Buyer Beware: What you need to know before buying at auction

Kelly Bek

Associates

Associate

Phone: +64 7 927 0546
Email: kbek@clmlaw.co.nz

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Bachelor of Arts (Hons), PG Dip Law, University of Birmingham

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Strong demand in the current market has seen the number of properties being sold at auction reaching record highs. However, whilst an auction can offer the best option for a seller to achieve the most favourable sale price, the auction process itself can be quite daunting for buyers. This is largely due to the fact that, on the fall of the hammer, the buyer will be locked in to an unconditional agreement and not be able to pull out of the deal if problems arise at a later date.

A buyer must therefore complete all their enquiries and investigations into a property prior to the auction date.

So what should you do to prepare for an auction?

1. Register with the real estate agent.

There are two main advantages of doing this. Firstly, the agent will provide a copy of the “pre-auction pack” containing copies of the legal documentation that can be reviewed by your lawyer. Secondly, once a buyer is registered, the agent is obliged to let you know if any pre-auction offers are made by other parties.

2. Go and watch an auction.

The process of bidding at an auction can be quite daunting, especially if you’re a first time buyer. It is therefore recommended that, if possible, you attend a few auctions prior to the auction you intend to bid at. This will give you a better understanding of how an auction is conducted and help you feel more comfortable on the day.

3. Review the legal aspects.

The pre-auction pack supplied by the agent will usually contain copies of the auction agreement, the title for the property and a LIM Report. These are important documents and should be reviewed by your lawyer.

  • Auction agreement – This is the document which contains the terms and conditions of the sale of the property. The successful bidder will be required to sign this immediately after the auction, so it is important that you review the terms beforehand and be aware of what you will be signing. In auction agreements, the warranties that a vendor would give under a normal sale process are often deleted. These include warranties that there are no outstanding requisitions or requirements relating to the property and that any works carried out at the property have the required consent and permits. In addition, the standard right to requisition is usually removed meaning that the buyer is deemed to have accepted the seller’s title. It is therefore important to check the terms and conditions carefully. The agreement will also set out the deposit required to be paid, which is usually 10% of the purchase price, and the intended settlement date.
  • Title – The title document contains details of the current registered proprietors, the legal description of the property and any rights or restrictions registered against it. The buyer will take title subject to all of these encumbrances so it important to have an understanding of what they are and how they affect the property. The title will also reveal the tenure of the property, for example whether it is a freehold, cross-lease or unit title. If the property is a cross lease or a unit title, there will be further investigations that a buyer will need to make. For example if the property is a cross lease, it will be important to check the title plan and the terms of the leases themselves to ensure that the title is not defective. If the property is a unit title, further investigations will need to be undertaken in relation to the rules and operation and of the Body Corporate.     
  • LIM report – A Land Information Memorandum Report (LIM) contains all the information about the property that is held on the council file. It includes information relating to zoning of the property, any special land features, requisitions or notices affecting the property and all building consents and/or permits granted for the property. It is therefore important to check the LIM report carefully. Most importantly you should check that the property has all required building consents and Code Compliance Certificate(s) and that there are no natural hazards affecting it. Recent case law has established that a buyer cannot rely on a LIM report that it has not ordered itself. Therefore a buyer who has concerns on this regard may wish to obtain their own LIM Report from Council.

4. Obtain a builder’s report.

Sometimes the seller may provide a builder’s report as part of the pre-auction pack. More often than not however, it is up to the buyer to obtain and pay for their own report. Although this can be expensive, it is a small price to pay in comparison to the amount being invested in the purchase of the property and the possible cost of having to remedy defects in the future. You may also want to consider obtaining a methamphetamine test to ensure the property is not contaminated by “P.”

5. Ensure that finance is in place.

If required, you should ensure that you have an unconditional offer of finance in place from the bank. A general pre-approval may not be sufficient as the bank will often want to approve the specific property being purchased. The bank may also require that a satisfactory valuation be obtained for the property prior to the auction date. In addition, you must ensure you have sufficient funds available for the deposit. This is payable on the day of the auction and is usually 10% of the purchase price. It is important to note that KiwiSaver funds cannot be used as a deposit – the monies must be readily available in cash in your bank account on the auction day.  

6. Set a limit.

It is crucial that you know the maximum price you can afford for the property, and do not bid over that amount. Buying a house is a very emotional decision and it is easy to get carried away in an auction environment. A buyer has no legal remedies if they overbid on a property and then are subsequently not able to afford to complete settlement.

It is worth noting that a seller can withdraw a property from sale at any time before the auction date. Therefore if you are particularly keen to secure the property you may wish to consider submitting a pre-auction offer to the seller. If a pre-auction offer is made, the real estate agent is obliged to advise all other registered buyers and invite them to also put forward pre-auction offers. If the seller decides to accept any of these offers, the property will be sold without the need for an auction. If the property goes to auction but does not sell, a buyer may also have the opportunity to negotiate with the seller once the auction is concluded.

If you would like any further advice regarding purchasing a property at auction, please contact a member of our Property & Development team on (07) 578 2099.