There is something wrong with auctions. Informed consumers hate them, industry commentators condemn them, and governments have failed to legitimise them. The following hyperlinks will help consumers to understand what is wrong with auctions, and what steps they can take to protect themselves in auction situations.
Why auctions are regarded as scams
The auction process in Victoria is a farce. Recent legislation passed by the State Government has failed to protect consumers, and will succeed only in making auctions appear more legitimate by introducing superfluous bidding rules.
The following material will inform consumers and estate agents as to the true status of auctions, the reason they are regarded as a nonsense, and why they will have no future when consumers become aware of their flaws.
Real estate sales must be in writing
A contract is useless unless it is enforceable against another person. In Victoria, the law says that a contract is not enforceable against another person unless that contract is in writing and has been signed by the person against whom it is to be enforced.
It is one thing to have a person agree to buy or sell a property, but it is another thing again to have them sign a contract so that their agreement can be enforced against them.
The simple rule is: if it is not in writing or has not been signed by the other person, then it cannot be enforced.
First trick – the bidding conditions
Every lawyer involved in the preparation of Contracts of Sale of Real Estate will be familiar with the estate agent’s demand that “bidding conditions” should appear in the contract. Indeed, nearly every contract displayed at an auction will contain bidding conditions.
Usually, the the bidding conditions will include the following:
- No bid shall be retracted.
- No bid shall be less than the amount called for by the auctioneer.
- The highest bidder shall be the Purchaser.
- Highest bidder must sign within 10 minutes of the fall of the hammer.
- The Vendor is entitled to make dummy bids.
The estate agent points to the contract, and tells bidders that the auction will be conducted in accordance with the bidding conditions contained in the contract.
But why are the bidding conditions in the contract at all? The contract doesn’t bind anyone until it is signed; when the contract is signed, the auction has already finished!
There is only one reason for the bidding conditions being inserted into the contract, and that is to trick bidders into believing that they must be obeyed. We are critical of lawyers who allow themselves to be manipulated by estate agents who demand that bidding conditions be improperly included in sale contracts.
Why auctions will never be conducted properly
If auctions were to be conducted properly, and legitimately, every genuine bidder would sign a contract before the auction started (so that the contract could be enforced), and would accept the fall of the auctioneer’s hammer as confirming that the sale had been made.
Why don’t estate agents use this procedure now? Because no-one is silly enough to sign a contract under such circumstances. It is as simple as that.
Gazumping? There is no such thing
There is no such thing as “gazumping” in Victoria. People only believe they have been “gazumped” when they have been misled by someone.
Basically, when a contract of sale has been signed by a purchaser by way of an offer, and the offer has been accepted by the vendor, and the purchaser has been notified that the vendor has accepted the offer, there is a sale. Unless the parties have committed themselves in writing there can be no sale.
- Bids at an auction do not complete a sale of real estate.
- The fall of the hammer at an auction does not complete a sale of real estate.
- A declaration of “Sold”, shouted at the highest bidder does not complete a sale of real estate.
- A verbal promise by vendor and purchaser does not complete a sale of real estate.
Do not be misled. If any of the above occur there may be a verbal contract in the technical sense, but it is unenforceable unless it is in writing and signed by the party against whom it is to be enforced.
Can the winning bidder be forced to sign the contract?
No. For example, if the winning bidder is about to enter the house to sign the contract and overhears someone mention “the asbestos problem in the roof”, she may decide that she doesn’t want the property after all. She cannot be required to sign the contract, and cannot be in breach of a contract she has not signed.
Does the vendor have to sell to the winning bidder?
No. For example, if the winning bidder is about to enter the house to sign the contract and someone calls out to the vendor, “Forget $300,000, I’ll give you $320,000 if you’ll sell it to me”, the estate agents may feel embarrassed, but the vendor is entitled to refuse the highest bid and sell the property to the late-comer.
If the estate agent falsely advises the Vendor that he is not allowed to accept the late-comer’s bid, the Vendor could eventually sue the estate agent for the difference between the $300,000 bid and the late $320,000 offer for giving wrong and misleading advice.
The dreaded “dummy bid”
Everyone who attends an auction is frightened of the “dummy bidder” – someone who is hidden in the crowd for the sole purpose of making false bids in an effort to artificially increase the price of the property.
