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For many property investors, auctions are one of the best avenues to score a property bargain, but coming in unprepared can lead to a delay in one’s property investment journey, or even worse, its ultimate derailment.
According to buyer’s advocate Cate Bakos, investors should avoid joining auctions if it’s not even a part of their investment plan. While it may be enticing to just stop by a property auction you see while walking around town, thinking ‘Let’s see how this goes,’ joining these type of events could be a massive risk for an investor. Bidding without doing one’s homework may be tactic that some have successfully pulled off, but for many, it could mean disaster and upset.
Cate shares her four-step preparation for property investors looking into incorporating auctions in their investment plan:
1. Understand recent comparable sales in the area
Identifying recent sales results in the area for similar properties can help a potential buyer determined whether or not he is buying below fair market value.
“I remember one buyer who bullishly felt that he could place the property on the market with one swift, bold bid. He shouted out ‘Nine hundred thousand dollars..." and the auctioneer asked him to confirm his bid. He nodded assertively and the crowd gasped,” Cate shared, “Not only had he placed the property on the market, but he'd bought it. It was beyond any other bids and he hadn't tested other buyers' preparedness to purchase the property at all. One could argue that he was brilliant, but I'd argue that he was paying above market value and, perhaps, a better degree of planning could have saved him thousands.”
Moreover, he reminds investors that just because a property has sold at an auction does not mean that the bank will automatically accept the purchase price as its final valuation.
2. Have a legal representative review the contract
Failing to have a legal representative go over the particulars of a contract may actually lead to getting a property that is different from the one you thought you bought at the auction.
“Have a professional go over the property searches, the title, the potentially nasty clauses in the contract, any overlays adversely affecting the value or opportunity to improve the property, and the covenants or caveats which may have been present,” Cate said.
While she’s not a certified legal practitioner, she was once trusted by her cousin to go over a contract with only minutes to spare before the auction.
“I quickly determined that the property was not zoned the popular and accepted Residential 1; it was a Green Wedge Zone. In addition, it was a 7.5-acre property and it featured a Bushfire Risk,” she added. “This property might have been special but I was under no illusions that a Mortgage Insurer could potentially reject it. That meant that if my cousin required an 80 per cent loan or more, she may have faced rejection from the lender or high scrutiny, at the very least.”
3. Have a building/pest inspection or town planning assessment carried out
It’s never safe to just assume that a property is in good condition, so building and pest inspections, as well as town planning assessments, should be vital parts of an investor’s purchasing process.
According to Cate: “I've seen plenty of buyers who have bought, felt the heartbreak of realization that they were ill-prepared, and then have made the tough decision to sell based on holding a property which doesn't actually meet their plans or needs.”
“What these buyers discover is that stamp duty, agent's fees, marketing fees and solicitor fees are ugly when the transaction is a fast turnover,” the buyer’s advocate added.
4. Don’t enter into a purchase contract without a “Subject to Finance” clause
Many buyers often enter a purchase contract without a “Subject to Finance” clause, believing that they made a good purchase because they are already pre-approved. However, bank pre-approvals often say “subject to lender approval of the security property and bank valuation, which, according to Cate, could mean the following:
a) The lender needs to 'like' the property—from the correct zoning, the correct size, the correct postcode, and the correct condition. Otherwise, they may reject it.
b) The price tag needs to match that of the bank valuer's valuation.
c) The lender can't be too exposed to a higher percentage of units in the block, if applicable.
d) The buyer's circumstances have changed in any way or they have obtained pre-approval in principle but there are details they have missed.
At the end of the day, it’s always important that a buyer knows which types of properties are liked and disliked by banks and other lenders. “If the bank doesn't like a particular property, it means that the purchaser may not be able to finance it,” Cate explained.
She added: “By the time the lender has rejected the loan application… the buyer's 10 per cent deposit is at-risk. If they are served a recision notice... they will lose their 10% deposit. If the vendor cannot re-sell the property at the same price, the purchaser may find themselves in a position where they are not only sued for damages and costs but also sued for the differential.”
The simple property investment lesson for investors looking into dipping their toes at auctions: Educate yourself and plan ahead.
After all, creating wealth through property is not a business to be nonchalant about—while its returns could be great when done right, it could also mean disaster for people who dive in unprepared.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.