Tips for buying at auction

Buying at auction is a popular home-buying method for many Australians. So what can buyers expect? How can you give your bid the best chance at winning? And how does the auction process impact your home loan?

Let’s get into what home buyers need to know about bidding at a property auction.

The main way to prepare for an auction is to know how much you can bid. For this, you need to know your home loan borrowing power.

Borrowing power, also called ‘borrowing capacity’, is how much you can get from a home loan lender. Your borrowing power doesn’t have to be the same as the final sale price, but you'll want to borrow enough to purchase the property. 

Mozo’s free borrowing power calculator can help you get started. 

Home loan pre-approval is a conditional ‘yes’ on your home loan application from a lender when you don’t have a property just yet.

It can be helpful when comparing properties or buying at auction to have conditional approval because it lets you confidently make an offer.

Here are the documents you need for home loan pre-approval.

Property auctions don’t have cooling-off periods. This means if your bid wins, you are legally bound to buy the property. Since the first step of home loan settlement is to pay the home loan deposit, the auctioneer will wave you in to pay it. 

Typically at an auction, your vendor will expect you to pay a deposit of at least 10% of the final purchase price. For most home loans, the standard deposit size is 20% (giving you an 80% loan-to-value ratio, or LVR). 

There are a few ways to pay a deposit at auction:

• Electronic funds transfer (EFT) or bank transfer.
• Personal cheque.
• Bank cheque. 
• Cash.

Each payment method has pros and cons, so choose which works best for you. Have at least two payment methods readily available in case one doesn’t work.

A solicitor is an important part of the home-buying process. Their main role is ensuring home loan settlement goes smoothly, but they can also help you at auction.

For example, a solicitor:

• Could bid for you.
• Help review and exchange contracts of sale.
• Advise you of any last-minute details on the property.

At the very least, having an expert in your corner is great.

Right before the auction, the vendor will open the property up for final inspections. Take a good look around the property, ask the agent questions, and take notes. 

Now is the time to decide if you’re serious about buying the property – and how much you’re willing to pay, maximum. 

Here are Mozo’s top tips for property inspections: 

• Don’t judge a book by its cover. Fixtures, faucets, and furniture don’t matter. The foundation and construction of the home do. Is the foundation cracked? What’s the roof made from? Are the walls brick? These give you a better idea of quality. A $42,000 kitchen renovation is better than a $420,000 foundation fix. 
• Get an expert opinion. If you can, conduct pest and building inspections before the auction day. If the floor creaks underfoot, is that a foundation issue, termite issue or nonissue? An expert can tell you. 
• Look inside cupboards. You want to check for signs of water damage or poor installation. 
• Look under the house. Is it wet? This could be a serious pipe or construction problem. 
• Look at the power. How’s the house or flat connected to the grid? Are there solar panels installed, and if not, does the property face north (the optimal direction for solar)?
• Trust your nose. If the agent has scented candles lit, they could be trying to cover up the smell or mould.
• Check window sills and sliding door sills. These give you an idea of how well the house has been maintained and where potential leaks are. 
• Watch out for flaking paint. Flaking paint in one area means it’s getting wet. You want to know where the water is coming from. 
• Ask questions. When was the property built? When was it last renovated? The real estate agent, owner, or even Google can answer many of these questions for you.

Unless you do property valuations and research for a living, you may not know how to price a home. That’s okay! Look at similar properties in the area to see how much they go for. 

Doing this gives you an idea of a “reasonable” price for the property. You don’t want to sink more money into a property than it’s worth – that’s a great way to get negative equity.

If you’re a buyer bidding on a dream home, an auction can feel intensely stressful – especially if you don’t know what you’re doing.

Get familiar with the process by attending a few practice auctions as an outside observer. Not only can this help you decrease your nerves, but you can also see which bidding strategies work and which don’t.

Never go into an auction cold: have a bidding strategy in mind. Our recommendation is to show confidence in your bid and start strong.

For example:

1. Start with a strong opening bid. Don’t bid at your maximum: you’ll want wriggle room. But starting strong with a confident and high first bid lets everyone know you’re serious. It also thins out the herd quickly.
2. Keep going in reasonable increments. It might get a bit tight if people keep bidding in $1,000 increments close to your max. But stay strong. If someone outbids you, outbid them. Just don’t go past your maximum. 
3. Keep calm and cool. Master your poker face. Don’t look at your solicitor for advice, don’t show fear, and don’t “telegraph” that you’re about to cap out at your maximum. 
4. Dress the part. Show everyone you’re serious about the auction by at least dressing business casual. This can also help empower you: dress strong to feel strong.

This is the ultimate auction advice: do not overbid. Do not. Don’t. Never. Write it on the back of your hand. Say it in the mirror. Dance it down the street. Whatever you do, do not overbid.

The financial consequences of overbidding at auction can be disastrous. Winning bids are legally binding, so if your bid wins but you can’t afford to pay, it’s one of the few worst-case scenarios for property buying. 

Overbidding at auction could result in you:

• Losing your deposit
• Forfeiting the property
• Getting sued by the vendor. 

It’s never worth it. Do not overbid at auction.