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Buying a property at auction with less than a 20% deposit

With the property market as hot as it is, a lot of properties are being sold via auction and understandably so. We are hearing of great prices for people selling their properties at auction. However, auctions can be emotionally stressful and there are a few more things to consider, especially for people who have less than a 20% deposit, which are normally first home buyers. 

Can it be done?

In short, yes. Let's look at how and what to watch out for. 

Importance of being pre approved for finance

Whenever someone buys at auction, regardless of their deposit, if you win, it is considered an unconditional offer (generally, there are a few minor exceptions). Unlike a deadline, price by negotiation or priced property sale you can't bid at auction with a range of normal conditions like builders reports, LIM Reports or finance conditions. You pay a deposit (usually 10%) to the person selling the property the day of the auction. At this point you are committed or you could loose your deposit. 

If you are already pre approved through one of the lenders, we'll be able to help you work through all of your finance conditions and be able to mark everything off so you can be almost 100% confident that when you bid at auction, the bank will lend you all the required funds to make the purchase. Usually the only condition that might be outstanding will be the valuation (we'll explain ore below).

Auction dates can also be pulled forward if there seems to be a lot of interest and so if you wait until you find a property for auction before you start getting your finance approval sorted, it can mean that there isn't enough time. The auction could be pulled forward and then you don't even get the chance to bid.

Having a 10% deposit to pay on the day

When you buy at auction, it is an unconditional sale and so on the day of the auction, you need to pay a deposit to secure the property. Usually that is a 10% deposit. 

If you are using KiwiSaver to help with the purchase, you will need to make sure that you have got your KiwiSaver out from your KiwiSaver provider and is ready to be used to pay the deposit. Sometimes this can be difficult with timings as it can take 10 - 15 working days for your KiwiSaver to be withdrawn and put in your solicitors account. 

If possible, it is sometimes useful to have a back up option of family or friends who can help buy paying the 10% deposit with cash on the day and then when you get to settlement, your solicitor can arrange to have them paid back using other funds associated with the settlement. 

Note: This is the same pool of money we talk about in terms of the amount you have have to put towards a property purchase 

Due Diligence, especially valuations

The last thing to consider with auctions (whatever your deposit) is that you need to do all your due diligence before the auction date. Everything from builders reports, meth tests, LIM Reports and making sure you can get finance needs to be done before the auction as there are very few ways to get out of a successful auction bid after the fact.

This means doing all of this without even knowing if you are going to win at auction. It can get expensive so you need to be prepared. It is always advised to speak to your solicitor before auctions and getting their advice on all the due diligence. 

The main difference when buying at auction with less than a 20% deposit is that the bank will require you to get a valuation done on the property you are wanting to buy. Now you are able to get that done before the auction but it is a large cost (close to $1000) and so ideally you wait until after you know you are going to be able to buy the house to do this (i.e. after the auction).

The risk you run by doing it after the auction is that it values lower than what you have paid for it and then the bank wants to lend less as they will take the value to be the lowest of the purchase price of the registered valuation. If the valuation does come in lower than what you have won for at auction, it is not impossible to overcome but you need to be able to secure either more lending with the bank to make up the difference or need family or friends available to gift you the difference in funds. 

So, can it be done...

Yes, you can buy at auction with less than a 20% deposit. It is slightly more difficult and you need to be a little more organised with back up plans, but it can be done. 

Touch base with the My Mortgage team and Greg, Amber, Adam or Claire would love to walk you through the process, get you pre approved and help you buy at auction.