How Do New Zealand Property Auctions Work?

In Episode six, host Joel Sadler is joined by Scott Miller, the owner and founder of Advanced Mortgage Solutions, to discuss the complexities of buying a home through the auction process. 

With over 20 years of property investment experience, Scott shares his insights on the rules and required preparations for purchasing at auction, emphasizing the importance of pre-approval, lender sign-off, and securing insurance before bidding. 

This episode is packed with valuable advice for both first-time buyers and seasoned investors, including tips on price by negotiation, deadline sales, and what to expect post-auction. 

Don't miss this essential guide to making your property journey smoother and more successful!

For assistance with a new or existing home loan, reach out to Advanced Mortgage Solutions today. www.advancedmortgagesolutions.co.nz 

Transcript

SPEAKER_01 0:06

Hi everyone, welcome to the Advanced Mortgage Solutions Podcast. This is a podcast that just people on their property journey. Whether you're a first-time buyer or a seasoned investor, we cover all topics. I'm Joel Sadler, our mortgage expert today, Scott, owner and founder of Advanced Mortgage Solutions. G'day Scott. Scott's been a property investor for over 20 years, and his professional background was in logistics, management and finance. So this technical knowledge combined with real-world experience and property investing, the mortgage insights gives us powerful information and IP that Scott's gained over the years. So as we know, knowledge is power. So today we're going to talk about and unpack the auction process. So I've you know purchased my last home by auction process to Scott and uh it wasn't my first home, but it was quite a nerve-wracking process. I went in with a very aggressive mindset because my wife was heavily pregnant and I definitely overpaid for the property, but I was happy to do that at the time because I was kind of desperate, I suppose, you know, when if you know what I mean. Um, but there's a lot of nuances there that I wasn't aware of, um, and I found it quite stressful trying to come up to speed with you know, what am I not just how to the strategy, but also what are the rules and what do I need to do to be successful, you know. So do you want to start off by um giving us a bit of a an overview of the rules applying to to buy a lot of people?

SPEAKER_00 1:33

It is a great question, and and let's be let's put it up front that auctions aren't particularly first-hand buyer-friendly. Uh and what I mean by that is that you absolutely have to be pre-approved, um, and you have to have had the the house that you're looking to go to auction on signed off by the lender before you go to the auction. Uh, and you have to have insurance in place to purchase the property. Um, because once you win the auction, there's no oh sorry, I've changed my mind. Or actually I can't get insurance, you know, you're in real trouble because you've actually you've gone unconditional by winning the auction. So um I'm sure you've got some questions around the first home buyer, but and uh you know, subsequent to the question that you've asked now. But the the real thing is is you have to be more prepared to go to auction than any other type of way of purchasing. So price by negotiation or deadline sales of bag in Christchurch, for example, both of those options you're able to put your own conditions in in your offer and then use those conditions through your due diligence period to find everything about the house. With an auction, you've it's almost completely reversed. You have to go out and find everything about the house and spend your money just to get yourself at the auction in a position where you can stick your hand up and start bidding on the house. Um, and that can come with some cost depending on whether you have a 20% deposit or not.

SPEAKER_01 3:07

I see what you're saying. So basically, because the bidding process of an auction is final, you know, if I say bid on a home and win it, then the due diligence and all that can't be done afterwards. It has to be done prior, and they have to be ready to go, I suppose, and literally ready to make a deposit. That's right.

SPEAKER_00 3:24

And and the bank needs to be ready to go because a pre-approval only assesses the applicant. It doesn't assess the security that that applicant is looking to purchase. And if it's going to auction and you win the auction, they have to have signed off on that security before you go to the auction. Because you could imagine Joel going, winning the auction, taking the the very proudly taking your signed sales and purchase document to the bank, and they're going, We would never have agreed to buy that property. Uh oh, you know, now there's some real trouble. Right. Uh, so that that's why there is that need just to get things signed off, including insurance, right? For exactly the same purpose. Uh there's no point winning the auction and then going to try and get insurance, and and the insurance company just turning on saying, sorry, uh, we can't offer insurance on that property. You're in exactly the same position as uh not having finance accepted on that property.

