Buying property at auction can be a daunting task, and with more and more properties being sold by auction these days it is important that you understand the process and have your finance in place before you bid.
When you are buying property at auction there is no cooling off period, which means once the hammer is down you have bought the property and have to proceed to pay for it. Unlike a property that is sold by private treaty you do not get 5 days to arrange finance and do property searches all this must be done before the auction.
The most often asked questions people have when buying property at auction are:
1. Can I have the loan approved before I bid?
I advise all my clients to have their loan application assessed before starting negotiation on any property purchase but if you are buying property at auction you need to know in advance that you will be able to get a loan for the amount of money you need.
We can arrange to have your loan pre approved which means that the lender will look at your credit report, income, savings, assets and any other debts you may have and then pre approve you for a loan based on this information. As you cannot be sure how much you will have pay when buying property at auction, the loan cannot be formally approved.
When buying property at auction, I suggest to all my clients that we get the loan approved for the maximum amount your income can service and that you feel comfortable with and then lower the loan amount once you have successfully purchased the property and we know exactly how much loan money is required.
The loan preapproval with be subject to a valuation on the property and if you are borrowing more than 80% of the property value acceptance by the mortgage insurance company.
There is always an element of risk buying property at auction with no cooling off period but with the right pre work the risk is greatly diminished.
2. Can I have the lender value the property before the auction?
This question is always a tricky one.
When buying property at auction and there is a contract of sale with an amount on it a valuer will base their valuation on the sale amount plus comparative sales in the area. Because someone was prepared to pay the amount on the contract as long as the amount is not unrealistic based on other sales in the majority of cases the valuation will come in at the sale price.
When there is no contract of sale the valuer will base their valuation on comparative sales and the property may value at less than you are prepared to pay. If the Bank has done the valuation before the auction they will accept the valuation amount not the purchase price when accessing the LVR (loan to valuation ratio) which may result in a reduced loan amount or an increase in the cost of mortgage insurance.
Again, when buying property at auction there is an element of risk that the property may not value at the purchase price but if you have done your research and keep your cool at the auction and do not exceed the maximum amount you believe the property to be worth the risk is extremely low.
In my 25 years of lending I have not had a property purchased at auction come in lower than the amount paid. This gives you confidence to use my service when buying property at auction.
3. How do I know how much to pay?
You need to research property prices in the areas you are looking at prior to buying property at auction. You can do this by attending open houses and gauging the value of the property by the asking price and what the property has to offer in way of size, location, quality of fittings, décor.
You can look on the various real estate sites at the sold properties which often list the sale price.
The easiest way is to ask me to provide a free RP Data property report on any property you are considering buying property at auction, or indeed any property at all. This will give an estimate of the current value and list comparative sales in the area. This report is one of the tools the valuers use when assessing the value of properties and I can give you free access to it.
4. How can I buy before I sell my current place?
This is the problem existing home owners find themselves in and causes the most stress when buying property at auction or otherwise.
If you sell before you buy what if you cannot find a property you like, but if you buy before you sell how can you afford to pay for the new property?
I always advise my clients who are in this situation to ask for an extended settlement time. Most contracts of sale have a completion date of 42 days (6 weeks) after the signing of the contract. If you can extend this time to 10 or more weeks to allow you to sell your property you do not have to consider bridging finance.
With a bridging loan, the lender will loan you the money to cover the gap between settlement and buying a property at auction or otherwise. Effectively, the lender agrees to take on both mortgages. Bridging finance typically covers a period from a few days to a few months.
This form of finance is expensive because in most cases your existing loan and the full amount of the new purchase are combined and interest accrues on the new total loan balance. The lender will access your ability to repay the loan based on the amount you will owe after the sale of your existing property. There are additional fees due to the lender having to value two properties plus other associated costs.
There are strict criteria for bridging finance before approval is given which will include the unconditional sale of a borrower’s existing property and restrictions on proposed settlement terms. Other conditions may be imposed on a case-by-case basis. The finance is usually only available for 6 months after which penalties may apply.
My advice is to allow me to fully access your personal situation and together work on the best strategy for you when buying property at auction. I have always bought before I sold so I understand the stress involved in purchasing this way but with careful planning the stress can be reduced.
5. I haven’t sold my place yet so how can I get the money to pay the 10% deposit.
Once you find the perfect house and you have the thrill of buying property at auction, you sign the contract of sale and will be required to pay the 5% or 10% deposit which ever amount has been agreed upon. If you do not have the money and cannot borrow it short term from family we will need to arrange a deposit bond for you.
A deposit bond is basically an insurance policy. The deposit bond is the policy document that tells the vendor that the insurance company will pay the 10% deposit to the vendor if you for some reason do not proceed with the purchase. The insurance company will then endeavour by all legal means at their disposal to get the bond money back from you.
There is a once only premium paid for the bond. When purchasing at auction the premium is calculated on the maximum amount you are prepared to pay. If you are unsuccessful at auction the bond can be returned and a portion of the premium refunded.
In the normal course of events settlement takes place, the purchase price is paid in full and the deposit bond simply lapses
6. Other than the loan what else should I organise?
Buying property at auction can be an expensive exercise as you have to do all your due diligence even though you may not be the successful bidder but it could be even more expensive if you do not.
- Have a solicitor review the contract of sale. They can address any conditions of the contract that may not be in your best interest and can also ask for an extended settlement if required. They will also arrange any searches that they feel would be in your best interest to undertake such as strata reports or building surveys.
- Get a pest & building inspection done. It is important to find out if there are any building or pest problems before you buy.
- If you are buying before you sell have the contract for sale for your existing property ready. If you are the successful bidder and you need to sell your existing property time will be of the essence and you need to move quickly to list your property for sale. By law a real estate agent cannot show a property unless they hold a contract of sale. By having your solicitor prepare the contract you will lose no time it getting your place to the market.
- Have a Real Estate Agent lined up ready to put your property in the market. Again as time is of the essence to sell your current property by having already decided upon the real estate agent you want to sell your property you will save time. A good agent will be able to arrange photos and have your property listed in a day or two. They may already have people to show through which will give you confidence for a sale.
- Have your house prepared for sale. I cannot stress enough the importance of being prepared to list your current property as soon as you have purchase. Now is not the time to think about decluttering, fixing the gutter, cleaning the carpet etc. you want your house to be ready to show to potential buyers immediately. Have all the jobs that needed to be completed done so you can attract that potential buyer.
As you can see they are many things to consider when buying property at auction. I hope you have found this information useful and if you have any questions that I may not have covered please contact me at this web page or at firstname.lastname@example.org.