Buying a property at Auction does come with some risk even if you have pre- approved finance.
After you buy a property at Auction the bank you are borrowing the money from will need to organise a valuation to confirm that the purchase price is within a range that they are comfortable with.
In most cases (95% percent plus) the valuation will come back at the same amount as what the property was purchased for. The valuer is just confirming that the price paid is within a certain range of what would be considered reasonable for the bank to be comfortable.
However, if the valuer cannot justify the purchase price falling within this range (Normally by comparing similar properties that have sold in the area over the last 6 months) they may value the property below what the client has paid for it at Auction.
For example, a place may be purchased for 1 Million at an Auction and only be valued at $950,000. If this happens (very rare) then the bank will only lend money based on a $950,000 valuation.
One way to guard against this happening is to have a valuation done prior to the Auction. The risk here is that it puts a limit on what you can spend. In these cases, the valuers are always very conservative because they are working in the banks interest.
What would most often happen if this was done is that the valuer may value the place at $950,000 before the Auction however if the same valuer valued the place after it was purchased for 1 million (And had not performed a pre -Auction valuation) he or she would in most cases value the place at 1 million. This is because it is always much easier to value a property when you have a price to work towards. What normally happens is if you get the bank to do a valuation before an Auction you are usually restricted to bidding up to a price that won’t win the Auction and you will be unsuccessful.
- To buy at Auction you really need to ensure:
- You have done your research and know the market.
- You stick to a limit that you set before the Auction and don’t get carried away.
- You have surplus funds that you can access and put towards the deposit in the case that the valuation comes in under purchase price.