SPEAKER_01 4:19

Right, right. And so I imagine with the insurance, the bank would require the insurance. Would that be fair as part of the process?

SPEAKER_00 4:26

No insurance or insurance with conditions is no finance. Yeah.

SPEAKER_01 4:30

Yeah.

SPEAKER_00 4:31

Yeah, right. So super important to get those two things aligned. So you know when you're sitting at the auction and putting your hand up to bid that you're absolutely able to do that. Yeah.

SPEAKER_01 4:43

And so how would how would I get the bank to check the property out as a first-time? So let's just say, you know, first-time buyer situation, not all the process. How would I say to the bank, hey, check the check this property out?

SPEAKER_00 4:55

That's a great question. And look, if you're using like uh our services, for example, then we would request um a copy of the pre-auction pack that comes along with auctions, and in within that pack, you'll find things like the sales and purchase document, you know, the rates demand, the a limb, um, title, all of that information that the bank really needs. So we would send that through on your behalf. Um, we'd probably need at least sort of five working days, particularly if it's busy before the option starts, to give the lender enough time to pick it up and assess it and come back to us and say, yes, look, that that particular security is absolutely fine. Allow your uh allow your clients to go up and bid to the up to their point of the pre-approval that they've been accepted to. And then off to the side, uh, we have some contacts with particular insurers in New Zealand. Um, that doesn't stop people going out and getting their own quotes directly from other insurance companies, just to cover off the insurance angle and again be satisfied that when they're at the auction ready to bid, they know that they're completely unable to do so. Right, brilliant.

SPEAKER_01 6:04

Okay, well it sounds super important and uh yeah, really good tips there on being prepared to bid. Um, and then so you know, once someone you know is pre-prepared, say for example, uses you or a mortgage broker or mortgage advisor, um, gets all their ducks in a row, goes to auction, manages to win the auction. What sort of then happen what's the process after that to you know what what sort of rolls out then? Do they get an email? Do the does the bank kick into gear straight away? You know, what sort of generally folds out?

SPEAKER_00 6:34

You would need a copy of the counter-signed sales and purchase document. So it shows that the vendors accepted your um offer and you've accepted to take that offer on. Um that can obviously only happen by winning the auction. Uh by that stage, the bank already have all the information, so all they need is that signed sales and purchase document, which then says, okay, we now have a confirmed live contract on that house. Um, very quickly, because they've pre-approved the house and you, they would send out an unconditional offer of finance. Um, we would then let the uh the vendors, uh, sorry, the uh purchasers solicitor know that. So they know that everything's tickety-doo and we're we're just really heading towards settlement now. Um, as part of that, we'd organise a um, you know, pricing and loan structure meeting with the client to make sure that we are setting up the loan in a way that suits them and not the bank.

SPEAKER_01 7:28

Awesome. And and just for those listening that might not understand what settlement means, that means the literally the the day the money's paid from the purchaser's bank to the seller's bank or vendor's bank and the keys are handed over. Would that be fair to say?

SPEAKER_00 7:43

But the handover date where you take ownership of the house and can and can move into it, it becomes your house on the settlement date. Yeah. Awesome.

SPEAKER_01 7:53

That's when you pop the uh bottle of champagne. When an auction is brought forward, or you get say if you're, you know, looking to bid on a home and it's brought forward, what's what's happened and why would they do that?

SPEAKER_00 8:08

I mean, generally once a house has been put up for auction, um, it has to go to auction, right? So by bringing the auction forward, it doesn't get rid of the process of having an auction, it just brings the auction to a closer date. So what you might find is say, we've got uh uh an auction date two weeks away from us now. Uh the vendors received an offer that they are prepared to bring that auction date forward to to um uh have the auction run on that day. And the idea of a purchaser making that kind of arrangement is it's trying to cut off other people getting ready to go to auction, the same auction, um, by not having all of this time that they would have had. You know, the two weeks that we just talked about might come down to a couple of days. And the attempt by the purchaser is to cut other people off that they can't make it to the auction in time. The auction itself still has to take place, right? Because it was sold under the auction rules. That means that it has to still go to an auction, it does not get rid of the auction, and that's what some people who do put in a pre-auction offer think that, oh, okay, now I've won the house. Not quite, not yet.

