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Why you shouldn’t buy property at auction

Published on 21st March by Josh Johnston

Why you shouldn’t buy property at auction

There are many ways to buy a property, from buying new off the plan, buying a property privately as well as buying a property at auction. Although, buying property at auction can be exciting to watch and you might get a bargain, you’re more likely to end up paying above market value, due to the pressure on auction day, especially if there is high demand.

In Australia, Melbourne is often regarded as the auction capital, with the largest number of properties selling under the hammer in the country. For the week ending Sunday 19 March 2017, 1,068 auctions were held in Victoria alone with an 81% clearance rate. This was down from 1,671 auctions at this time last year, but had a lower clearance rate of 74%.

Buying property at auction is becoming a popular way to buy property and can be achieved in an afternoon’s work. In fact, many more first home buyers are attending auctions and attempting to purchase a property this way. Auctions are also highly regulated today, and many states now require buyers to formally register. However, it’s important to keep in mind that auctions drive market prices up, whilst private sales and off the plan property sales sit more in line with the market.

So, should you buy property at auction? Here are the advantages and disadvantages to buying a property at auction.

Advantages of buying property at auction

1. Fast process
Buying property at auction is a fast process and takes around four weeks from the catalogue being issued until the auction date. Compare this with a private sale, which could take months.

2. Transparent buying process
Auctions also provide a transparent buying process where you can see all the other bidders around you. You also will only pay one increment higher than the under bidder so there’s no gazumping.

3. Highly regulated
Auctions are also a lot more regulated today, with many states requiring potential buyers to formally register beforehand. On the day, you only need to provide ID such as a passport or driving licence along with proof of address; your solicitor details as well as a method of payment for the 10 per cent deposit (debit card, cheque, banker’s draft etc).

4. Bargains if low demand
There are cases where you can snap up a bargain at an auction, if the seller needs to urgently sell and if there is low demand. However, it is more likely that you will pay over the asking price.

As well as advantages, an auction also has a number of disadvantages which you need to be aware of too.

Disadvantages of buying property at auction

1. Immediate financing
Although the fast process can be an advantage, it also means that you need to get all your finances in order and ensure that you have a 10 per cent deposit on the day if your bid is successful. The balance will then be required within 28 days. You need to pay by this date otherwise you risk losing the property.

2. An unconditional purchase
When you buy a property at auction, it is an unconditional purchase. This basically means that you are buying the property as seen, so if there are any issues with this then it is your responsibility. You cannot get out of the sale if there are any major issues that you did not know about and there is no cooling off period.

3. Overpay the market value
More often than not you will end up overpaying when you buy a property at auction and quoted prices tend to be unrealistic. This is particularly true if the property is in high demand and there are large crowds spurring you on. It can be very easy to go over budget.

4. Restricted to buy property that’s available
Unlike buying property within an off the plan development which is home to multiple properties and has several properties with the same floor plan, buying property at auction limits your choice. You can only buy property that is available for auction and this might not be in the suburb or street that you preferred.

5. Competition
Buying property at auction generally means you have to face a high amount of competition, particularly for properties or suburbs that are in high demand. This can make it harder to successfully purchase the property at your desired price, particularly if other bidders are prepared to pay more than you. In comparison, buying property off the plan within the early stages has greater choice and less competition to go up against.

6. Renovation work required
If your property is an established property then it is likely that renovation work will be required. It’s best to get a builder or someone to inspect the property with you before auction date so you have an idea how much extra this property will cost you.

7. Vendors might not want to sell for the price
Another disadvantage is that the bid might not reach the reserve price so will not be passed in or the vendor might not want to sell the property for the price you offered. This can be frustrating to buyers who thought they purchased the property, only to find that the vendor will not accept it after all.

8. Highly emotional experience
Buying property at auction is an emotional and nerve-racking experience, especially if you do not understand the process. You therefore need to familiarise yourself with auctions and attend some beforehand. However, on auction day, you might not feel comfortable enough to make a bid and end up leaving empty handed.

Why you should buy property off the plan instead?

If the thought of buying a property at auction has left you feeling completely overwhelmed, then there is a simpler way to purchase property without the overinflated price tags whilst you have a greater chance of being successful.

Buying property off the plan is well worth considering and is also becoming increasingly popular. This is because of the following reasons:

  • Affordably priced - The earlier you buy within an off the plan development, the cheaper the prices. This makes off the plan properties an affordable way to enter the property market.
  • Less competition - There is also less competition to go up against, particularly if you get in early in the initial phases.
  • More choice - Off the plan developments tend to have a number of properties with the same floor plan on different levels, giving you greater opportunity to buy the property you prefer.
  • Longer settlement - Off the plan properties tend to have a longer settlement of around 18 months or more, depending on the development size. This gives buyers more time to save up a larger deposit.
  • Capital growth - When you buy a property off the plan, you buy at today’s prices. This means by the time settlement arrives, your property might have gone up in value without you having to start paying a mortgage.
  • It’s new! - Finally, when you buy off the plan, you are buying a brand new property that no one has lived in. As it is new, it is less likely you will need to carry out major repairs or maintenance work and if you do, this is covered for the first few years.

Although buying property at auction can be an exciting prospect, it can also be a stressful and nerve-racking experience. Not only do you face higher competition from other buyers in the same boat as you, but the competition can also be fiercer and you might not even have the chance to make a bid.

If you do manage to make a successful bid, then it’s likely that you will overpay for the property instead, whilst you could also face your bid being turned down by the vendor. You might also find that the property will end up costing you a lot more due to major issues you discover later on.

In comparison, buying property off the plan can be a much more smoother process and our Property Consultants are happy to help you understand this purchase method in more detail.

Find out more today about buying off the plan and why you shouldn’t buy property at an auction by contacting iBuyNew today on 1300 123 463.


Josh Johnston

Josh has 20 years experience in the real estate industry and is focussed on helping his clients find their next off the plan property. For more information, contact Josh by email, josh@ibuynew.com.au, or call 1300 123 463.

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