Home Buying

How do house auctions work?

Toni Mladenova
Dec 27, 2020
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

Property auctions are just as exciting in real life as they seem on the news or TV shows. As exciting as they are if you’re planning to purchase a property via a real estate auction you’re likely to get the best result if you go prepared.

Learn how auctions work by understanding the process, what happens on the day as well as after. Also, get an idea of the difference between purchasing at an auction vs a private treaty.

What’s the process of buying at auctions?

An auction involves a seller, real estate agent and auctioneer working together to sell a property to a group of buyers. Leading up to the auction there will be advertising and open house inspections all in the hopes to entice potential buyers to attend the auction.

On auction day, potential buyers will all register their interest in bidding on the property. The auctioneer will then do their best to elicit as many bids as possible to get the sellers’ the best price.

What should you know before you bid?

Before you rush to put your hand up and place your first bid, there are some essential things to understand to make the most of your bidding. Before the auction, the real estate agent needs to provide potential buyers with a bidders guide for auction day. This will include information on how to register to bid on auction day and what identification is needed.

On the day of the auction, there should also be a list of conditions about how the auction will work like bidding, the auctioneer's ability to bid, the final bidder is the purchaser etc. 

What is the reserve price?

A reserve price is a number or price set before the auction by the sellers often in consultation with the real estate agent. The seller will have a number in mind but will also take advice from their real estate agent. The agent will use their knowledge of the market and any feedback from potential buyers they met previously to advise the seller on a reasonable reserve price. 

During an auction when bidding goes over the reserve price, it’s officially on the market, and any subsequent bids could potentially be the final sale price. If bidding doesn’t reach the reserve price, the sellers have to make a choice. They can choose to take the highest bid as the sale price, negotiate with the highest bidders or leave the property on the market. 

How does bidding at an auction work?

Bidding at an auction may seem as straightforward as attending the auction and raising your hand, but there are some things you should know before putting your hand up. The auctioneer will suggest bidding amounts and buyers will raise their hand if they wish to place a bid for that amount. Typically bids will increase by $5,000 or $10,000 unless no one is taking the bids and the auctioneer will suggest alternate amounts. Buyers or bidders can also present alternate amounts as well. Still, it’ll be up to the auctioneer whether they’re accepted as bids. 

The auctioneer can also place one bid on behalf of the sellers to increase the bids and move them closer to the reserve price. 

How to pay a deposit at an auction?

Once the final gavel is dropped on the highest bid at an auction the property is sold, as long the bids have surpassed the reserve price. If you’re the highest bidder, you’ll have to sign the contract of sale. This also means you have to be prepared to pay the deposit on the day. 

You’re typically required to pay a minimum of 10% deposit on the day of the auction. This can be done with a personal cheque, a bank cheque, cash or you can organise a deposit bond. A deposit bond is an insurance that works to guarantee the seller that you’ll pay the deposit. Not all agents will accept them so you should check that they do beforehand. The seller and agent may also allow a bank transfer on the day but again check beforehand. 

You’ll need to pay a deposit on the day no matter which way you choose to pay it, so it’s best to be prepared. You should also have pre-approval for a home loan before attending the auction to ensure your finances are all in order.

What happens after the auction sale?

Once the auction is over, there is often a lot of celebrating by both the winners and the sellers, but before you celebrate, make sure to understand what happens next.

What’s the auction cooling-off period?

There is no cooling-off period when you purchase a property at an auction. Once the gavel goes down on the final bid, you’ll need to sign the contract of sale and pay a deposit. What this means is you’ll need to do any property checks or inspections as well as legal due diligence before auction day. You should also have home loan pre-approval as you’ll have no time to organise your home loan.

What’s the auction settlement period?

The settlement period’s length will be determined by the seller and stated in the contract of sale. Typically settlement is 90 days from exchanging of contracts. For an auction, this would be 90 days from the day of auction as you exchange contracts on the same day as the auction. 

What does it mean if a property is passed in at auction?

After the bids of an auction reach or exceed the reserve price the property goes on the market for sale, if this price isn’t reached and the auction ends the property may be passed in. A property passed in at auction merely means that the bids didn’t reach the reserve and the sellers decided to keep it on the market. The property then remains on the market, and the seller will either hold another auction or sell via private treaty.

Different types of auctions

Real estate auctions

Real estate auctions are the most common auction types where a house or apartment is put up for sale via auction. The auction will either occur on-site, which means at the property, or at an auction house or alternate location. 

Deceased estate auction

When a property owner dies, their estate may decide to sell the property via an auction known as a deceased estate auction. Due to the circumstances, there is usually an increased urgency to finalise the sale. This could mean the reserve price may be lower than a regular real estate auction.

Foreclosure auction

Foreclosure occurs when an owner fails to repay the mortgage on a property, and the lender takes possession. The lender will then want to sell the property, and they may choose to do this through a foreclosure auction. This is another instance that there’s often urgency in finalising the property sale. Lenders may be content merely recouping their losses rather than getting the top market price and set the reserve price to reflect this.

Land auctions

Land auctions are not that different from real estate auctions. The main difference is that the price will likely be lower, as there is no physical property on the land up for sale.

What’s the difference between an auction and private treaty?

There are various differences between purchasing at an auction and via private treaty. The most important differences involve the preparation you need to do before finalising the sale. If you’re purchasing at an auction, you’ll need to do all your due diligence checks before the auction. You’ll also need to have your finances ready, which means home loan pre-approval, to pay a deposit and finalise the sale on auction day. 

With a private treaty sale, you can organise due diligence checks during the cooling-off period along with finalising your home loan. It’s still best to have pre-approval before beginning your property search because it ensures you find a property within your budget. There are also fewer unknowns around a private treaty sale with the seller advertising the price when they list the property. In contrast, at an auction, you don’t know how high the price might go.

Possible auction strategy for sellers

If you’re a seller thinking about using an auction to sell your property, the best options you have is to plan and prepare. Probably the most important part of planning for an auction is the marketing campaign beforehand. As a seller, you should work with your real estate agent to plan a campaign that will attract the most potential buyers and bidders on auction day. Make sure you set a reserve price that is not only what you want but also a reasonable price, your agent and auctioneer should help you with this.

You should also consider accepting pre-auction offers. There can sometimes be uncertainty around selling via an auction. You have no guarantee on the number of bidders or the final price. If you accept pre-auction offers, you have certainty around the price, you sell the property. If your reserve isn’t reached at the auction, you can also negotiate with the highest bidder to see if they may be willing to offer more.

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