SPEAKER_01 9:21

Yeah, yeah. Right, right. So so for a seller for them to agree to bringing forward an auction, it must have been a pretty good offer, right? Someone must have made a good offer.

SPEAKER_00 9:33

Uh, you know, bidders out of the room, it would have to be something pretty special. Yeah. Um, yeah. Or or the or for themselves, they're under some kind of time pressure that maybe we're not aware of. You know, maybe they needed to bring it forward because now they've found another house that they want to purchase and those dates didn't quite align up, you know. So but mainly it's because they've received an offer that was just, wow, okay, we don't want to lose this potential bidder, let's bring the offer forward, the option forward for them.

SPEAKER_01 10:01

Purchasing the first home, I I see everything in life as a bit of a learning experience anyway, right? And so if you end up bidding on a home and don't get it, it's disappointing, obviously, but it's a bit of a learning process. Um So if someone was, you know, part way through getting, say, an inspection done and hadn't finished the insurance part yet, and then all of a sudden they get a notice that the an option's been brought forward, um would they normally reach out to you and sort of go, well, what do we do here? Like, how do they kind of make that this is it worth them continuing through the process, do you think? What's your sort of, you know, after your years in the game, do you think it's worth someone continuing through and rushing through the auction?

SPEAKER_00 10:38

I suppose it depends to how far you've got through your own process of getting ready for the auction. You know, if you can put pressure on the building report guy or the registered valuation guy or or your solicitor or whatever's required um to get you still to the auction, because remember the auction still has to take place. It's just whether you can get there in a position where you can put your hand up and bid, as we've just talked about. Um, so if you've only just really started out and haven't got any reducts in a row, you'll probably find that if there's only a couple of days to the auction that you wouldn't be able to get there in time. You know, insurance, your solicitor to check the limb and the title for finance to go and get it signed off by the lender. So there's no yes or no answer to what you've said, it just depends how far through the process you're in yourself. Yeah. The bigger lead-in time you get to an auction, and the more you can prepare yourself to get to that option, the better. So in case it does get brought forward, it doesn't matter to you because you're already ready to go and bid at that auction anyway.

SPEAKER_01 11:36

Yeah. And then what's what's your experience? So, you know, you could argue that, as you said, for a first-home buyer, they're almost better to um I mean, generally they'd be buying the lower end or mid-tier valuation of a property anyway. My understanding, unless the market's running super hot, it's generally highly desirable, more expensive properties, say that are on, you know, uh, I don't know, in the premium suburbs of a of a of a town that go to auction because there's people lining up to buy them that have got lots of money, you know. But if you're a first home buyer, you could almost um and in the market's not running super hot, it'd be almost better to look for something that's available where you can just make an off as opposed to going to auction. Would that be fair?

SPEAKER_00 12:20

It would be absolutely fair, particularly if you don't have a 20% deposit. Now, the reason I bring this up is if you don't have a 20% deposit, then it's very, very likely that the lender's gonna ask for a registered valuation for the property. Now they can be up to$1,000. You can go and spend your thousand dollars on your registered valuation, possibly six hundred dollars on a building report. You're gonna spend a couple of hundred dollars with your solicitor, and then you get to auction, first home buyer, you might find that the very first bit at that auction is above your pre-approved amount, and you've gone and spent the thick end of two, two and a half K, and you didn't even get a chance to put your hand up once at the auction. I've seen it happen. So that's where I was saying at the start of the show that you know auctions are not generally first-hand buyer friendly. Uh, they are more friendly if you have a 20% deposit because then there isn't a need to get a registered valuation, so it takes that, you know,$800,000,$1,000 cost away. Um, but just be prepared to know that there's other people out there with possibly deeper pockets than you, and if they like the house, they may be in a position to outbid you.

SPEAKER_01 13:30

Yeah. And I I've seen that as well on um arguably lower value stock, you know, housing stock or a house. Um and often wondered why it's going to auction. And I've realized it's the land, the value underneath where property investors or builders will come and bowl the house and then put some apartments up on it. So that's quite interesting to be aware of, isn't it?

