Auctions - Tricks, Traps and Strategies
"There is something wrong with auctions. Informed consumers hate them, industry commentators condemn them, and governments have failed to legitimise them."
Lawyers Conveyancing (Victoria)
Preparation for an Auction
You need to prepare before buying a home at auction by knowing your legal rights and requirements. It is also useful to attend a few auctions first to see how they work.
The Queensland Government's "Buying Property at Auction" webpage states that the following legal requirements are binding when bidding at auctions:
The Successful bidder
If you are the successful bidder, you must sign a contract immediately.
There are very serious legal consequences if you cannot settle the sale on time. You may be forced to pay:
- the amount of your winning bid, regardless of whether you had access to the money
- the cost of re-auctioning the property
- any shortfall between your offer and the winning bid at the next auction.
There is no cooling-off period for buying at auction. If you are the successful bidder at the auction, you will have to settle the contract even if:
- the house doesn't pass inspections (refer Building Inspections Problem Areas)
- you change your mind
- you can't afford it.
The cooling-off period also does not apply to a private treaty contract:
- entered into within 2 business days of an unsuccessful auction of that property
- in which the buyer was a registered bidder at the auction.
The terms of sale usually require you to bid on an unconditional basis. This means you cannot have any conditions, such as:
- subject to finance
- subject to the completion of another sale.
However, Lawyers Conveyancing (Victoria) presents an alternative legal perspective to the above suggested 'binding' agreements for successful bidders:
First Trick - the bidding conditions
"Every lawyer involved in the preparation of Contracts of Sale of Real Estate will be familiar with the estate agent's demand that "bidding conditions" should appear in the contract. Indeed, nearly every contract displayed at an auction will contain bidding conditions.
Usually, the bidding conditions will include the following:
- No bid shall be retracted.
- No bid shall be less than the amount called for by the auctioneer.
- The highest bidder shall be the Purchaser.
- Highest bidder must sign within 10 minutes of the fall of the hammer.
- The Vendor is entitled to make dummy bids.
- The estate agent points to the contract, and tells bidders that the auction will be conducted in accordance with the bidding conditions contained in the contract.
But why are the bidding conditions in the contract at all? The contract doesn't bind anyone until it is signed; when the contract is signed, the auction has already finished!
There is only one reason for the bidding conditions being inserted into the contract, and that is to trick bidders into believing that they must be obeyed. We are critical of lawyers who allow themselves to be manipulated by estate agents who demand that bidding conditions be improperly included in sale contracts.
The winning bidder cannot be forced to sign the contract. For example, if the winning bidder is about to enter the house to sign the contract and overhears someone mention "the asbestos problem in the roof", she may decide that she doesn't want the property after all. She cannot be required to sign the contract, and cannot be in breach of a contract she has not signed."
A Trap - vendor bids
Under Queensland law, auctioneers can accept 'vendor' (seller) bids up to the reserve price.
Before the bid reaches the reserve price, the auctioneer can:
- bid on behalf of the seller
- accept bids from the seller (or their representative).
The auctioneer must announce if a bid is a vendor bid. If a vendor bid is announced, you know that a reserve price has been set and that it has not yet been reached.
Once you reach the reserve price, any more vendor bids will become 'false bids' which are illegal.
Dummy bids are also illegal. A dummy bid is an attempt to raise the bidding, after the reserve price has been reached by:
- the seller
- their family or friends
- the auctioneer
- any other 'planted' individual.
Lawyers Conveyancing suggests the following as a way to avoid the "Vendor Bid" trap:
"Consumers should understand that an auction can be crippled if "permissible vendor bids" are used by the auctioneer. (We suspect that the use of vendor bids by auctioneers may become grounds for an action in gross negligence in future).
A vendor bid could be described as a counter-offer made by the vendor. When a person makes a bid at an auction she is really saying, "My offer to buy is $290,000". When the vendor offers a vendor bid, he is effectively saying, "My offer to sell is $300,000". All the bidder has to do to buy the property is to call out "Done!" The bidding stops, because the vendor's bid, or counter-offer has been accepted.
