As a method of selling, auctions can come with some potential pitfalls for the buyer and seller. In a sellers' market a buyer may spend money on getting a building report and doing due dilligence only to be pipped at the post time and again. It can be an expensive business for unsuccessful bidders.
What's more, buying at auction is almost always unconditional, which means the buyer can't set conditions, such as a finance clause, or make the purchase subject to early access to complete renovations. The person who wins at an auction is compelled to proceed with the deal on the agreed date at the agreed price.
If the price doesn't reach the reserve at auction then it will likely be paused so the auctioneer can take instructions from the vendor on what to do next.
The auctioneer may try to convince the vendor to put the property "on the market" by dropping the reserve price. Or the vendor may tell the auctioneer to pass the property in.
The auctioneer will then attempt to convince the highest bidder (if there is one) to increase their offer. In this case the offer doesn't have to be unconditional because the sale price is being negotiated.
Believe it or not, the seller of a home can bid on their own property at an auction. This is called a "vendor bid" and used by the vendor as a tactic, says Kevin Lampen-Smith, chief executive of the Real Estate Agents Authority, to:
• Start bidding
• Keep the bids moving
• Persuade buyers to raise their bids
Auctioneers can't add vendor bids if the reserve price has been met.
The Fair Trading Act was changed in 2013 to limit the circumstances a vendor bid is allowed. Previously, vendor bids had been used to artificially inflate the price that was reported if the property was passed in below reserve price, says Lampen-Smith.
There are very few circumstances in which a buyer or seller can get out of completing an unconditional sale at auction.
Property lawyer Tony Steindle, of Steindle Williams, had one case that went to the High Court where a buyer pulled out of a sale after winning the auction because of a misrepresentation.
In that case the vendor had failed to disclose he had given the residential tenant in the property a long tenancy agreement, which meant the buyer would not be unable to move in. After a protracted legal case the buyer did get most of his deposit money returned.
If you're unhappy with the actions of an estate agent or the auctioneer you can go to the Real Estate Agents Authority and the case will be heard by its Complaints Assessment Committee.
It's essential for buyers to have a lawyer check over their auction agreement, says John Stirling, property lawyer at Turner Hopkins. Most auctioneers use standard Auckland District Law Society forms. But there is no guarantee that there aren't additions or deletions.
Bidders should be especially careful at mortgagee auctions, adds Stirling.
"The [agreements] are usually very, very heavily weighted in favour of the mortgagee and the purchaser must get them checked by a lawyer."
BUYING WITH FRIENDS
Buying in the Auckland market requires creativity. If you have been priced out of the market, you might want to consider clubbing together with others to get a foot on the property ladder.
In one fell swoop you double the deposit available and the income to pay the mortgage. Some co-buyers use it as a way to become property investors and don't plan to live together in the property.
Barfoot & Thompson agent Kirk Vogel sees a lot of co-buying. He knows of two couples who are house-hunting together in Grey Lynn, looking at properties in the $1.2 million range.
Co-buying comes with risks and it's important to tread carefully. What happens if you fall out, the other person is posted overseas for work, one of you loses your job, or one is forced to sell before you're ready?
As well as the standard sale and purchase agreement you will need a special contract drafted by a lawyer that covers you if your arrangement goes awry. That additional legal agreement is money well spent. It will make you consider issues that you may never have thought of, such as ownership. If you become "tenants in common" your share goes to your will if you die. If you are "joint tenants" your half goes to the other person.
Other issues large and small to consider include:
• What happens if your co-owner wants to move out? Are you required to accept a flatmate or to sell even if you're not ready?
• What happens if one of you wants your new partner to move in?
•If you sell to the other co-owner how will the price be determined?
•Who is expected to do what chores? You don't want to find you've moved in with a slob.
•Will you have a sinking fund for maintenance, how insurance will be handled and, if it's an investment property, tax?
Vogel has seen co-buying arrangements end not so amicably because all eventualities weren't covered in the agreements. "It can turn nasty."
On the borrowing side, says Vogel, a former mortgage broker, there are some real risks that friends and siblings may not have thought of.
For example, you'll be "joint and severally liable" for the other person's debt. "Banks don't care about private agreements if one half of the ownership defaults."
What's more, that doesn't just mean the mortgage. That's any other debt your friend or sibling gets into. Ouch.
