The auction season has started! Auctions can generate a variety of emotions when trying buy your next home – fear, anticipation, jubilation if you’re the successful bidder, or irritation if you’re among those missing out.
Understanding the auction process and auction terms can help to keep your emotions at bay on the day. There are rules about how an auction must be run; but within those rules, auctioneers have their own ways of conducting auctions. Good auctioneers aim to create competition by encouraging as many bidders as possible to participate, in large increments and quickly. They do this to achieve the highest possible price for the seller.
Get familiar with the following auction terms to gain some confidence.
Please note, the below information is referenced for NSW only. If bidding in another state, please get familiar with the state’s rules and terms.
Reserve Price
Before the auction, the vendor will set a price that is the minimum price they will accept. If the reserve price isn’t reached during the auction, the auctioneer will privately ask the vendor if they will sell at a lower price.
The reserve price must be given in writing to the auctioneer before the auction commences.
Registration
In NSW, it is a legal requirement that every bidder is registered prior to making a bid. This is normally done before the auction starts, but sometimes during the auction people can register before making a bid.
The agent will note each bidder’s name, address, the identifying number of their proof of identity and the bidder number allocated to the person for the auction.
Bidder number
Each bidder will be allocated a unique number. The number could be printed on a paddle, or written on a piece of cardboard, plastic or laminated paper. Basically, it must clearly seen by the auctioneer.
When bidding, this number must be held up so the auctioneer and the agent logging the bids can see it clearly.
Authority to Bid
If the prospective purchase of the home has a representative (such as a buyer’s agent) bidding on their behalf, because they can’t be present at the auction, they want a professional acting on their behalf, or don’t want to let emotions get in the way, a letter of authority to bid for that person must be presented to the auctioneer.
The letter must include the person’s name, address and identifying number of their proof of identity.
Bidders Guide
The NSW Fair Trading’s fact sheet the Bidder’s guide provides information for bidders including how to register, the kinds of proof of identity required, privacy rights and auction conditions. The selling agent must attempt to ensure that all bidders receive a copy prior to the auction.
Bid
A bid is an offer by the buyer to set a price for the property. Bidding amongst interested parties is used to determine the value for the property. Bidding in general is viewed as an inherent way of determining the price of a commodity in a free market economy.
At an auction, the auctioneer can refuse to accept an initial bid that they feel is too low. Once the initial bid has been accepted, competing buyers will then offer higher bids for the property.
While the bidder doesn’t have to bid at the amount stated by the auctioneer, the auctioneer can choose to accept or reject the bid, if it’s in the best interest for their client (the seller).
Vendor bid
A bid made on behalf of the seller is known as a vendor bid. During the auction, the auctioneer may place a vendor bid, which must be declared by the auctioneer. It gives the buyers an indication that the vendor is not satisfied with the bidding level/price at that point of the auction.
Only one bid may be made by or on behalf of the seller.
Dummy bidding
Dummy bidding is illegal and is bidding made on a property that either the auctioneer, agent, employees, seller or friends and family make to drive up the selling price.
A bid may be found to be a bid made on behalf of the seller even though the seller did not request the bid, or have any knowledge of the bid.
Severe penalties may be imposed on persons convicted of dummy bidding.
Passed In
If bids do not meet the reserve price, the auctioneer will try to get more bids and may use a vendor bid to encourage more bidding. If the bids still do not meet the reserve, the property will not sell at auction and will be ‘passed in’.
The highest bidder then usually gets first right to negotiate with the seller after the auction.
Fall of the Hammer
Towards the end of the auction, the auctioneer will call for any final bids. Once there are no more bids, the auctioneer will count down the ‘fall of the hammer’, which signals the end of the auction. No bids can be made after the fall of the hammer and the highest bidder is legally obliged to sign and exchange contracts.
If there is a disputed bid, the auctioneer is the sole arbitrator and makes the final decision
Successful bidder
Congratulations! The successful bidder is the person with the highest bid at the fall of the hammer. If you are the successful bidder, you must sign the sale contract and pay a deposit on the spot, usually ten per cent of the purchase price. There is no cooling-off period when you buy at auction.
Cooling off period (not!)
Auctions differ from private sales as there is no cooling-off period after the seller and buyer exchange contracts. Even if contracts are exchanged on the same day as the auction after the property has been passed in, the property will still be sold under ‘auction conditions’, meaning there is no cooling off period.
If you are bidding at an auction, you must be ready to exchange contracts and complete the sale. Otherwise, you will lose your deposit and may be liable for any damages suffered by the vendor.
So there you have it! Auctions really aren’t that daunting and sometimes they can even be good fun. Ensure you’re well prepared and more importantly stick to your budget. Remember, you should always consult with your solicitor and lender before heading to any auction to buy a home.