Auctions! What First Home Buyers Need To Know Before They Go!

Prepare yourself for auctions with these tips.

Agrrh Auctions!! This seems to be the resounding cry from our First Home Buyers (and understandably so!) Our recent poll of First Home Buyer Club Members suggests that as many as 80% do not even view a property listed online for sale via auction. For those that do, actually participating at an auction seems to be the last resort.

So why are Auctions so popular today?

Check out the properties for sale listings and you will note that auctions are currently by far and away the most popular sales method of choice with Vendors & Real Estate Agents, particularly in many main centres.

Auctions work well for Vendors in markets where there is a shortage of listings or the property is unique or in great demand for some reason. Auctions are designed to get the maximum sale price for the vendor by pitting willing buyers against one another in an often emotive bidding war. The Auction environment, coupled with emotively charged buyers can lead to some properties selling way over even the registered market valuation which is great news but only if you’re the owner!

The Real Estate market is one in constant change, ruled by multiple factors including but not limited to seasons, supply, wages, interest rates, migration, and government intervention, as seen with the introduction of  LVR restrictions. Not too long after LVR restrictions were implemented, Real Estate agents started to report a drop in numbers of buyers interested in properties at the lower end of the market, this trend has continued with Real Estate agents now reporting more properties at the lower end being handed in at auction without any genuine bids. So are these instances a good opportunity for First Home Buyers? Perhaps, as one strategy may be to attend these auctions, wait until after the auction, hope it will be passed in and then (at the conclusion of the auction) make a conditional offer. We recommend if you try this strategy that you are well organised and prepared to give you the best chance of success!

As a First Home Buyer, What do I need to be aware of before I participate at an Auction?

In order to participate at an auction, you need to have completed all your due diligence and have your finance FULLY approved before attending the auction. This is because a bid at an auction is viewed as an ‘unconditional offer’ meaning you cannot change your mind and MUST proceed with the purchase.

Completing all your due diligence includes things such as;

• Your solicitor reviewing sale and purchase agreement/LIM Report/Certificate of title
• Any inspections you may require such as Building Inspection/Meth Testing/etc
• All conditions relating to your finance approval are met to the bank’s satisfaction including completion of a registered valuation (often required for loans with less than 20% deposit)

What other things do I need to be aware of?

Immediately after the auction, you will be required to pay a deposit (usually 10%). You may be able to negotiate the amount of deposit but will need to have this agreed to prior to the auction. If you don’t have the cash available to pay the deposit you may be able to borrow this from your bank but this can be expensive as it is viewed as unsecured lending. If you are borrowing your deposit from the bank, you should have this approved prior to attending the auction.

Can I use my KiwiSaver to pay the deposit post-auction?

Yes, you can.  However, you will need to get the real estate agent to seek a variation to the auction conditions to allow it.  You should get written confirmation from your KiwiSaver provider of the balance of funds eligible for withdrawal and the time it will take to process the withdrawal.

What is a Reserve Price?

Prior to the auction proceeding, the vendor will have set a Reserve Price, until bidding reaches this price, the property is not on the market. Once the reserve price is met, the auctioneer will state that the property is now on the market.

What’s the story with Vendor Bids?

Until the bidding reaches the reserve price, some agents auctioneers can make bids on behalf of the vendor which he/she must declare as being a vendor bid. Once the property has reached reserve Vendor bids are not permitted.

Other Considerations

• You will need to be registered to bid on auction day.  Speak to the sales agent about this process.
• Decide your maximum price before you go to auction – (Don’t get caught up in the excitement of the auction and pay over the odds).
• The auctioneer doesn’t need to reveal when the auction has met reserve, just when the property is on the market.
• Attend a few other auctions to get a feel for the process.
• Don’t be put off by the large numbers attending an auction as these can often be other agents, friends and families of the vendor and not necessarily interested buyers.
• If a property doesn’t meet reserve and is ‘passed in’, it may be offered at a price or by negotiation. Remember, even price is negotiable.
• While you should always get a lawyer to look at a property’s documents, they may not charge you until you successfully buy a property.  Our advice, discuss with your lawyer how their fees work before engaging them.

For more information, check out our section on Auctions on our Finding a House page.