I have been an advocate of auctions for many, many years and I have to admit that when subject to finance auctions were first introduced, I had my doubts.
After all, as they say “if it ain’t broke, don’t fix it” – auctions were working just fine: selling properties faster than private treaty, encouraging buyers to act, getting the best price the market would pay. Plus, subject to finance auctions are something the traditional, strong auction markets of Sydney and Melbourne would never consider introducing, so why did we need to?
However, they have certainly been embraced in WA and been hugely beneficial to our auction market.
Why? Well, in my opinion, one reason they have found a place here is that WA has traditionally been a private treaty/offer and acceptance market and, unfortunately, banks only give formal approval for finance when they receive an offer and acceptance contract.
Therefore, in the past, even if subject to finance buyers wanted to bid at a traditional cash unconditional auction, they couldn’t as their bank would not give approval for finance without a contract. They could take a risk and waive their finance, but understandably, most will not do that.
So there they were, avoiding auctions. Or if they did attend, they’d be waiting in the wings, hoping there were no cash bidders, or that the property would be passed in so that they might have a chance to make an offer.
Now, with subject to finance auctions, these buyers can bid alongside cash buyers at the auction, all they need is a pre-approval, giving them an equal chance to ‘win’ the property. They can also see what other buyers are prepared to ‘offer’ and know how much they may have to bid to be successful.
This has huge benefits for sellers too, with more bidders able to vie for the property. And the more bidders, the greater the competition and the better the result.
Subject to finance auctions have also brought auctions to a wider market, to suburbs where it was thought ‘auctions would never work’ – maybe traditional auctions wouldn’t suit, but subject to finances auctions are having great success. I have seen them work well in Belmont, Beckenham, Atwell, Success and the southern suburbs for example.
While they will never replace cash unconditional auctions, they certainly have their place. That said, there are some things buyer and sellers need to be aware of.
Firstly, all buyers will need to be registered so the agent can qualify them. This is a huge benefit as it gives the agent and seller clarity on the level of interest in the property.
As mentioned earlier, buyers will need to show that they have received preapproval from a bank or lending institution to show they are in a position to purchase the property.
There is still the risk that a cash buyer, wanting to avoid the competition of auction day, will make an offer beforehand. However, as all buyers should be registered, the agent will be able to contact them, also giving them a chance to make an offer – if possible, subject to finance buyers are encouraged to get their finance approved prior to auction, putting them in a position to make a cash offer at the auction or prior.
Sellers will need to expect delays in finalising the sale. If a subject to finance buyer is successful at the auction the seller will need to wait a further 21 days for the finance to be formally approved and then longer for settlement to take place. It could take six weeks or more as opposed to the 30 days associated with cash unconditional auctions.
There is also the chance that the buyer may change their minds or the valuation not stack up or the finance falls through, meaning the seller is back at square one. However, this can also happen in a standard offer and acceptance situation, so there is no extra risk to try selling by subject to finance auction.
Buyers should be aware that the highest bid may not always be successful. Sellers reserve the right to consider all final bids and their associated conditions prior to accepting, and may accept a lower cash offer with more favourable conditions over a subject to finance offer. And sellers can still accept offers prior to auction.
My final point is that, while subject to finance auctions certainly have their place in the market and are perfectly legal, there is still no official subject to finance contact. Those that are using subject to finance auctions have either created their own contract or are using a RIEWA cash unconditional contract and are annexing a subject to finance clause, both which are potentially legally flawed.
Auction Services Australia have had a reputable legal team draw up a new contract that can be used as a cash unconditional or subject to finance contract with the REIWA ‘Offer and Acceptance’ forming part of the contract. The REIWA ‘Offer and Acceptance’ has been approved by the ACCC.
We are happy to talk to agents, sellers and buyers about subject to finance auctions and how they work.