Ep 3. Are you Auction Ready?
This episode covers the ins and outs of auctions, and what you can do to be prepared for success.
Here’s what you’ll learn from today’s episode:
Your rights and obligations as a potential buyer.
What to look for on auction day.
Bidding strategies.
What to do once you have won the auction.
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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Hi and welcome to Buy Your Side, the Property podcast aimed at making sure that you buy better. My name is Michelle May, I'm a buyer's agent based in Sydney, and today I want to talk to you about getting you 'auction ready'.
So a couple of things I wanted to cover with you are how do auctions actually work and why do sellers prefer them in hot markets? What are your rights and obligations? Things to check before auction day, what to do the morning of, bidding strategies, and what to do once you have actually won the auction.
So let's get started with: how do auctions actually work? So auctions were brought to life because they are meant to, and designed to, be more transparent by law. Everyone who wants to purchase has to be registered to bid, and, you know, they can see everyone else there on the day. And although agents won't give away their clients minimum acceptable price, you have been given, in most cases, a guide on which to go from. So auctions are designed to be transparent by law. You can eyeball everyone there at the property or in the auction rooms, and you can see exactly how much everyone is prepared to offer. And basically it runs until the last man is standing.
So although agents don't give away their clients' minimum acceptable price, which is what they call 'the reserve', vendors are committed to selling their property once it's officially on the market. Now, this on the market thing is quite funny because some buyers do get a little bit fixated on it and they will actually call out the auctioneer and ask them, "is the property on the market yes or no"? Now, I don't really understand the reasoning for doing so, but ultimately you're there to buy. So the great thing about auctions is that there's a defined timeline, usually four to six weeks or less, with two scheduled open homes a week and possibly some private inspections in between as well. So the idea is that this exposure will allow as many buyers as possible to see the property and hopefully create competition. The auction date also sets more surety for the seller, especially if they've committed to buy elsewhere, of course. And with more buyers competing directly against each other, this will drive up the price. And this is where, in a hot market, vendors tend to choose an auction campaign because there are typically more buyers prepared to register for auction.
Now, one thing to remember is that when it comes to deceased estates or beneficiaries or couples splitting up or there is a government involved, perhaps, a default on the mortgage, those types of sales tend to have to be through an auction campaign because all vested parties can see the open way in which an auction is conducted. So, when it comes to you as a buyer, what actually are your rights and obligations when it comes to bidding at auction? Well, first of all, you need to register for an auction, you can't just rock up and put up your hand. A great tool to explore is The Bidders Guide in New South Wales, and you can find that on the Fair Trading website. You can go to www.fairtrading.nsw.gov.au and look it up where you can see everything that you need to be doing.
So one thing to remember is that your obligation is that your purchase is unconditional, which means that you waive the cooling off period. And that means you need to have done all your due diligence prior to going to auction to make sure that there's nothing which can affect the value of the property or your willingness to buy it. If you cannot go through with the purchase after you've signed on the dotted line, you will actually lose your deposit and may actually be liable for damages from the vendor. So in New South Wales, that's 10% of the purchase price. So that obviously is a lot of money to walk away from. So when you are the successful bidders, you will need to sign the contract and pay the deposit right there and then. So like I mentioned, that's typically 10%, however, you can actually arrange for that 10% to be less, say, 5%, but that will need to be agreed to prior, including any other changes to the contract that you may wish to have. Normally people use a conveyancer or a solicitor for this.
Now, if a property is passed in, as in the bidding hasn't reached that reserve that we talked about before, and the bidding has stalled, the highest bidder usually gets the first option to negotiate with the vendors and still buy the property under auction conditions. So that's within that twenty four hour period of that auction, you can still buy it unconditionally. But please be aware that this is only a courtesy from the agent and it's not the right of the highest bidder. So I have actually seen that multiple negotiations were going on simultaneously in different rooms with different bidders. So if you are the highest bidder and you want to play hardball and you say, "no, I'm not paying any more, I'm not negotiating", then you actually may well lose the right to purchase altogether and they may just move on to the next purchaser. So things to check before auction day. Ideally, you don't just show up on the day, have a look through the property and put up your hand, because this is obviously a big purchase, so please ensure you do your due diligence.
Let's start with your pre-approval. So make sure that your pre-approval is current and covers the amount that you're actually thinking of using as your maximum bid. So a good thing to do would be to talk to your broker or to your bank and say, "Hey, this is the property I'm looking to purchase, it's going to auction", then, "This is what I'm thinking about spending on it. What do you guys think?" Because remember, your pre-approval and what the property's worth are not the same thing. The bank will still need to deem the property worth the amount of money that you've put on the front page. So make sure you check that with your bank.
The second thing I would do is to have the contract reviewed. So get a conveyance or a property lawyer involved and let them tell you what they think about the contract. There may be a number of different clauses in there that are not to your advantage. Just remember that the vendor is obviously putting in their ideal picture in the contract. So, for example, is there a release of deposit clause in that contract? Now, what a release of deposit clause means is that instead of your deposit staying in the trust account of the selling agent, it will actually be released to the vendor, as the term implies, and they can spend it however they like. Now, if the contract were to fall over, you then have to chase the vendor to get that money back. So it's a lot safer to have that removed from the contract.
