Buying at auction vs private treaty

What are the pros and cons of each, and what do you need to know as a first homebuyer?

As a first homebuyer looking for your first place, you’re going to have to choose between two options: buying at auction, or buying through private treaty. Both are quite different so it’s important you understand the differences between them.

Buying a home through private treaty

When a property is sold through a private treaty, the seller sets the price that they want for the place. This price is normally set out in the property’s marketing material, so you have a good idea of whether the property is within your budget.A private treaty sale also gives you the opportunity to negotiate the price by making an offer that’s below the listed price. You can then work towards a figure that both you and the seller can agree on.

The upsides of private treaty

One of the advantages of buying through private treaty is that as a buyer, you may be able to make a ‘conditional offer’. This may mean that you agree to buy the property, but your offer is subject to certain conditions — like having your finance approved, or the home receiving a satisfactory pest and building report.A private treaty sale may also give you the benefit of a cooling-off period. This can let you back out of the purchase if you change your mind about the property, even after you’ve signed the contract.

The downsides of private treaty

One of the drawbacks of a private treaty sale is the risk of being ‘gazumped’. This is where the vendor accepts a better offer from another buyer. This is legal because no sale is a done deal until you’ve signed and exchanged contracts with the vendor and paid your deposit.One way to protect yourself from being gazumped is to speak with your FND Broker about having your home loan pre-approved so that there’s less delay in getting approval and then signing the contract of sale.

Buying at auction

Buying your first home at auction can be a very different experience from a private treaty purchase.At an auction, interested buyers gather together and compete to make the highest bid. The negotiations for a private treaty sale can take days or weeks — but an auction can be done and dusted in a matter of minutes. That makes buying at auction very exciting, but also stressful.When the hammer falls at an auction, the highest bidder doesn’t have the benefit of a cooling off period. As a bidder, you won’t have the option to make conditional bids — like your bid being subject to lender approval — so you need to be able to pay the deposit and exchange contracts with the vendor on the day of the auction.This is why having your home loan pre-approved makes sense if you’re buying at auction.

Preparing for an auction

It’s a good idea to attend a few auctions as an observer before you go as a bidder. These are our top tips to prepare for the big day:

1. Be sure the property is right to be your first home

If you’re the highest bidder when the hammer falls, you will be asked to sign the contract of sale right then and there. So be very sure the home is right for you. That said, if you miss out you have to keep in mind that there are other options out there and something else may come along.

2. Research the market

Research the local market and look at the prices that similar homes are going for. This can give you an idea of how much the property you are interested in may sell for. It’s no guarantee, but it can help you avoid lining up for a home that’s beyond your budget.

3. Know what sort of deposit you need

If you’re the winning bidder, you’ll need to pay a deposit on auction day — usually 10% or more of the sale price. Check with the selling agent to find out exactly how much deposit you need, as well as if they expect a bank cheque or personal cheque.

4. Set a bidding limit

It’s important to think about the the maximum amount you are willing to spend. You can speak with your local FND Broker (before the auction) to know how much you may borrow. Knowing your borrowing limit gives you a firm bidding limit so you can avoid overspending.

5. Have the sale contract reviewed before auction day

Since there is no cooling off period for an auction, it’s critical that you get the contract of sale reviewed by your solicitor or conveyancer before auction day. This way, you can be alerted to anything unusual or any conditions that may not be in your favour — it’s even a chance to negotiate the fine print like the settlement period or how much deposit you need, before any bids are made.