the auctioneer to kick-off the bidding or move the bidding closer to the reserve price. The Particulars and Conditions of Auction will state whether vendor bids will be used at the property auction.

Vendor bidding is only allowed if the property being auctioned has a reserve price, the reserve price has not been met and the auctioneer clearly states that the bid being made is “a vendor bid”.

Stick to your budget

By the time you’re at the property auction and in the bidding process, you’ve probably already spent a fair bit of time and money on the property, paying for building and LIM reports, and all the other before-the-auction homework.

Don’t let this financial, and associated emotional investment, or your competitive spirit, affect your bidding in the heat of the auction. Decide beforehand what the absolute maximum price is that you are willing or can afford to pay for the property, and stick to it. There is no point in taking on something that you cannot afford.

Get sound legal advice

Buying a property is one of the biggest, if not the biggest, financial transaction you’ll ever make. Never sign any property contract without first getting professional legal advice about what you are committing yourself to. Buying property is not something to be taken lightly, and this is especially true when you plan to buy at a property auction because there’s no going back once the hammer falls. Get in touch with your local Auckland law firm and work closely with your conveyancing & property lawyer at Quay Law to make sure you have all your ducks in a row before you head into the property auction.