What is the difference between Auction and For Sale?

 
09-04-2018
When you’re buying a property, you’ll come across a number of situations requiring a decision that you may not fully understand the implications of. Knowing the difference between an Auction and a Private Treaty (For Sale) sale may seem simple, but there are implications for both so it’s important you understand what is involved in each of these kinds of purchases and, therefore, what your costs and responsibilities as a buyer will be.

Once a property is listed, it will be advertised for a period of time that is usually determined by the seller’s preferred method of sale. If the house will be sold by Auction, then the date for the Auction is set in advance and potential buyers must make all of their relevant enquiries, secure their finance and have done building, pest and/or strata inspections before that date. If the house is to be sold by Private Treaty, then the advertising period will be dictated somewhat by the degree of interest from potential buyers, as well as the homeowner’s capacity to choose the right offer, when a buyer puts their best foot forward. If a Private Treaty home continues to be advertised for ‘too long’ at too high a price, a buyer who is doing their research well would have seen it multiple times and start to wonder what is wrong with it, if it still hasn’t sold.

With a Private Treaty sale, a price for the property will be clearly stated, or a range within which offers are anticipated - depending on where you are in Australia. However, with Auction, the owner’s ‘Reserve Price’ remains a secret until the Auction itself. With auction, the market determines the price and, if that exceeds the owner’s reserve, the property will automatically be sold to the highest bidder. A Private Treaty asking price will usually be stated clearly (unless ‘offers above’ has been requested) but anybody can make an offer that is different to the asking price. This is great for those on a tight budget who need to know they’re not wasting time on a property where demand may lift the final price beyond reach. A Private Treaty sale almost always ensures a clear price that you can respond to, so you won’t be scrambling to find extra dollars post-auction. Auctions can throw all your best laid plans out the window, however, they can also deliver unique opportunities for buyers to buy well; especially if properties don’t generate much interest and end up selling at, or just above or below the reserve.

At an Auction, once someone bids for the property at or above the reserve price, the property is officially ‘on the market’. In a Private Treaty sale, the homeowner’s agent will be contacting potential buyers before the property is even advertised so when you first see an advertisement, there may already be significant interest. At an Auction, all of your competition appears on the day, for you to eye deviously from behind your sunglasses and take away coffee. By contrast, with Private Treaty, the agent may have numerous buyers all interested in the property at once that you don’t see or know anything about. This makes your negotiating tactics a little trickier, but it can pay off if you are the hottest (or only) member of the competition. In an auction, if the reserve is not met, the agent will negotiate between the homeowner and the highest bidder to try and reach an agreeable sale price. If the reserve is met, then the highest bid on the day will close the deal. In relation to property sold by Private Treaty, there may be other factors influencing the homeowners decision such as a buyer who has a bigger deposit than you (and is prepared to release it on exchange of contracts), is offering a longer or shorter settlement period, or is simply offering to pay more than you are - and that could mean you miss out.

In both cases you are required to pay a deposit on agreement of the sale price, however the 10% deposit you pay at auction is locked in and there is no cooling off period after your bid is accepted. If you back out of the deal you will lose that deposit. Worse still, if the homeowner eventually is forced to sell for less than you agree to pay, you could end up compensating them for the balance as well as any extra marketing costs they incur. You have to pay a deposit also for a Private Treaty sale too but this is sometimes negotiable, in the light of the price you are offering as well as settlement terms. Flexibility to work in with the homeowner’s wishes is key to coming up with an attractive offer and this is where open dialogue with the agent can really help you. Once you have paid that deposit, a percentage is refundable during any applicable cooling off period, but you are encouraged to sign the paperwork and exchange contracts as soon as possible after the deal is made. It’s in your best interests to do this as the seller may get a better offer in the meantime, in which case they can refund your deposit and you once again miss out. Remember; an agent is duty bound to inform the owner of any offer that is made so even if you have a verbal agreement, a better offer might be received and the owner isn’t bound to continue with you unless you’ve entered a legally binding contract of sale.

Whichever of these situations you find yourself in, the important thing to remember is that you must be serious, be clear about your decisions and respond quickly and decisively when the ball is in your court. Be sure you have your finance secured, your inspections need to be completed, and you need to have a good strategy that means you walk away with the keys before anybody else does.