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Buying a Property at Auction - what do you need to know?

Purchasing a property at auction can be a risky undertaking if all the required due diligence is not completed before the auction date. This is because on the fall of the hammer, if you are the highest bidder, you will usually be locked into an unconditional contract. This means you are legally bound to buying the property and have conditions under which to cancel. Therefore it is imperative that any interested purchaser has done all their homework on the property and has satisfied all of their conditions prior to the auction date including but not limited to:

1. Obtaining pre-approval of finance to a certain level on the property to be purchased;

2. Making sure that you have the deposit required on the auction date (normally this is 10% but it will depend on the auction terms and conditions);

3. Having your solicitor check the auction terms and conditions and the title;

4. Obtaining LIM report or checking the council property file to confirm that the property is suitable in all respects (for example, check that the buildings have all the required consents and code compliance certificates, that there are no natural hazards on the property or other features affecting the property);

5. Obtaining a builders report or a weathertightness report to confirm the structural integrity of the buildings;

6. Obtaining a valuation to determine value and also to support finance applications (if required).

Your solicitor will be able to assist you with the above matters. We recommend that you have your solicitor review the auction terms and conditions prior to auction and check the title on your behalf. The auction terms and conditions normally include important vendor warranties which should be checked by your solicitor to ensure they are included. Another issue to check is the chattels list to ensure that all chattels are included.

A word on mortgagee auctions
The mortgagee auction poses even more risks for a purchaser and is to be treated with caution. When a property is sold at mortgagee auction it is usually the result of the owner defaulting under their mortgage obligations. In these circumstances their mortgagee (bank) will enforce its rights under the mortgage to sell the property. Because the mortgagee not the owner is selling the property, auction agreements for mortgagee sales often do not include many of the important purchaser protection clauses as standard auction agreements. Some additional risks purchaser’s may face at mortgagee auction include:

1. No vendor warranties - often the mortgagee removes all the vendor warranties which are there to protect the purchaser. For example, the mortgagee will often remove the warranty that all work undertaken on the property has the required building consents and code compliance certificates. This means extra care needs to be taken by purchaser’s prior to the auction to ensure that these matters are checked off to reduce risk.

2. Vacant possession - vacant possession is not guaranteed on settlement. This means that a purchaser at mortgagee auction may find that they have purchased an occupied property and now have to evict the occupants. This can be a costly legal process to resolve and it is important steps are taken prior to the auction to secure vacant possession.

3. Damage to the property before settlement and possession - In most cases the risk of damage to the property passes to the purchaser from the fall of the hammer. We have seen cases where a disgruntled owner having their house sold from underneath them trash the house or remove chattels, fixtures and fittings.  It is therefore important that prospective purchaser’s make enquiries prior to the occupation about who is in occupation of the property and ensure if possible that it is vacant and secured. Purchaser’s must also arrange insurance prior to the auction to ensure their interest is protected from fall of the hammer.

4. Not being able to view the property prior to auction - often if the owner is still in possession, it will be difficult to view the property prior to auction. It goes without saying that there is real risk buying a property without having first inspected it.

5. Chattels not included - It important to check the chattels list in the auction terms and conditions prior to auction day to ensure that all the chattels are included. This will avoid chattels being removed prior to settlement.

If you would like further advice on buying at auction contact Ian Reeves, Virginia Craig or Jamie McGregor.