By Ben King, Senior Solicitor, Aspiring Law
Of all the methods to buy a property, winning at auction tends to come down to a little luck and a lot of homework – but it can also bring risks for the uninitiated.
Sellers have a few methods to choose from when selling their home: “auction”, “deadline sale”, “tender” and “by negotiation”. For sellers, deciding which method is best is one of the most important considerations when arranging the sale of your home, and tends to be linked to the market factors at the time. In other words, supply and demand.
An auction is, simply put, a public – and typically swift – negotiation on price to buy a property. It seems buyers still outnumber homes for sale, so auctions continue to be popular with sellers keen to capitalise on the bidding wars that are typical of a buoyant market and lack of supply.
As anyone who has ever attended an auction with multiple interested parties can likely attest, it’s all too easy for bidders to get carried away and pay that little bit – or, in some cases, a lot – more than they initially intended. But an expensive dose of buyer’s remorse is not the only potential pitfall when it comes to auctions.
First and foremost, by simply raising your hand at an auction, you’re committed to buy at whatever the bid is at that time. Bidding at an auction without doing your due diligence is the same as signing an unconditional sale and purchase agreement without completing any checks on the property. If you win the auction, only to discover there are issues, it’s highly unlikely you will be able to back out of the deal.
The price you have to pay
One of the major annoyances for would-be buyers at auctions is having to stump up in advance for the likes of LIM and building reports on a home that then ends up in someone else’s hands come auction day. There’s no getting around that, unfortunately. If you are serious about bidding, then you really do need to know what is in the LIM, what interests are on the title, and whether the property is in good order.
Speaking of LIM reports, it’s common for real estate agents to provide a LIM in the auction sales pack, which most purchasers rely on. What most people don’t know is that you can’t rely on a LIM report that’s not addressed to you. So, if it transpires Council has been negligent in preparing the LIM report, unless it has your name on it, you can’t recover any losses from Council.
Another really important consideration that can be easily overlooked in the heat of the moment is around finance, particularly if you’re relying on your KiwiSaver or arranging a HomeStart grant. Many buyers discover all too late that getting their hands on these desperately-needed funds isn’t exactly the speedy process they assumed.
Ensure you have enough time from auction day to settlement to arrange the necessary documentation to free up your money – or else, risk hefty penalties. You’ll need to confirm the timeline with your provider, but as a rule of thumb, at least three weeks is needed to process a release of KiwiSaver funds.
While the pace at auctions can be intense and quickly price some bidders out of the action, sometimes this method of sale serves to whittle down the competition. Some would-be buyers simply don’t want to pay for the reports needed for pre-auction due diligence. So, you might just find yourself the only bidder and score your dream home at a dream price. It does happen.
But wait ...
On the other hand, it’s not exactly all “buyer beware” when it comes to auctions. While sellers do face fewer risks using this process because buyers have no opportunity to include conditions, sellers still carry obligations and risk.
The auction contract includes a raft of warranties. For example, all systems – including the likes of lawn sprinklers, heat pumps and appliances – must be in good working order on settlement, excepting fair wear and tear. Warranties can, and do, come back to bite sellers, both pre-settlement and post. Be sure to run through these with your legal adviser, so you enter the process fully informed, as these warranties can be amended or deleted.
If you’re house hunting and don’t have experience in auctions, it’s wise to school yourself before a property that catches your eye goes under the hammer.
Bidding at its best
It is generally wise not to bid too early and add fuel to fire; see where it’s heading. You might find it gets out of reach quickly. Remember, auctions can be absolutely frenetic and stressful. It’s a good idea to take a support person as a soundboard, and who can help keep you on the straight and narrow.
If a property is “passed in”, it simply means the price wasn’t high enough to reach “reserve” – the lowest price that the seller is willing to accept. Typically, the highest bidder will have the opportunity to negotiate with the seller once the property has been formally passed in.
Sometimes, a temporary stop will be put on the auction while the auctioneer takes a few minutes to get instructions from the seller. In some cases, the reserve is lowered and the auction resumes, but not always.
If a property is passed in, and you hold the highest bid, you can then enter into a standard agreement for sale and purchase, but now with the ability to include conditions for your benefit. Hopefully, you won’t need to do any due diligence, because you will have already completed the requisite protective checks ahead of the auction.
