Property auctions are a great way to buy or sell a property. Buyers can often find a decent property at a bargain price. For vendors, it’s a great way to ensure a sale occurs.
However, a recent trend in property auctions is for real estate agents to reduce the usual 10% deposit required and payable by the buyer at the auction to only 5%. This is done in an effort to increase interest in the auction and improve the likelihood of a successful sale.
In essence, the 5% is used as a selling point to get people interested in the property. While there is certainly some benefit from this tactic, there are some complexities that vendors should consider before trying it.
Pros of a 5% Deposit
Introducing a 5% deposit at an auction instead of the usual 10% can elicit increased interest from potential buyers. Many buyers have the means, or at least think that they might have the means, to get financing for a new property but lack the cash on hand for a full 10% deposit.
However, such buyers might very well be able to afford a 5% deposit, which allows them to play the field and take a shot at snagging a property. As a result, with a 5% deposit on the table, you’re more likely to end up with a wider collection of potential buyers at the auction.
Naturally, the more interest you can generate in the auction itself, the higher the likelihood of securing a sale. After all, the certainty of a sale at an auction is clear: once a buyer makes a bid, the gavel comes down, and the auctioneer says, “Sold!”, the deal is made. For a property vendor, nothing is sweeter than a confirmed sale.
Yet, there are a few downsides to offering a 5% deposit on an auctioned property.
Cons of a 5% Deposit
One of the biggest drawbacks of having a 5% deposit is that it might attract questionable buyers. These are the kinds of buyers with enough money to pay the deposit but who don’t necessarily have the financial backing to pay the full price.
These questionable types might make a play for the house, only to find afterwards that they can’t actually afford it or get a loan for the full settlement amount. Naturally, this can create a lot of problems, not only for the buyer but for the vendor as well.
Although an auction sale is legally binding, pursuing a buyer through legal means for a settlement can be time-consuming, costly and stressful.
Real estate agents don’t have too much to worry about here, as they still make money from their cut of the deposit, which is why they’re happy to take the risk of offering a 5% deposit on a vendor’s property. Sure, a legitimate sale would be ideal, but if it falls through, they don’t lose anything and still get paid, leaving the vendor holding the ball.
What Recourse Does a Vendor Have When a Buyer Doesn’t Pay?
For the buyer, failing to honour an auction property sale agreement can lead to even more costs, as the vendor is not only entitled to the full settlement but can also pursue the reneging buyer for damages, legal costs and other fees. The buyer will also lose their deposit.
The damages a vendor can claim are typically associated with the costs involved in trying to sell the property again, along with any ongoing costs associated with keeping the house until it is sold, such as utilities, rates and taxes. Damages might also include the expected difference in the sale price if the property is to be sold for less to another buyer.
Damages could also include interest accrued on these amounts until the house is sold or until the buyer pays up. While this might seem fair and just to the seller, it doesn’t always work out this way in reality.
The fact of the matter is that since the buyer cannot pay for the house, they most likely cannot pay any of the other costs either. This can lead to the buyer filing for bankruptcy or being forced into long-term loans to pay off their debts, which can take years to recover. In some cases, the costs and damages are never fully recovered at all.
At the end of the day, some vendors only walk away with a 5% deposit and nothing more or are forced to enter into legal battles for the rest, with only that 5% at their disposal.
At Flash Conveyancing, we can guide you through the sale or purchase of a property, whether you’re the vendor or buyer, ensuring the entire process is smooth, easy and satisfies all parties. Contact us today to get assistance.
