Pros and Cons of Property Auctions

As auctions continue to become an increasingly popular method for property sellers, prepping ahead before participating at one is necessary to protect yourself from possible risks as a buyer. Here are the things you need to keep in mind if you are considering bidding at an auction.

What is an auction?

An auction is the meeting of potential property buyers where each potential buyer places a public bid for the property, and the property goes to the highest bidder. Most auctions have a ‘reserve price’. If bids are lower than the set reserve price, then the property is not sold.

Pros of an Auction 

• Transparency: The bidding process is usually straight forward with almost no negotiation. The property goes to the highest bidder.
• Faster: Auctions could last from a few minutes to a few hours, but in most cases, they are substantially quicker than a long-drawn negotiation process that could take days or even months in some rare circumstances.
• Market-driven: Market forces are more in play while determining the final price the property sells at, instead of an arbitrary asking price.
• Negotiation opportunity: If the reserve price is not met, buyers have a chance to negotiate for a better price.

Cons of an Auction

• No cooling-off period: A cooling-off period is a period during which the potential buyer can opt to not go ahead with the property purchase after expressing interest. This may be due to various reasons like inability to arrange funds, property evaluation concerns or council approvals on existing renovations, among others. Different states have different laws pertaining to the cooling-off period associated with purchasing property. In case of an auction, there is no ‘cooling period’. The highest bidder must go ahead with the purchase. The seller can sue the highest bidder if he/she doesn’t proceed with the purchase.
• No contract termination rights: With a regular non-auction property sale, a potential buyer has the right to terminate the contract if he/she can’t arrange the finances, or finds structural, pest or council approval issues. With an auction, a contract can’t be terminated for any of the mentioned reasons like finance procurement or property evaluation concerns.
• Time Constraints: Since there is no cooling-off period, all property evaluations and inspections for pest infestation, structural soundness and council approvals need to be done well in time. This may become very challenging if you happen to find a suitable property very close to its auction date.
• Evaluation and Inspection costs if you don’t win the bid: If you don’t win the bid, you will lose the money spent on evaluation and inspection. Be mindful that if you need to attend a few auctions before you become a successful bidder, the amount you may need to spend on evaluation and inspection may add up to a lot.

Tips to make most of auction purchase

• Research: Gather as much information and research as possible on the property and area before paying for professional inspection and evaluation. But do be sure to purchase a property only once the inspection and evaluation are complete as you can’t back out from a purchase if you are the highest bidder even if you discover major pest or structure soundness issues.
• Sufficient Time: A lot of potential buyers have the FOMO (Fear of missing out) on a good deal and end up compromising on proper checks. Avoid participating in auctions where you’ve had insufficient time to research and inspect the property.
• Finances: Be sure to have a valid pre-approval in place as so that you are in a position to make an upfront payment if you win the bid. Also, resist overbidding for a price that is beyond the ‘pre-approved’ amount.

Auction laws vary from state to state. To cover all your bases, rely on the advice of a professional mortgage broker to understand the best possible home loan options if you are looking to purchase a property through an auction.

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