Buying an Auction

Posted on 16 JAN

Q: I’ve just bought at auction and I settle in another three weeks. The property is tenanted but will be vacant at settlement. What safeguards do I have that it will be in good condition when I settle? Gary W.

As a purchaser you are entitled to a ‘pre-settlement inspection’. What this means is that you can insist on the agent showing you through the property a day or two prior to settlement. Strictly speaking you can only insist on the property being in ‘as inspected’ condition i.e. the same condition as when you viewed it at say the open home, and that the chattels are in good working condition. When we market a property we ensure all chattels are in good order; if the dishwasher, for example, is faulty, we list it on the sale and purchase agreement as an ‘excluded chattel’, so make sure you check all the included appliances are working and that things like the alarm system and all the lights, are working too. Contrary to popular belief the sellers do not have to clean the property prior to settlement, although most do of course.  Enjoy your new home!

Q: I am going to be bidding at auction in two week’s time. The agent selling the property has told me I need 10% deposit on the fall of the hammer, but I can’t raise it until just before the settlement date of late April. What options do I have? Sarah W.

A: Our first suggestion is to talk to the agent and explain your situation. Although auctions usually call for a 10% deposit you can ask the agent to approach the vendor with a variation allowing you to pay, for example, 5% deposit. If the vendor agrees then you are all set for auction day. In our opinion it is short-sighted for a vendor or agent to reject a lower deposit – at the end of the day we want every interested party to be at the auction and able to bid, and with property prices in Auckland the reduced deposit is usually still a significant amount. This is another reason our auction clearance rates are so high. The same thing applies to settlement dates: If the vendor’s settlement date doesn’t work for you then you can approach the agent and ask for a variation. This variation will only apply to you and no other buyers will be told.

Q: Like many other young people new to the market I’m looking at buying my first home with a friend, just to get a ‘foot on the property ladder’. What do I need to know about ownership options for my property? I hear words like “jointly owned’ but what does this mean for me? Bruce G

A: Well Bruce, this is a very common approach now that prices have increased so much. It’s really more of a legal question so I passed it on to Nick Birdsey of Birdsey and Associates. Here is Nick’s response:

For a residential property, ownership can be held by a private person or persons, in 3 different ways. First, a person can hold the property in their own name, or in their trust. So, looking at personal (non trust) ownership, a person such as Allan, whose spouse or partner is Brenda, can buy in his own name but Brenda still has or may have a relationship property interest.

Secondly, Allan and Brenda can buy the property in (a) joint ownership - the Title will say “Allan and Brenda” are the owners - or (b) as Tenants in common in equal shares, where the Title says ” Allan as to a half share and Brenda as to a half share.”
There are important differences. With joint ownership ((a) above), if one party passes on, say Allan, his share goes immediately to Brenda, under “survivorship”. The property does not go through Allan’s will or estate. So there is no control over what happens to the couple’s biggest asset. That may be fine, but there are situations where (b) is better. Say that Allan and Brenda have not been together long, and bring 2 children each, Diane and Eric and Gerald and Hesta. Allan can leave his defined half share to his children with Brenda having occupation for as long as she needs it. Brenda can do the same, and after a time they can change the ownership to joint ownership. (b) is also good where there are unequal contributions to the purchase price, eg one third Allan, two thirds Brenda. Sounds complicated I know, so I suggest you discuss it with your lawyer before putting pen to paper.

Q: I’m looking for an investment property and I’ve been following mortgagee sales. Looks like there are some bargains out there, but what are the drawbacks? Johnny M.