SPEAKER_00 13:54

You know, as you might think, hey, this is And that first-hone buyer stock is exactly the same stock as entry-level rental properties or development properties, and you'll find that those particular types of purchases might have deeper pockets than the average first-home buyer. And depending on how attractive that particular piece of land is, uh, you might find again that you're being outbid by someone that's just got more horsepower than you have. Yeah. Yeah. It's not nice, you know. And that's why, you know, largely priced by negotiation or deadline sales are so much more first-hand buyer-friendly in that regard. Yeah.

SPEAKER_01 14:32

Yeah. Let can we take um five minutes to unpack that, Scott? So price by negotiation, give us a rundown on what that means. What does that mean?

SPEAKER_00 14:41

So price by negotiation, you'll typically find in the advert from the real estate agent that they'll list a price and it will say offers above, you know, 550,000, for example. And it just means that the vendor is open to um having offers placed on their property and then um pick one that they particularly like and then agree to countersign that and say yes, right? The advantage of doing it that way is that you can place conditions in your offer, which you can't do with an auction. And it just means that you give yourself, say, 10 or 15 working days due diligence to go and do your building report, your registered valuation. It gives your solicitor time to check out the limb and the title, it gives the bank the time to do their checks on the house. You know, it's it's a lot slower in karma, and you're only spending money because now you know you've had an offer accepted on a property. Um, huge advantage there. A deadline sale is similar, where they'll probably say, you know, um offers uh in excess of 550. Let's use the same example. But the only difference to this is that for each offer that the real estate agent receives, they'll put it in an envelope, um, they'll gather all of the offers, and then on the deadline sale date, um, they'll go to the vendor, they'll open all of the um different envelopes at once, and then it's up to them, the vendor and the real estate agent, to go through those to see which one they want to accept. Now, you might find that the highest offer is not the offer that's always accepted, particularly if, for example, one of the clauses in the highest offer that was um presented has subject to sale of an existing property. And it just means that, okay, now the vendor knows that they have to wait for the potential purchaser that they've agreed to choose, has to sell their house before they're going to have the money to buy the house, right? Yeah, and that's where someone that might have a slightly less uh purchase price, a slightly lower purchase price, but no subject to sale clause has a bird advantage and says, hey, look, we're gonna take it even though it's slightly lower because we know it's more immediate. Right.

SPEAKER_01 16:58

Interesting. Yeah, that's it's quite strategic, isn't it? And so it sounds to me that that path, you know, the um offer your price by negotiation where you can make an offer and all the deadline sale, as you said, are a lot more user-friendly for first-home buyers.

SPEAKER_00 17:12

Only start spending money once a lot of sense, offer accepted. And that's super important if you're really a first-home buyer. You know, you're pretty much usually cleaning out the cupboards just to get the deposit required in the first place. You know, you haven't got a lot of money hanging around, yeah. Um, that you can sort of willy-nilly spend on auctions here, there, and everywhere. Um, and that's where the price point negotiation and deadline sell are huge advantages. Yeah, you wait, yeah. Offers accepted, bang. Now I'm prepared to spend some money.

unknown 17:43

Yeah.

SPEAKER_00 17:44

Yeah, fantastic.

SPEAKER_01 17:46

Well, thanks, Scott. The advice today's been amazing in this space. And um, for those that are listening, how can they uh get hold of you, Scott, to you know, to talk to you about buying it?

SPEAKER_00 17:56

All of the contact details of me and the other advisors are available on our website. Um, there's also uh you know um forms to fill in on the website to cut to start the process, to speed the process up, contact forms, uh, phone numbers, emails. It's it's the one one place to go, and you can get all of our details from the website.

SPEAKER_01 18:17

Awesome. And just to clarify, your services are free for those that want to.

SPEAKER_00 18:22

The banks pay us for our services so we don't charge a fee.

SPEAKER_01 18:28

All right. Thanks, Scott. Thanks for the day. Thanks everybody. We'll see you on the next episode. Reach out to Scott if you need help, and uh yeah, we'll catch you soon. Thanks.