Why You Need To Secure Your Finance Before Auction.
Auctions are unpredictable at the best of times. One minute you’re looking through the property and the next you are in the middle of a life and death battle to win the auction, throwing your hands into the air as the crowd watches you in action!
Auctions can be a particularly stressful time for first home buyers. The pressure of staying within their budget whilst actively competing against other (in some cases more experienced purchasers) is enough to put many people off the idea of buying at an auction altogether.
Case Study: Making a crucial mistake at auction
I had one particularly difficult situation a few weeks ago where a young couple had purchased a property at auction! So far so good you say! Nothing about that seems difficult!
Subject to finance?
The catch was that whilst they had employed a conveyancer to complete their legal work and had conducted a review of the Section 32 Vendor Statement they had chosen to bid without the safety of ‘subject to finance’ protection which is unavailable at an auction.
Valuation of the property
Having signed the Contract of Sale and paying the deposit (over $100,000) they heard back from their broker the next week only to be informed that the major banks had offered them nearly $120,000 less than they had anticipated. They now had a giant gap between the purchase price and what the bank was willing to lend them.
What is the lesson here? These purchaser’s were a very smart young couple, they had done the right thing by having the Vendor Statement reviewed by their conveyancer but came to me when the matter became more complicated.
Despite contacting multiple brokers and exploring all sorts of options involving using their parents as guarantors or their assets as security we were still unable to secure the additional funding.
The consequences of default are enormous for any buyer, let alone a first home buyer. Instead of choosing to default we were able to set up private funding with a third party lender to cover the gap.
Despite having to pay a slightly higher rate of interest at least we had minimised the damage and enabled them to settle the property
HOW TO AVOID THIS MISTAKE:
- Work with your broker to ensure that if you are purchasing at auction that you have approval and access to the ‘ceiling’ amount you are going to bid.
- If you need subject to finance protection under the Contract of Sale, an auction is the wrong place for you. A pre-auction offer may have been accepted by the Vendor and would have allowed the purchase to be subject to finance. Of course it would have to be an attractive offer for the Vendor to accept a ‘conditional’ sale over an auction.