A: Great question, and happy to answer it here but as always, we suggest you get professional legal advice before undertaking any purchase, mortgagee or otherwise. You will probably know that a mortgagee sale occurs when a property owner is not meeting the terms of their mortgage and the lender decides to sell the property to recover its debt. That can mean you get a bit of a bargain with a mortgagee sale (there may not be a huge amount owing on the property), but there are some real pitfalls to watch out for too. The thing to be aware of is that a mortgagee sale and purchase agreement differs from a standard agreement in several ways. Firstly, all liability transfers to you as the buyer once the agreement is unconditional (i.e. at the fall of the hammer in an auction) and any damage is at your risk from then instead of at possession as with a normal purchase. Secondly, the chattels (E.g. stove, floor coverings, etc.) are not included in the sale. This means that between unconditional and settlement/possession the previous owner can remove any, or all, of them – leaving just a shell of the building when you take possession. We’ve seen instances where complete kitchens have been removed leaving holes in the floor and walls, handrails on the stairs taken and even in one instance a deck off the living area removed completely! All of that means you need to have insurance in place between then and settlement – not an easy thing as many insurers won’t want to cover you before you have legal possession. Lastly, the mortgagee sale and purchase agreement does not guarantee ‘vacant possession’ meaning that if the previous owners decide not to vacate it will be your problem to get them out – and that can be a nightmare! Again we strongly suggest you take legal advice before bidding on a mortgagee sale so that you are fully informed of all of the risks involved.

Q: I’m going to auction my home for sale later this year and I’ve been seeing lots of houses being sold before auction. How does a pre-auction sale work and is it a good thing to bring the auction forward? Thanks, Lily W.

A: No problem Lily. When a property is being marketed for auction, provided the agent has advertised it as “unless sold prior (USP) the agent can present a pre-auction offer to the vendor. Once an offer is presented the vendor has three options: (1) Accept the offer, sign it and it’s a done deal (2) say ‘no thank you, we will wait for the auction date’ or (3) say “yes that’s enough for me to sell’ and bring the auction forward. In this case (#3) the reserve is set at the offer figure and the auction starts with that as the opening bid, and if no higher bids are received then the property is sold at the offered price. Of course other buyers can still bid and the property will then sell to the highest bidder.

In our opinion, 99% of the time pre-auction offers only benefit the buyer. And what are those benefits? Firstly, bringing the auction forward means that less potential buyers will view the property (one or two weeks fewer open homes) so the buyer is cutting down on competition. Secondly, most pre-auction offers are not at the maximum the buyer is willing to pay. We have seen many auctions brought-forward where there has been additional bidding and the buyer that made the original offer has bid many thousands of dollars more than their first offer.

The only up-side for the seller is that they get sold earlier, and they don’t have to go through the stress of an auction where they don’t know if they are sold until the day. In our experience most vendors ultimately care more about getting a good price.

Some real estate companies have a policy to automatically bring the auction forward if an acceptable offer is received prior, but we think that it should be the vendor’s choice to decide how they want to handle the offer – it’s their property after all! We are always willing to give advice of course, but that is all it is – advice. Remember that the selling/listing agent works for the vendor, not the buyers, so always bear that in mind when talking to the agent who is selling the property.

Q: I have found a property I really like that goes to auction in a couple of weeks. Problem is the open homes have been really busy and I’m wondering whether I should even bother going along? Robert H.

A: We know that the mere thought of standing in a crowded auction room with emotions running high is enough to put many people off, especially those who plan to bid, but the best advice we can give is to make the effort and just turn up anyway. We have seen so many people decide not to attend an auction because they think it will sell for more than their budget, only to find their dream property sells for less than expected.

Having said that, it doesn’t necessarily mean that they could have bought it for that price, as they’ll never know if the other buyer had a stronger budget and would have kept bidding if they had had competition. Being the underbidder can be frustrating, particularly when the other buyer pays only $1,000 more, but we will never know if that was their last bid or if they would have gone way higher.

As we have said, you won’t ever know if you don’t go to the auction!

In the current market we are finding that we are having very busy open homes. A couple of years ago we knew that for every 15 open home visitors we would get one bidder, on average. Now that number seems more like one bidder per 35 or 40 open home visitors. SO don’t be too put off by open home numbers. Instead you should ask the agent a few clever, pointed questions. Agents are required to answer questions truthfully, to the best of their knowledge. If you ask about the likely sale price of a property going to auction, be prepared to get a pretty vague answer. The truth is that in this fickle market no-one knows what the final sale price will be – it all depends on the level of interest and the seller’s motivation. So ask the agent about those! And don’t rely on the CV to give you much of a guide, CV’s vary considerably from property to property and can’t be relied on much at all.

To re-cap: Ask the agent the right questions, and go to the auction!