Disclaimer:
This article provides general information only and does not constitute financial, legal, tax, or investment advice. Property investment involves risk. Always do your own research and seek personalised advice from qualified professionals before making investment decisions.
Key Takeaways
- Auction purchases are unconditional, so all due diligence must be completed before bidding.
- You need finance pre-approval and typically a 10% deposit on auction day.
- Building inspections, LIM reports, and title searches are essential before the auction.
- Set a firm maximum price and stick to it regardless of auction pressure.
- Auctions can offer good buying opportunities, but the risks are higher without conditions.
Auctions are a popular method for selling property in New Zealand, particularly in Auckland and other major centres. For property investors, auctions can present excellent opportunities, but they require careful preparation and a clear understanding of the rules.
Unlike conditional offers, when you buy at auction, the fall of the hammer creates an unconditional contract. There is no cooling-off period and no ability to back out without significant legal and financial consequences. This makes thorough preparation absolutely essential.
How Property Auctions Work in NZ
In a standard auction, the property is marketed for several weeks with a set auction date. Interested buyers complete their due diligence during this period. On auction day, registered bidders compete by making increasingly higher bids until the highest bidder wins, provided the reserve price is met.
If the reserve is not met, the property is passed in and the highest bidder typically gets first negotiating rights with the vendor. This can sometimes result in purchasing below what might have been the reserve price.
Pre-Auction Due Diligence
Because auction purchases are unconditional, you must complete all your investigations before bidding. This includes:
Essential Due Diligence Checklist:
- LIM report: Check for any council compliance issues, consents, or hazards
- Title search: Verify ownership, easements, covenants, and encumbrances
- Building inspection: Identify structural issues, weathertightness, and repairs needed
- Valuation: Get an independent valuation to inform your maximum bid
- Tenancy review: If tenanted, check the lease terms and rental history
Financing Your Auction Purchase
You need to have your finance sorted before auction day. This typically means getting pre-approval from your lender. However, be aware that pre-approval is not the same as unconditional approval, and banks can still decline to lend on specific properties.
Discuss with your mortgage adviser whether your pre-approval covers auction purchases and what conditions might cause problems. Properties with certain issues, such as weathertightness concerns, non-consented work, or unusual titles, may not be acceptable to your lender.
Finance Tips for Auction:
- Get written pre-approval before the auction campaign begins
- Share the property details with your lender to confirm they will lend on it
- Ensure you have the 10% deposit available in cash or bank cheque
- Know your borrowing limit and do not exceed it in the heat of bidding
Setting Your Maximum Price
Before the auction, determine the absolute maximum you are willing to pay. This should be based on your investment analysis, not emotion. Consider the rental yield, potential capital growth, renovation costs, and how the property fits your overall portfolio strategy.
Write down your maximum figure and commit to it. Auction environments are designed to create excitement and competition. Experienced investors know that overpaying at auction can take years to recover through capital growth.
Bidding Strategies
Start Strong or Wait?
Some bidders prefer to enter early and bid confidently to discourage competition. Others wait until bidding slows before entering. There is no universally correct approach; it depends on the situation and your temperament.
Bid Increments
You can bid in any increment you choose. Using odd numbers, such as $501,000 instead of $500,000, can sometimes throw off competitors who are bidding in round figures. As bidding slows, smaller increments can signal you are near your limit.
Use a Buyer's Agent
If you are uncomfortable bidding yourself, consider engaging a buyer's agent to bid on your behalf. They bring experience and can remove the emotional element from the process.
If the Property Passes In
When a property does not reach its reserve, it is passed in. As the highest bidder, you typically get the first opportunity to negotiate with the vendor. This can be advantageous, as you may be able to negotiate a price below the reserve or include conditions.
However, the vendor is not obligated to sell to you and may choose to negotiate with other interested parties or relist the property.
Risks of Buying at Auction
Key Risks to Consider:
- No finance condition means you must complete even if your loan falls through
- Hidden defects discovered after purchase are your problem
- Emotional bidding can lead to overpaying
- Due diligence costs are lost if you do not win the property
- Settlement issues can result in penalties or legal action
The Bottom Line
Buying investment property at auction can be an excellent way to secure properties in competitive markets. The key is thorough preparation: complete your due diligence, secure your finance, set a firm maximum price, and stick to your investment criteria.
Do not let auction fever push you beyond your limits. There will always be another property. With discipline and preparation, auctions can be a valuable tool in building your investment portfolio.