Buying at Auction v’s Private Treaty

As a first-time homebuyer looking for your first place, you must understand the differences between buying at auction vs. buying privately.

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Buying at Auction v’s Private Treaty

If you are a first homebuyer, you will have to choose between two options: buying at auction or buying through private treaty. The process for each is quite different, so it’s important to learn about both methods of purchase.

Purchasing Your Home Via Private Treaty

A private treaty sale is one in which the seller sets the price that they want for the property. This price is normally outlined in marketing material, so you know whether or not the asking price is within your budget.

A private treaty sale may give you the chance to back out of the contract if you change your mind about the property, even after signing.

Benefits Of Private Treaty

When buying through private treaty, you can make a conditional offer. This means you will agree to buy the property, but your offer is subject to certain conditions being fulfilled — like having your finance approved, or the home receiving a satisfactory pest and building report.

A private treaty sale can give you the benefit of a cooling-off period. During this time, you can cancel the sale even after you’ve signed the contract.

Negative Side Of Private Treaty

One drawback of a private treaty sale is the risk of being ‘Gazumping’ (i.e., when another buyer makes a better offer than the one you accepted). This can happen because no sale is considered final until your contract with the vendor has been signed and exchanged and your deposit has been paid.

It can be helpful to speak with your My LMI Broker about having your home loan pre-approved, so that there’s less delay in getting approval and then signing the contract of sale.

Purchasing @ Auctions

When you buy a home at auction, you are bidding against other buyers in a very different way than when you buy privately. At an auction, interested buyers gather together and compete to make the highest bid. The negotiations for a private treaty sale can take days or weeks—but an auction can be done and dusted in a matter of minutes. That makes buying at auction very exciting, but also stressful.

When bidding at an auction, there is no cooling off period. Bidders cannot make conditional bids like making a bid contingent on lender approval, so they need to be able to pay the deposit and exchange contracts with the vendor on the day of the auction.

Having your home loan pre-approved gives you an advantage when you bid at auction.

Auction Preparation

Before you go to an auction as a bidder, it’s a good idea to attend a few auctions as an observer. We suggest the following tips:

1. Ensure The Property Is Right For You

When the hammer falls, if you are the highest bidder, you will be asked to sign the contract of sale on the spot. Be sure that the home is right for you. That said, if you miss out on this property, keep in mind that there are other options out there and something else may come along.

2. Understand The Market

Research the local housing market and the prices of comparable homes. This will give you an idea of how much a property may sell for, but it is not an exact science.

3. Understand The Deposit You Need

If you are the successful bidder at auction, you will usually be required to make a deposit immediately—generally 10% or more of the sale price. Please check with the agent as to exactly how much deposit is required, as well as if they prefer bank cheques or personal cheques.

4. Setting A Bid Limit

Before bidding at an auction, it is important to know the maximum amount you are willing to spend. Your local My LMI broker will be able to inform you of what amount you may borrow based on your financial situation and credit rating. Knowing your borrowing limit gives you a firm bidding limit so you can avoid overspending.

5. Review The Sale Contract Prior To Auction Day

It is crucial to get the contract of sale reviewed by your solicitor or conveyancer prior to auction day, as there is no cooling off period for an auction.

This gives you a chance to review the contract before bids are made and negotiate the fine print, such as the settlement period or amount of deposit required.