Auctions are a popular method of buying and selling real estate in Australia. So understanding how they work can help you secure your dream home. But if you’re new to the property market or have never participated in an auction before, the process might seem a bit daunting.
To help, this blog will take you through the ins and outs of auctions, explaining how they work, their advantages and disadvantages, and some strategies you can use to navigate the process successfully.
So whether you’re a first homebuyer in Sydney or seeking the best mortgage broker in Sutherland Shire, read on to find out more.
Auction definition
An auction is a public sale where a property is offered to potential buyers through a competitive bidding process. The highest bidder at the conclusion of the auction becomes the successful purchaser of the property, provided the bid meets the property’s reserve price (the minimum price set by the seller).
Auction process
The auction process typically begins with a marketing campaign to attract potential buyers. On the auction day, interested parties gather at the property or an auction venue, and a licensed auctioneer conducts the proceedings. Bidding then begins, and potential buyers compete with each other to place the highest bid.
If the reserve price of the property has been reached when the hammer falls, the highest bidder wins the property, and the sale becomes legally binding. The successful bidder will then pay an immediate deposit, typically 5% to 10% of the purchase price, with the balance due at settlement.
If the bidding does not meet the property’s reserve price, the auction will be deemed ‘passed in’ or ‘withdrawn’. The seller may then decide to negotiate with the highest bidder after the auction has concluded. This negotiation could lead to an agreement on a price that’s considered acceptable to both parties, and the property will then be sold.
Auction advantages
Transparency
Auctions provide a transparent buying process, as all bids are made publicly, creating a level playing field for all potential buyers.
Speed
The auction process is usually swift, with a predetermined sale date, which can be advantageous for both buyers and sellers.
Certainty
When the hammer falls, the sale becomes unconditional, reducing the chances of a sale falling through due to finance or other reasons.
Motivated sellers
Auctions often attract sellers who are committed to selling their property, creating opportunities for serious buyers.
Auction disadvantages
Competition
Auctions can be highly competitive, and this environment might lead some buyers to bid beyond their budget, potentially overpaying for the property.
Stressful environment
Bidding at an auction can be nerve-wracking, especially if you are a first homebuyer in Sydney who isn’t accustomed to the process.
No cooling-off period
Unlike private treaty sales, auctions usually don’t have a cooling-off period for buyers to reconsider or change their minds.
Limited time for due diligence
Buyers must conduct thorough research and inspections before the auction as the contract is unconditional, leaving no room for negotiation
Auction mechanics
Bidding process
Once the auctioneer opens the bidding, potential buyers raise their hands or signal their bids, stating the amount they are willing to offer. The bids increase incrementally, and the auctioneer acknowledges each bid, announcing the current highest bid throughout the process.
Competitive bidding
The competitive nature of auctions means that bidding can escalate rapidly. As such, it’s usually a good idea for potential buyers to establish their budget beforehand by getting home loan pre-approval.
Auction types
There are three common auction types in Australia:
- On-site auction: Held at the property itself, an on-site auction allows buyers to get a feel for the property’s surroundings and potential.
- In-room auction: Conducted at a venue, such as a hotel or auction house, in-room auctions are generally used for selling multiple properties in one session.
- Online auction: Buyers participate remotely via a bidding platform.
Auction strategies and auction tips
For first-home buyers in Sydney, auctions can be an attractive option, but it’s crucial to be well-prepared.
That means:
- Doing your research beforehand to get an idea of the property’s realistic value
- Attending practice auctions to familiarise yourself with the process.
- Conducting thorough due diligence on the property so you can avoid any nasty surprises
- Arriving early so you can register and calmly prepare for the bidding.
- Keeping a cool head during the auction to avoid bidding beyond your means
Auction finance
Arranging finance is a critical aspect of buying a property at auction as the sale is legally binding. So it’s strongly recommended you have pre-approval for your mortgage in place before the auction day so you have a clear understanding of your borrowing capacity.
Auction property buying
When buying at auction, be prepared to act quickly and decisively. Remember that there’s no cooling-off period, so you must be ready to commit to the purchase immediately if you are the highest bidder.
Auction market trends – Sydney auction market
The auction market in Sydney can be extremely competitive, particularly in sought-after suburbs. Staying updated with local market trends, such as median home values and auction clearance rates, can help you avoid getting carried away in the heat of the moment.
The final word
Navigating the auction market may seem daunting, but with the right strategies, research, and support, you can confidently participate and increase your chances of securing your dream home.
As such, take the time to understand the auction process thoroughly, attend a few auctions as an observer to familiarise yourself with the process and ensure you have your finances in order with a pre-approved mortgage.