While the State Government has introduced laws banning “dummy bids”, and new rules require that “vendor bids” (another name for a bid made on behalf of the vendor to artificially increase the price) should be declared, few industry observers have realised that “dummy bids” are already a criminal offence.
A genuine bidder who suspects that a “dummy bid” is being made is entitled to remind an auctioneer of this by asking, “Is that a dummy bid, because dummy bids are a criminal offence.”
Handling the “vendor bid”
The new legislation introduced by the State Government prohibits “dummy bidding”, but allows “Permissible vendor bids”.
Consumers should understand that an auction can be crippled if “Permissible vendor bids” are used by the auctioneer. (We suspect that the use of vendor bids by auctioneers may become grounds for an action in gross negligence in future).
A vendor bid could be described as a counter-offer made by the vendor. When a person makes a bid at an auction she is really saying, “My offer to buy is $290,000”. When the vendor offers a vendor bid, he is effectively saying, “My offer to sell is $300,000”. All the bidder has to do to buy the property is to call out “Done!” The bidding stops, because the vendor’s bid, or counter-offer has been accepted.
Estate agents expect that bidders will allow the vendor to pretend that he is one of them, and that they will bid against him as though he really wants to buy his own house. Clever bidders will remain silent as soon as they hear the agent declare the vendor’s bid. It is at this point that the estate agent should be called upon to to declare the reserve price, and to stop the nonsense.
How the government has failed consumers on “vendor bidding”
Consumer Affairs Victoria and the State Government think they have improved the auction system, when in fact they have created an opportunity for estate agents to manipulate the new law. It won’t take estate agents long to catch on.
Estate agents have demonstrated a remarkable ability to manipulate laws designed to protect consumers, so that they actually disadvantage consumers.
Example 1: The Section 32 Vendor’s Statement
When a lawyer asks to see the contract, the agent delivers only the Section 32 Vendor’s Statement. If the lawyer then follows up and demands to see the contract, the estate agent sends a blank Contract Note, saying that the contract will not be completed until the purchaser attends at the office. The Section 32 Vendor’s Statement is used to convince the purchaser that it, and not the Contract Note, is the most important document. Because of this, very few contracts are examined by lawyers before they are signed by the purchaser.
Example 2: “Cooling Off”
This was supposed to assist consumers to get out of contracts where they had been impulsive or the victims of pressure sales tactics. Now it is used to trick purchasers into signing contracts without obtaining legal advice. The estate agent tells the purchaser NOT to obtain independent legal advice before signing the Contract, because they will lose their “cooling off” rights. In fact, all consumers are much better off if they obtain legal advice first.
Example 3: Disruption of Auction
We expect that clever estate agents will manipulate the new laws regarding the disruption of auctions. It is easy to imagine a situation where a bidder hears that the vendor is making a “Vendor Bid”, and then calls out the auctioneer, “If he’s bidding for his own property, he’s making me an offer.” (Remember, the idea behind the Vendor Bid is that the vendor is pretending to be a competing bidder, when he is not – therefore, a Vendor Bid could be seen as a counter-offer). The bidder could address the rest of the crowd and tell them the truth:
“If this is a Vendor Bid, then that means the genuine bids are finished, and the Vendor is just trying to trick us into offering more – let’s all just keep quiet, and get him tell us the reserve.”
This would be a fair approach, but undoubtedly the auctioneer would declare that the person addressing the crowd (and exposing the trick) is “disrupting the auction” which the State Government has declared to be an offence!
Changing the conditions in an auction contract
Everyone knows that auctions are held at times and places where it is impossible to get legal advice or legal assistance.
It is also well known that the estate agent is the only person at the auction who knows enough about the law of real estate to be able to win an argument. At the auction the estate agent is king, simply because no-one knows what to say when the agent refuses to allow the addition or deletion of any conditions in the contract.
However, there is a way to ensure that you are protected when you attend at an auction as a Purchaser. Obtain a full copy of the Contract before the auction, and have a qualified lawyer check it out. Have any nasty conditions deleted, and add any protective conditions your lawyer suggests.
Before the auction, hand a photocopy of the amended Contract to the auctioneer or any of the other estate agents at the property (be sure to record the name of the person you hand it to, and be sure to keep the original in your safe custody). Tell the auctioneer or estate agent that you will be bidding, but you will be bidding on the basis that YOUR contract is the one to be signed.
