Purchasing a property at auction is exciting and the stakes are high. But regardless of whether you're purchasing your dream home, an investment property or a commercial property for your business, there are a number of things you should do or consider before raising your paddle on auction day, to put you in the best position to successfully and confidently purchase the right property for you.
Due diligence
The standard contract of sale in Queensland is designed to allow the parties to sign the contract prior to the buyer obtaining all relevant searches in relation to the property. However, buyers will only have a right of termination or compensation in very limited circumstances, where there are serious issues with the property or the seller's title to it.
Some sellers provide pest and building reports to buyers as part of an information package about the property. However, no two pest and building inspectors will pick up on the same issues. Even if the seller provides a pest and building report, consider obtaining your own pest and building report prior to the auction so you are well-informed about the condition of the property.
Buyers may not have rights of termination or compensation under the contract for such things as physical defects, asbestos, unapproved structures, restrictions on the use of the property, the property being in a flood-prone area or services not being connected to the property. As such, intending buyers should consider ordering any relevant searches in sufficient time before the auction to receive and consider the results prior to bidding. While the cost of the searches may be wasted if the buyer is not successful at the auction, issues that may be discovered after purchasing the property may be far more expensive in the long run.
Finance
Auction contracts are not subject to the buyer obtaining satisfactory finance approval, so buyers should be confident that they will be able to fund the purchase on the due date for settlement. The buyer's bank is likely to carry out a valuation of the property and if that value is less than the buyer's expectations, it may require the buyer to tip in more cash than the buyer originally anticipated.
Deposit
Auction contracts are formed on the fall of the hammer and the standard contract of sale in Queensland requires the deposit to be paid on the date that the buyer signs the contract, being the auction date.
Failure to pay the deposit on time is a fundamental default that entitles the seller to immediately terminate the contract.
This means that a successful buyer will need to be in a position to pay the deposit immediately on the auction being completed. However, recent changes to the standard contract mean that buyers who make an electronic funds transfer on the due date for payment and provide evidence to the deposit holder of that transfer, will not be in default if the deposit does not arrive on the due date.
Insurance
The property will be at the buyer's risk from 5 pm on the first business day after the contract is entered into. The buyer should be ready to put in place insurance cover promptly after the auction to ensure that the property is adequately insured by that time.
Cooling off (residential contracts only)
One of the biggest differences between purchasing a residential property at auction and purchasing by negotiation with the seller is that the statutory 5 business day cooling off period does not apply to contracts formed at an auction. Buyers will be bound by the contract unless one of the standard terms of contract provides a right of termination (and those rights of termination are limited to serious matters regarding the property and the seller's title to it).
The cooling-off period also does not apply where the property was passed in at the auction, and a registered bidder at the auction enters into a contract to purchase the property in the 2 business days immediately following the auction.
Advice
Intending buyers should obtain a copy of the proposed auction contract and seek advice on it prior to the auction, so they are aware of the terms and conditions by which they will be bound if they are successful at auction.
The proposed contract may disclose easements or other interests in the property, that affect the buyer's intended use of the property or impose obligations on the buyer after settlement. The proposed contract may also have special conditions that significantly amend the parties' rights and obligations.
It may be possible to negotiate amendments to the contract prior to the auction, to apply if the buyer is successful.
Summary
While they might look the same, an auction contract presents risks to the buyer that a standard contract of sale does not.
The lack of usual conditions means that buyers should ensure that they have properly investigated the property and their ability to pay for it ahead of the auction date, as once the hammer falls, the buyer will be bound to complete the contract on the due date unless there are serious issues with the property.
Buyers considering bidding at an auction should seek advice early, to minimise the risks associated with purchasing at auction and to maximise the chances of a successful property purchase.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
