Auctions are simply a way of life in the Melbourne property market. Even though, in overall Metropolitan Melbourne, there are only about 30% of properties that go to auction, in the inner suburbs around the 20km ring of the CBD, this could be closer to 60%. If you are intending to purchase in these areas, you will need to understand the auction process and how to handle it.
This is an overview of what you can expect on the day of auction. Over the next few weeks I will break down the sections of the auction in a lot more detail. Feel free to comment or ask questions via our feedback section.
Firstly, you need to understand that the auction system is a method of sale, but do not assume all properties up for auction will sell under the hammer. In fact, most do not. The “clearance rate” is made up of all properties that are listed for auction that are sold before auction, sold under the hammer, passed in and then sold in post auction negotiation on the day. Many more than half of the auctions I attend as a professional buyer’s advocate pass in and then are negotiated. When you see the result in the papers the next day, it is listed as “sold”.
Assuming you have found the property you wish to purchase and it is listed for auction, you need to understand that within 3 days of the auction (usually a Wednesday) and 3 days after the auction, there is no cooling off period. If you sign a contract at this point then the deal is done! This means if you wish to have a building inspection done, you need to have done it before you sign the contract, very few agents will allow a conditional contract to be offered to the vendor within this time frame. You will also need to have the contract vetted by a competent solicitor or licensed conveyancer. If there are any legal issues with the contract or property, you need to sort these out prior to signing the contract.
Assuming you know what the property is worth to you, you have had the contract checked and the building and pest inspection done, then you are ready to bid on auction day. You need to understand, when buying at auction the work you do before the auction is of paramount importance and this will prepare you for the auction. If the auction is being held at the property (95% or more are) then the property will be open for inspection 30 minutes prior to the auction. In Victoria, this is a legal requirement as the rules of auction must be on display for 30 minutes prior to the start of the auction.
Once the auction begins, the auctioneer will usually introduce him/her elf and his/her colleagues and then talk a little about the contract and then about how good the property is. Amongst this “street theatre”, the rules of the auction must be read out and the property identified, usually as the volume and folio number on the title. Once the auctioneer has finished his spiel (usually around 6-10 minutes, however I have been to a few auctions where the crowd are almost starting a slow clap) the serious part of the auction will get under way.
The opening bid from the public is very rare and more often than not, the auctioneer will start with a vendor bid. This is a bid on behalf of the vendor, which is simply used as a starting point. In Victoria, an auctioneer can vendor bid as often as he/she likes, however, they are quite meaningless bids. If there is no bidding at all from the public, then the property is “passed in on vendor bid” and listed that way in the papers the next day.
Assuming there are people there to bid (you are!!) then someone will usually shout out a bid. Note: you do not have to register as a bidder in Victoria – you can just stand there and bid). Bidding can be putting your hand in the air to accept the suggestion of the auctioneer, or you can call out any number or increment increase you want. If the increase is too small, the auctioneer does not have to accept it. Assuming the auctioneer does, and there is another bid, then the auction is off and running.
In an auction, you need to be the highest bidder to win the prize. If you hear the auctioneer call out “The property is on the market” this means the vendors reserve has been met and the top bidder will purchase the property at that price. If the property is not on the market, then you are bidding for the first exclusive right to negotiate with the vendor directly. Either way, if people are bidding, then you need to keep bidding up to your limit, whether the property is on the market or not.
Once the highest bid has been reached, the auction is over and either the property will be sold to the highest bidder at the last number bid, or negotiations will commence inside the property in private with the highest bidder and the agent. Either way, when the hammer falls, you have not yet purchased the property. This only occurs once the contracts are signed. In the state of Victoria, no property sale has occurred until the contracts are signed. (Even though the auctioneer may have yelled out SOLD!)
Assuming you are lucky and you are the highest bidder and the property is on the market, then you will be ushered inside by the agent. You will be kept away from the vendor until you have formally made a written offer on the property. This will mean you will sign 3-5 copies of a contract of sale but before you sign, make sure the documents are exactly the same as the one’s you had checked prior to the auction. When you have signed, and the vendor has signed, most of the time the agents will introduce buyer and seller and then quickly finish up and put the sold sticker on the board.
This is the process of an auction. Over the next few weeks I will break down the individual sections and explain the pre-auction offer, how to bid at an auction, post auction negotiations and your rights as a purchaser.
If you are considering purchasing a property this year in Melbourne and you require some assistance because you are overseas, or interstate, or simply because you want to save money, time or make sure you pay the right price, please feel free to give us a call. We assist investors and owner occupiers alike.
JPP Buyer Advocates