Whether you are purchasing a new home, an investment property, or a commercial property for your business, bidding at auction is an exciting experience that also feels high risk. Similarly, the contract that follows a successful auction presents risks to the buyer that a standard contract of sale does not. As a prospective buyer it is important to understand the differences between an auction and standard contact, so that you are equipped with this knowledge before stepping into the excitement of an auction. To this end, several considerations are highlighted below, with the goal of minimising the risks associated with purchasing a property at auction.
Auctions are Unconditional – No ‘Cooling-Off’ Period
When purchasing a residential property by negotiation with the seller, there is a statutory five (5) business day cooling-off period. This does not apply to residential contracts formed at an auction, which have no cooling-off period. Once the auction is concluded and the contract is signed, the buyer cannot back out of the terms without incurring serious consequences. The only exception to this is if one of the standard terms of contract provides a right of termination. However, this is almost always limited to serious matters regarding the property and the sellers’ title to it.
Some states also restrict the cooling-off period when private contracts are signed close to, or on the day of the auction. For example:
- In QLD, the cooling-off period does not apply if a private contract is entered within 48 hours of a passed-in auction or if the buyer was a registered bidder at the failed auction.
- In VIC, buyers that make pre-auction offers waive their cooling-off period if the offer is accepted less than 72 hours before the scheduled auction.
- In SA, a cooling-off period does not apply if the sale is achieved on auction day, whether privately or as part of the auction.
Insurance
Being prepared to put in place insurance cover promptly after the auction is vital as the property will be at the buyer’s risk from 5pm on the first business day after the contract is entered into. While this may differ from case-to-case it is essential that you are prepared.
Due Diligence Before the Auction
Before participating in an auction, potential buyers should conduct their own due diligence. This includes reviewing their rights of termination or compensation under the contract for issues such as physical defects, asbestos, the property being in a flood-prone area, and restrictions on the use of the property. They should also consider conducting their own inspections, reviewing legal documents, and ensuring adequate financing. An auction contract assumes that the buyer has done their research and is prepared to proceed promptly. Whilst standard relevant searches may be provided such as pest and building reports, conducting your own searches will protect you from the get-go against unforeseen complications. The buyer may incur additional costs in conducting independent searches, however, in the long run this may save them from substantial costs.
Deposit and Finance
Auction contracts are signed immediately after an auction has successfully completed. A deposit must also be paid at this time. Failure to pay the deposit on time is a fundamental default that entitles the seller to immediately terminate the contract. Therefore, buyers should be aware of what the deposit will be and have the confidence that they can immediately meet this amount when it is required.
Seek Legal Advice
Understanding the terms and conditions that will bind you if you are successful at auction is vital. Therefore, prospective buyers should obtain a copy of the proposed auction contract and seek legal advice on it prior to the auction. It may be possible to negotiate certain terms to the contract prior to the auction. It is also important to be aware of the full range of your obligations as a buyer.
At M+E we are happy to assist you in this process to ensure your rights and obligations as a buyer are respected, so you can experience the full excitement of buying a property at an auction. If you feel we can help you, please do not hesitate to contact Wayne Riggien (wayne@morganenglish.com.au) and the Property team at M+E today.
