How does a property auction work?

Thinking of selling your home via auction, but not sure much about them, or if it is right for your property?

In Australia, you have two options when it comes to selling, via private treaty sale or sale by auction. Auctions are popular amongst owners of properties in sought-after areas or when a market is ‘hot’, and are known for being able to drive up the sale price up through an often fierce bidding war. However, selling a property via an auction in Australia is very different from the private treaty route, and careful planning and preparation are required in order to get the best sale price. 

Let’s start by looking at the different rules and regulations that apply in each state. 

Regulations covering house auctions in your state or territory

Before we look at the unique rules in each state, there are some basic rules that apply to auctions Australia-wide, no matter what state or territory you are in:

• There is no cooling-off period with sales via auction.
• Raising the price via dummy bids is illegal.
• When bids reach the reserve price, the property is officially on the market.
• The highest bidder has first dibs on negotiations if a property fails to sell (reach its reserve price).
• Contracts need to be signed and deposits paid immediately after an auction sale.
• Vendor bids must be announced to buyers.

Now let’s look at each state and what unique rules apply:

NSW: Buyers must pre-register to bid at a property auction in NSW, and only one vendor bid can be made per property auction. Agents must also be able to document all property appraisals. 

Victoria: Victoria is the only state where auctioneers do not need to be licensed. Buyers also do not have to pre-register to bid on auction day, and there are unlimited vendor bids allowed.

Queensland: Vendors and agents are not permitted to produce a price guide for buyers in the Sunshine State,  and vendor bids are only allowed up to the reserve price, after which they are illegal.

South Australia: Vendors can make up to three bids in SA, and like in Queensland no price guide estimates are allowed to be presented to prospective buyers. Reserve prices must also be set by the vendor in writing before auction day.

Western Australia: In WA auctioneers must announce all the particulars and conditions of sales before bidding starts on a freehold property. As a vendor, you are also allowed 10 bids, which must be made via the auctioneer.

Tasmania: In Tasmania, if you want to bid you must pre-register before the auction begins, and there are no limits on vendor bids.

Northern Territory: In the NT any pre-auction offer will mean buyers forgo any cooling off period, with no limits on vendor bids though these must be disclosed to other bidders.

Now let’s look at the steps it takes to market your property before it goes to sale at auction.

Marketing your property before auction

Marketing a property in readiness for an auction should commence around six weeks before the event. A real estate agent should utilise a range of marketing opportunities to create a real ‘buzz’ around the property. Possible outlets could include:

• Property websites
• Local newspapers
• Real estate magazines
• Flyer drops in the local area
• Personal invitations
• Social media
• Community notice boards

As part of the marketing process, vendors will need to make their home available for viewing. This can be done on an individual basis or through a series of 'open home' events on convenient dates. In order to generate a healthy level of interest in a property, vendors should schedule events in the evenings and on weekends wherever possible.

A real estate agent will usually take charge of communication with interested parties, and this may result in an offer being received before the auction date. If the vendor accepts an offer, it's possible to arrange a sale in line with private treaty arrangements. If no offer is accepted before the auction, the process will continue as planned.

A good real estate agent will keep all interested parties abreast of developments until the day of auction – a good way of maintaining their interest in a property.

Auctions in Australia are conducted on an unconditional basis. This means that the sale of property on auction day is not reliant on the arrangement of finance, searches, legal checks and conveyancer’s reports. Buyers are expected to conduct their affairs prior to the auction date, and once a winning bid has been confirmed, the sale is legally binding.

This is different from private treaty offers where there is usually a cooling off period before the sale is unconditional.

What happens on auction day?

A copy of the proposed contract should be displayed in the auction house before and during the bidding – something a real estate agent should deal with. This contract will detail and caveats and encumbrances that apply to the transaction.

Buyers will need to complete a formal registration process before being given the opportunity to bid, which will include the provision of an official form ID. Registered bidders will then be given a numbered paddle, which they must raise in the air to signify a bid.

When auction day arrives, the vendor and the agent should have set a reserve price that best reflects the property’s potential – without deterring interest in it. This price will be communicated to the auctioneer only a few minutes before bidding starts, and it will remain completely confidential.

A sale will only complete if a bid matches or exceeds the reserve price – an event that is often announced by the auctioneer with the words: “the property is now on the market.”

The bidding may temporarily cease occasionally to allow negotiation between the vendor and buyers, but bidding will commence once discussions have ceased. Once a successful bid has been lodged and the auction has been formally declared as over, the buyer will need to pay the required deposit immediately – normally 10% of the final sale price.

At this point, there is no cooling-off period. Bids are unconditional, and any winning bid is legally binding.

On occasions when the winning bid has not met the reserve price, the buyer has the option of walking away or negotiating with bidders on an individual basis; this is something a real estate agent will take charge of on behalf of the vendor.

What are the advantages of selling by auction?

• Sellers don’t have to worry about withdrawals, renegotiation and delays – winning bids are made on an unconditional basis
• The public nature of an auction ensures the best possible price is achieved in many cases
• An auction works on a predetermined schedule, which provides a level of certainty and order to the vendor
• The competitive nature of auctions drives price upwards – particularly in highly sought-after areas
• Properties which are difficult to value due to their unusual features can benefit from auctions, as there is no better way to determine the true value of a property at any given time

Like any process, selling at auction also has some downsides which you should be aware of.

Are there any downsides to selling at auction?

• An auction can be intimidating for some people who are put off by the ‘pressure cooker’ environment - so may not register to bid at all.
• If you are in a hurry to sell there is no guarantee an auction will result in a sale, which could be problematic if you need it sold asap.
• If bidding is sluggish for your property it could result in a lower sale price than you expect.
• If your property ‘passes in’ i.e. doesn’t sell, it could put potential buyers off and lower the perceived value of your home.

Auctions deliver certainty for the vendor and competition between buyers, but they are legal processes that require skill and experience to navigate – attributes demonstrated by an accomplished real estate agent with local knowledge.

Make sure you do your research and find a real estate agent who can get the best outcome in the sale of your property at auction.