Don’t listen to the agent’s protests (the person you want to impress is the vendor). If the property is knocked down to you the agent may say that you have to sign the original unaltered Contract, but you will know that this is false. You are entitled to demand that your Contract be the one that is signed if the Vendor wants a sale. It will then be up to the Vendor (not the agent) as to whether or not your offer will be accepted on your terms. If you have made a good offer, and the Vendor is keen to accept your price, it will be your Contract that will be signed – on your terms.
Can a property be purchased before the day of the auction?
Yes. It’s simply a matter of submitting an offer in the normal way. However, you may find that the real estate agent will be less than co-operative, and may even refuse or fail to pass your offer on to the vendor.
Real estate agents like auctions because they are an excellent form of self-promotion for the real estate agent:
- Pre-auction advertising is paid by the vendor, and promotes the real estate agent locally.
- Open-house inspections give the real estate agent the opportunity to meet prospective vendors (a person who is buying is likely to be selling).
- The day of the auction is a further opportunity for promotion of the real estate agency.
Obviously, the real estate agency and the estate agent in charge of the auction will be keen to see the auction proceed.
If the real estate agent indicates reluctance in submitting your bid to the vendor, just by-pass the agent and approach the vendor in person. After all, the vendor is the person who matters most.
Can I have building and pest inspection conditions included in the contract at auction?
Yes. See “Changing the conditions in an auction contract” above.
Is there a “cooling off” period when you buy at auction?
No. According to Section 31 Sale of Land Act 1962 the cooling of period does not apply where:
- the sale is by publicly advertised auction
- the land is sold-
- within three clear business days before the day on which a publicly advertised auction for the sale of that land is to be held;
- on the day on which a publicly advertised auction for the sale of that land is held; or
- within three clear business days after the day on which a publicly advertised auction for the sale of that land was held;
How much deposit should I pay if I buy at auction?
The standard deposit payable on any purchase is 10% of the purchase price. You should not pay any more than this. Although you may be told by the real estate agent that you must provide a bank cheque on the day of the auction, you do not have to pay anything immediately unless the contract states that the deposit is due on the day of sale. For example, many auction contracts state that the deposit is due “on there signing hereof”.
You can avoid having to buy a bank cheque before the auction by ensuring that the contract allows a few days between the day of sale and the day the deposit is due.
If I buy at auction and later discover structural damage or termite infestation can I get my deposit back?
No, not unless a special condition has been inserted into the contract for this purpose. See “Changing the conditions in an auction contract” above. Of course, there are always exceptions to this general proposition, particularly if any deception has been involved. Also, there may be other means by which the contract can be cancelled, so you should seek legal advice from a qualified lawyer if you need to cancel the contract for any reason.
I know that buyer advocates bid by proxy at auction, but is it possible for a family member or friend to bid on behalf of the purchaser?
A purchaser can have another person bid for, and buy, real estate on their behalf. Buyer advocates do this regularly, although many buyer advocates put themselves at high risk when they do so. (Often, the buyer’s advocate is simply an estate agent with no legal training, and no idea about the legalities of representing another person in the purchase of real estate.)
ANECDOTE: We had a purchaser client who had used a buyer advocate to purchase a property, and who then sought legal advice about the finance condition in the contract. The silly buyer’s advocate had purchased the property in his own name, and inserted the words “and/or Nominee” after his name on the contract, thinking that by using these words he could make his client responsible for completion of the contract.
We pointed out to the client that the buyer’s advocate had made the contract subject to finance, and that the finance condition required the purchaser (i.e. the person named in the contract) to apply for finance according to the conditions in the contract. This meant that the buyer’s advocate (whose name appeared on the contract as the purchaser) was required to apply for finance. Obviously, the buyer’s advocate was not interested in applying for finance in his own name. We advised our client NOT to accept the buyer’s advocate’s nomination unless and until her finance had been approved. If our client could not secure finance, the buyer’s advocate would have to proceed with the purchase. Fortunately for the buyer’s advocate our client’s finance was approved, and she accepted the nomination and purchased the property.
It is quite easy to have a friend or family member bid on your behalf at auction, and the safest way to do this is by way of a limited Power of Attorney. A limited Power of Attorney allows the grantor (the person who grants the power to the attorney) to grant the attorney sufficient authority to purchase a specific property for a pre-determined price. Of course, anyone considering having another party representing them in the purchase of real estate should obtain legal advice from a qualified legal practitioner first. The person to whom the power is being granted should also obtain legal advice.