Estate agents expect that bidders will allow the vendor to pretend that he is one of them, and that they will bid against him as though he really wants to buy his own house. Clever bidders will remain silent as soon as they hear the agent declare the vendor's bid. It is at this point that the estate agent should be called upon to declare the reserve price, and to stop the nonsense."
First Strategy - before the auction
Before the auction, make sure you:
- inspect the property
- arrange your finance
- get a property valuation
- do your own research of the market
- get a copy of the contract
- get legal advice about the terms and conditions in case you're the successful bidder.
Make sure you ask the agent about:
- how much deposit they will ask for (as a percentage of the winning bid)
- how you'll need to pay it (a personal cheque, bank cheque or deposit bond is usually okay).
The standard deposit payable on any purchase is 10% of the purchase price. You should not pay any more than this.
Although you may be told by the real estate agent that you must provide a bank cheque on the day of the auction, you do not have to pay anything immediately unless the contract states that the deposit is due on the day of sale. For example, many auction contracts state that the deposit is due "on their signing hereof".
You can avoid having to buy a bank cheque before the auction by ensuring that the contract allows a few days between the day of sale and the day the deposit is due. The deposit can be paid by personal cheque, bank cheque or even cash on the day of the auction.
In Queensland it is illegal for a seller or their agent to give you a price guide for an auction property. This is because they cannot know how high the bidding will go.
A property may appear on a listing website when you search by price. This is only for the purposes of the web search, and is not designed as a price guide. The website should give you a statement that explains this.
Sometimes, an auctioneer may offer you a comparative market analysis (CMA). This is a document that offers you information about what similar properties have sold for in the same area. They can only give you this document with the seller's approval.
Second Strategy - property inspection
Try to arrange for property inspections and title searches before you start negotiations. This way, you'll know exactly what condition the property is in. You will then be able to factor in any future costs when you make your offer. When getting an inspection, find out exactly what the report covers and what it doesn't cover.
The main types of property inspections and searches are:
- building inspection
- pest inspection
- electrical inspection
- land tax clearance search
- swimming pool inspection (if relevant).
It is important that each area of inspection is conducted by an expert in their field. Building inspections should be undertaken by qualified builders, only registered pest control companies should inspect for pests and experienced, licensed electricians engaged for electrical inspections.
Pre-purchase building inspections should be carried out in accordance with Standards Australia AS4349.1-2007. Reputable pre-purchase building inspectors will contact the real estate agent to arrange an inspection on your behalf.
Courtesy - Lloyd Woods Builders
While some pests present temporary inconveniences that require pest control solutions, by far the most destructive and expensive pests are termites. Termites cause more damage to buildings in Australia than fire, floods and storms.
Courtesy - Tony's Termites
It is now common practice to get pre-purchase building and pest inspections. However, few people are familiar with a pre-purchase electrical inspection when buying a new or existing home or unit. Electrical faults are known to be the cause of destructive fire damage to properties.
Courtesy - Weiss Electrical Brisbane
If you can't arrange inspections before an auction or sale, you may still have inspections done before settlement day. You will need to write terms into the contract to let you cancel the sale if the property gets poor inspection reports.
Third Strategy - at the auction
Set a budget before the auction and stick to it. If you want to bid:
- ask the auctioneer if there have been late changes to the contract (they must announce the terms at the start of the auction too)
- ask any questions you have about the property
- register with the auctioneer.
- Only registered bidders can bid on the day. The auctioneer will give you a unique identifier such as a numbered paddle.
An auctioneer must have a current and valid licence. An auctioneer licence is the only type of licence that permits a person to auction real estate (not a real estate agent or chattel auctioneer licence).
However, it is possible that a person has more than one type of licence.
They will need to either:
- display their name prominently at the site of the auction
- announce their name at the start of the auction (but only if displaying would be impractical).
- You can do a free online search to make sure they have a valid licence.
Check a licence The auctioneer must announce the conditions of sale. These may include:
- the required deposit
- inspection details
- any other relevant details.
