16 May 2023

Auction vs Private Treaty – What’s the Difference?

No one ever explains to you how knowing the difference between buying through an auction or a private treaty can make sure you land your dream home. Each year there are nearly 100,000 property auctions held across Australia, and for each auction held there are just as many private treaty sales too. So when you’re hunting for your next home, you won’t know which sale type it will be, you just need to know how to manage both – and that’s what we’re going to show you in this post.

Depending on the market conditions and the seller’s unique circumstances, there are pro’s and con’s for auctions or private treaties. As a next home buyer you may sit on both sides of the table – as the seller of your existing home and the buyer for your next home. On the surface, it might seem that auctions or private treaties are the same – you are simply buying your next home. But that’s not necessarily true.. 

If you can understand the rules of either scenarios, particularly from the perspective of how it impacts your loan, which is what we will be covering today, you’ll be able to expand your next home buying options and be able to safely land your next home. 

Two Key Differences between an Auction vs Private Treaty Sale

So what’s the difference between buying at auction versus private treaty and what impact does it have on your loan anyway? We will answer this in two parts that should match the sequence of your actions and the process – Due diligence and Bidding. 

Part one – Due Diligence 

The due diligence you do is the same for both sale types but the timing of it is front loaded with an auction versus a private treaty. 

The sale at auction is unconditional, meaning there is no cooling off period. So you are committed to buying the property if you win the bid. That means you should definitely do all of the necessary checks to be comfortable that it is the right property for you before you bid. 

During this stage, you should work closely with your solicitor to check things like the contract, easements, building reports, pest reports and strata reports if applicable. 

You will also need to negotiate the settlement period in advance, and make sure to consider if you need to settle your current home prior or simultaneous to your next home as a condition of your loan! 

But for a private treaty, depending on the state or territory of Australia you are buying in, you may wish to defer some of these to be a condition of your offer that is satisfied during the cooling off period. 

Part two – Bidding 

The general rules of how an AUCTION works are as follows: 

  1. Auctions are unconditional – meaning they don’t have a cooling off period so you are committed to buying;  
  2. Once bidding has reached a vendor’s reserve price, the property is on the market and will be sold when the hammer falls; 
  3. If bidding doesn’t reach the vendor’s reserve price, the highest bidder has the first right to negotiate with the vendor; 
  4. Contracts are signed and a deposit is paid immediately after the auction is completed – so you will want to check beforehand if a 5% or 10% deposit required and what payment method is acceptable, bank cheque or transfer; and 
  5. There are finer details that are different such as whether you need to be registered, rules around vendor bids and what licence the auctioneer needs to have. 

For private treaty sales the rules can vary depending on the state and territory you are in. For example, a cooling off period is available, with the exception of Western Australia, although the length of the period varies.  

During this cooling off period it is critical that you do all of the due diligence we mentioned earlier plus progress your loan to formal approval.  Progressing the loan to formal approval requires obtaining a bank valuation and satisfying any non standard loan conditions, that is, a condition that is unique to you such as closing a credit card.  

When you’re going to auction or potentially facing a shorter cooling off period say less than 5 business days, our recommended approach is to satisfy the non standard loan conditions beforehand, leaving only the bank valuation.  

As a next home buyer if you are selling your current home, a key non standard loan condition may be aligning the settlement period of your current home and preparing any additional funds due to a variance in the purchase price of your next home and/or the sale price of your current home. 

By satisfying all conditions except the valuation prior to auction or the start of the cooling off period, you de-risk the possibility you won’t be ready before the cooling off ends or you require an extension which the vendor does not agree to. 

So when the cooling off period ends or that hammer drops with your winning bid, you can pay the balance of the deposit with peace of mind that it is the right next home for you and you can settle safely! 

Tips on Managing the Two Types of Sale

In terms of risk management, private treaty sales with cooling off periods are safer than auctions because you can withdraw without risking as much deposit. However as the buyer you won’t be the one who gets to choose the sale type, so if you want more next home options, you need to be ready for both. 

Auctions are unconditional so you need to have your pre approval and all of your due diligence completed, including the settlement period agreed on, before bidding. This includes the settlement period of your current home if you need to sell it as a loan condition for your next home. 

It is important to stick to your budget plus a buffer, that way you can have a contingency plan like having extra deposit or using a higher LVR option in case the valuation comes lower. This is equally relevant to auctions as they are to private treaty.

Private treaty sales require moving efficiently during the cooling off period and aligning the timing of the cooling off period expiry with the anticipated date of achieving formal loan approval. This requires a detail orientated mortgage broker who knows how to project manage the process with key stakeholders such as the lender, your solicitor and the vendor’s real estate agent. 

So make sure to keep your wits about you and be brave in participating in both auctions and private treaties, that way you maximise your chances of landing your dream next home! 

Speak to a Broker

If you have any questions or comments on this topic, you are more than welcome to get in touch with me () or anyone in our broking team.

For more tips on getting your next home, please stay tuned or head to our Youtube channel – “The Next Home Series