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Let the buyer beware of auction loopholes

 

Professor Alan Patching

Pretty much all Real Estate contracts in Australia contain a clause known as the caveat emptor provision. This is a Latin term literally meaning, ‘May the buyer be aware, which is more commonly translated as, ‘let the buyer beware.’ Generally, private treaty contracts are signed, subject to various conditions such as finance being approved and building and pest inspections returning results acceptable to the buyer, and these conditions are traditionally negotiated as part of real estate contracts in order for purchasers to comply with implied caveat emptor responsibilities.  

I recently witnessed something I had never previously seen, despite a long career in property and construction and personally negotiating numerous property deals, ranging from housing and apartments to commercial deals worth up to a billion dollars. I was so shocked by what happened I felt compelled to warn and prepare the many relatively inexperienced homebuyers currently looking to purchase in a somewhat unstable market.  

My brother-in-law, Chris, asked me to accompany him to an auction in Brisbane for a CBD apartment.  While the agent advised he couldn’t provide a price range for auction properties under Queensland regulations, he could share that the owner had already rejected an offer of $610,000. I told Chris to take that with a grain of salt and do his own research on actual prices achieved at recent sales for similar properties and use that data as the primary guide for establishing the upper limit of what he was prepared to bid.  

We arrived at the auction well prepared, and an obviously experienced auctioneer began the process by making the required announcements for auction purchases - pre-registration of bidders, no cooling off period, how bids were to be shown and that the highest bidder’s price was final and enforceable once the hammer dropped and the auction declared concluded. This latter phrase was to prove vitally important.  

The auction progressed from a starting point of $540,000 and bidding ceased at $575,000 with two potential buyers in the fray. This amount was comfortably within Chris’ predetermined upper price limit. 

As is often the case with residential auctions, the auctioneer declared the bid had not met the vendor’s reserve price and he would now deal with the highest bidder – Chris. I explained to Chris that he was about to be in a negotiation situation, and suggested next steps, the likely amounts the auctioneer would return with, what he might like to offer in reply, and the rough price at which, based on my experience, an agreement might likely be reached. The negotiation played out as predicted, landing on an agreed price of $590,000. 

But what happened next was unexpected and, in my view, outrageous. 

The auctioneer explained to Chris that the audience would be advised the reserve had been adjusted, having been met by Chris’ negotiated offer, so the property was now ‘on the market’ and he would restart the auction, opening up to further bids with the highest winning the right to purchase. Within seconds of the auction restarting, the competing bidder made a marginally higher offer. Chris, feeling manipulated and upset, offered an additional $10 before withdrawing. The underbidder secured the property at the expense of Chris’ effective negotiation. 

And as it turns out, it was all perfectly legal. Because the auctioneer did not officially declare the auction closed, he was able to continue proceedings even after negotiating with the highest bidder by ‘resetting’ the reserve price. 

I have never before seen that happen.  

What it makes clear is the need to know and ask the right questions, because in this case the auctioneer did not explain the full details how the auction would proceed during his opening address. He certainly didn’t advise that Chris, given the auction had not been declared closed, had every right to withdraw his negotiated offer.  

The auctioneer simply re-commenced at the newly negotiated price. Had Chris withdrawn, the auctioneer would have had to restart from the previous highest bid of $575,000, which might have seen the auctioneer facing a difficult conversation with the vendor. 

So, for the benefit of others in the market, here is my advice for you: 

Do your research  

Speak to experienced friends and family and check out reputable legal and government websites to ensure you know your rights. 

Don’t be controlled by the auctioneer 

They might be seeking bids of $5000 at a time, because that helps them boost the bids, but there’s nothing to stop you from bidding in increments of $1500, for example. The auctioneer might not like it, but that’s not your concern. 

 Understand your options  

If you are the highest bidder the reserve has not been met, categorically insist you will not negotiate until the auction is declared closed. If they refuse, you have two options:  

  1. Stand firm and see if any more bids are forthcoming.  
  2. Agree to negotiate, but make it clear that if you agree a price with the vendor and the auctioneer elects to continue the auction at the higher price, you will withdraw your offer. 

Although no laws were broken here, whether what happened to Chris was fair and right is an entirely different question. But it surely highlights the need for buyers to be well prepared both before and during an auction. 

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