There's also other due diligence that is very important, such as having a building and pest or a strata report carried out. It's really not worth saving your money or not carrying these out because the stakes are simply too high. If you think about an average building and pest report and a strata report are a couple of hundred dollars, quite a few of them have been commissioned by the vendors so they’re subsidised. You know, if you're thinking about dropping anywhere from half a million to multiple millions of dollars on a property, it's really worth investing that little bit of money just to understand the quality of the build in the case of an apartment, how well the building is run or that kind of thing. So do ensure you get your building and pest and your strata report reviewed before going to auction.
The other thing to check is how have you decided to pay that deposit in case you're successful? There's a couple of ways that you can choose to pay, but you've always got to check with the agent. The traditional way is to pay with the cheque. Now, I know most people don't have a cheque book anymore, but if you have won the back of a drawer somewhere, it might be time to dig it out. The other option could be to get a banker's draft, which is where you go into a bank and actually nominate the amount of money that you would like to have on the cheque, and you'll need to have the agent's trust account details to be able to do that.
Now, recent times has brought to light Macquarie Auction DEFT Pay, which is where the agent uses Macquarie Bank to withdraw the money directly from your account. Now, this is a very secure system. The Macquarie Auction DEFT Pay has the same kind of authority as the ATO and so they can withdraw as much money as possible on the day, unlike when you do a direct deposit transfer into the agent's trust account, that's another option, but then you have to ensure that you have increased your limits for that day because most people have a limit per day that they can move money around. So ensure that you've spoken to your bank and say, "Look, I'm looking to buy this property. This is probably going to be X amount of the deposit. Can you ensure that I can actually transfer that kind of amount of money?"
Next, you need to have a current ID with your address on it, such as your driver's license or perhaps a bill if you don't have a driver's licence, a bill and a passport to show the agent when you come to registration. If you are bidding for yourself, that's all you need. But if you are bidding on behalf of someone else, you will have to have authority (paperwork) that allows you to do so. So if you're a mum and dad or you're bidding on behalf of your cousin, your friend, your colleague, you will need to have that paperwork in play. Most selling agents will have a draft document that you can download and then bring with you on the day. You will also need a copy of that person's ID that you are representing.
Now, finally, I would make sure that you have the agreed-to contract changes with you so that you can ensure that the contract is amended as per the agreed to changes. Now, you got all that ready. Now you're ready for the actual day of the auction. Make sure you arrive on time and go through the property again and be absolutely sure that you still love the property and it is what you thought that it was. So don't rush it, don't have six coffees because it is an emotional day, so make sure you have your head about you, maybe bring a support team as well so they can make sure that you don't get too emotionally involved.
Now, before you go, of course, be absolutely sure of your maximum bid. So that's what that due diligence is all about, that you know exactly what you're prepared to go up to, so don't make it up on the day. And like I said, make sure you get there with plenty of time, because that will also allow you to be there before registration opens, because you want to make sure that you find a spot where you can watch everyone register and you can pay careful attention. You want to make sure who is your competition.
Now, I will cover auction competition in another episode, because that is a really interesting subject, actually, because there are so many different buyers out there and how you compete with them at auction is quite different. So let's leave that for another episode.
So hand in hand with the different buyers is also the bidding strategies, because I think it's a bit of a fallacy to say that whoever's got the most money wins the auction. I've actually had it happen to me several times where I've successfully bought at auction and people have come up to me, other buyers, have said, "oh, my gosh, you look like you had so much money. I just stop bidding because I knew I was never going to win against you", and they actually stopped short of their maximum bid. So along with the buyers profiles, I want to go through bidding strategies with you another time because, again, it's quite a complex subject. So let's leave that for another day. But let's assume that you are the winner. You've purchased, you've not spent all your money (let's hope) What happens now? So be aware that obviously you need to produce that deposit right there and then and you can have agreed to a lower deposit, but it still needs to be arranged prior to the auction. So you've sorted out how you are going to pay for that, and obviously you've got your contract changes there as well now because you're handing over so much money on the day, just make sure you get a receipt for that cheque, most agents will produce that right there and then.
But my final tip for today would be to take a photo of the front page. So I've actually got an app on my phone which takes PDF photos straight away, a free app, but a photo will suffice just nicely. Now send that to your broker and your solicitor straight away so the agent will normally send you a scanned copy, but that doesn't usually happen until the next working day. But this is just for your records, and it's also that you can give your broker and your solicitor a heads up that you've bought and they can get the ball rolling on their end.
So that's it. This should get you going and get you ready for auction, and certainly whether you've won or not, have a glass of champagne, you deserve it. It's a very stressful situation, and good luck out there. Do drop me a line if you have any questions: hello@buyyourside.com.au. I would love to hear from you if you've got any questions about the situation you're currently in, the strategy, what you need to apply. Get in touch. I look forward to hearing from you.