Why first home buyers hate auctions (and what they can do about it)

In a seller’s market, such as the one we’re in at the moment, auctions seem to make sense. Multiple buyers bid against each other to win a house, driving up the price.

But with almost two thirds of our first home buyers being “low deposit” buyers - ie having less than 20 percent deposit - there is a question of whether auctions, or the requirements around buying at auction, are fair.

Banks almost always require low-deposit borrowers to complete a valuation by a registered valuer in order to purchase a home. This protects both the bank and the buyer making sure they haven’t paid too much for a home.

If you’re a low-deposit borrower buying at auction, you have two choices:

1. Arrange a valuation prior to the auction. However, if you don’t win the auction, you have wasted $1000-$1200, which is sometimes a reasonable chunk of your available cash deposit, or;

2. Try to win the auction and arrange for a valuation after.

To be very clear, I do not recommend the second option. If you purchase a house at auction for $520,000, for example, and the valuation comes in at $500,000, you are required to cover the total difference - in this case $20,000 - and the bank will then lend you a maximum of 90 percent of the valuation. If you don’t have the required $70,000, some very unpleasant legal events happen.

I often hear an argument that an auction bid is the market price so an auction price should be the valuation. But there is nothing to say that two very keen bidders didn’t continue bidding past the point of market value. Banks are mostly interested in what they could sell the property for in the event of a default. A war between two bidders could easily exceed this.

One way around the valuation problem is to search below your means. If you are pre-approved to buy up to $800,000, set your search parameters to be $700,000 or below. These houses may go for mid to high$700,000s in this hot market and you’re more likely to be in the money.

But this goes completely against human nature. If buyers are pre-approved for $800,0000, it is only natural to have a quick glimpse at what they could get for just another $50,000 more, not less.

Another solution for low-deposit home buyers is to skew their searches heavily towards tenders, deadline sales and price by negotiation. They could make an offer conditional upon a valuation. A lawyer could put a specific valuation clause in the agreement. This would show the vendor that finance is not an issue. Potentially a much stronger offer.

For vendors, selling a property at auction is clean. The hammer falls and the house is sold house. But if you’re selling a property which is likely to appeal to first home buyers, it’s worth thinking about which method of sale would net the most buyers.