They may also use the unsigned sale contract to disclose the conditions of sale.
More Tricks - reserve price
The reserve price is the minimum sale price that the seller will accept. The seller sets the reserve price in writing with their agent before the auction. A seller doesn't have to set a reserve price, but most will choose to have one.
In Queensland, the auctioneer is allowed to tell you whether or not the seller has set a reserve price. However, the auctioneer must not tell you the reserve price itself.
Once the reserve price is reached during bidding (or no reserve price is set), the property will be 'on the market'. The auctioneer does not have to announce when a property is on the market, but they are allowed to do so if they wish. If an announcement is made, it must be truthful.
Once a property is on the market, it means the auction must result in a sale. The winning bidder must purchase the property, and the seller must sell.
If the property doesn't reach the reserve price, you can negotiate with the seller after the auction. If this leads to a sale within 2 days of the auction, you will not get a cooling-off period.
In Queensland if you reach an agreement more than 2 days after the auction, you have access to a cooling-off period.
Fourth Strategy - changing contract conditions
"Everyone knows that auctions are held at times and places where it is impossible to get legal advice or legal assistance.
It is also well known that the estate agent is the only person at the auction who knows enough about the law of real estate to be able to win an argument. At the auction the estate agent is king, simply because no-one knows what to say when the agent refuses to allow the addition or deletion of any conditions in the contract.
However, there is a way to ensure that you are protected when you attend at an auction as a Purchaser. Obtain a full copy of the Contract before the auction, and have a qualified lawyer check it out. Have any nasty conditions deleted, and add any protective conditions your lawyer suggests.
Before the auction, hand a photocopy of the amended Contract to the auctioneer or any of the other estate agents at the property (be sure to record the name of the person you hand it to, and be sure to keep the original in your safe custody). Tell the auctioneer or estate agent that you will be bidding, but you will be bidding on the basis that YOUR contract is the one to be signed.
Don't listen to the agent's protests (the person you want to impress is the vendor). If the property is knocked down to you the agent may say that you have to sign the original unaltered Contract, but you will know that this is false.
You are entitled to demand that your Contract be the one that is signed if the Vendor wants a sale. It will then be up to the Vendor (not the agent) as to whether or not your offer will be accepted on your terms. If you have made a good offer, and the Vendor is keen to accept your price, it will be your Contract that will be signed - on your terms."
One More Strategy - offers before auction
"An offer can be submitted in the normal way prior to an auction. However, you may find that the real estate agent will be less than co-operative, and may even refuse or fail to pass your offer on to the vendor.
Real estate agents like auctions because they are an excellent form of self-promotion for the real estate agent:
- Pre-auction advertising is paid by the vendor, and promotes the real estate agent locally.
- Open-house inspections give the real estate agent the opportunity to meet prospective vendors (a person who is buying is likely to be selling).
- The day of the auction is a further opportunity for promotion of the real estate agency.
Obviously, the real estate agency and the estate agent in charge of the auction will be keen to see the auction proceed.
If the real estate agent indicates reluctance in submitting your bid to the vendor, just by-pass the agent and approach the vendor in person. After all, the vendor is the person who matters most."
The Final Trap - avoiding it
"Basically, when a contract of sale has been signed by a purchaser by way of an offer, and the offer has been accepted by the vendor, and the purchaser has been notified that the vendor has accepted the offer, there is a sale. Unless the parties have committed themselves in writing there can be no sale.
- Bids at an auction do not complete a sale of real estate.
- The fall of the hammer at an auction does not complete a sale of real estate.
- A declaration of "Sold", shouted at the highest bidder does not complete a sale of real estate.
- A verbal promise by vendor and purchaser does not complete a sale of real estate..
- A declaration of "Sold", shouted at the highest bidder does not complete a sale of real estate.
Do not be misled. If any of the above occur there may be a verbal contract in the technical sense, but it is unenforceable unless it is in writing and signed by the party against whom it is to be enforced."
Lawyers Conveyancing (Victoria)
Researched, compiled and composed by Dr Steven Gration - June 2019 - researcher - SEO Gold Coast