What happens when someone overpays at auction?
We get it. The excitement, motivation, and fear of missing out, lead to many auctions reaching far in advance of reserve (the minimum price the seller will accept). So first of all, be aware of the auction laws, and just what you are committing to when bidding at auction. Each state has their own regulations, and it’s wise to spend atleast a few moments going over before diving in. In NSW for instance, you can check out the NSW Fair Trading guide here as an example. If you are using a buyers agent, they will assist you in ensuring you are aware of the laws you are adhering to, and can also act on your behalf (authority to act) on auction day to help remove the emotion form bidding.
Does a high auction price effect the market price?
Yes and no. Certainly in an area, if similar prices are all going well above the current market prices, then a valuer may accept the higher price, or a certain increase on the previous perceived market price. Usually though, valuers who work independent from the lenders, will look at historical prices, and not just the immediate recent ones, to complete their valuation report. Surrounding suburbs, amenities, market environment, and close developments can all be external factors to the property that could affect what a valuer records the properties market price as. This means, even though you may have paid 20% higher than the current market value of a property, and the contract of sale shows this, the lender may base the LVR (loan to value ratio) off the lower of the contract price, or the market price.
What happens to pre-approvals with high LVRs?
This is where issues can step in. If you are currently expecting a price of $500K for a property, and have been approved for a loan at say 95% LVR, and the final price you bid is accepted at $550K, you will likely need to find the extra $50K, or there abouts yourself. keep in mind too, stamp duty and other fees would likely be higher with a higher sales price as well. For a lower LVR, and stronger deal, there’s always the option to go back to the lender and see if the extra funds can be applied for, though this may need a new application Mortgage Home Loan Brokers, and could present issues due to the settlement time usually associated with auctions.
How to avoid issues
The easiest way is to just stick to what you have been approved with a lender for, or what you expect to spend. Though you may miss out on a property, you could also be missing out on a lot of other potentially costly issues. Another option is to try and be approved for an amount higher than what you are expecting to pay to give yourself some space, and also avoid high LVRs when going to auction – lower LVR deals can be quicker to process if a re-application for a slightly higher amount needs to be done. In short though discipline is key. From searching for a property to applying for finance, it is always best to know your budget well in advance, plan around it, and stick to it.