Auctions are fast-paced and can be stressful for those involved. It’s important to understand your role and obligations as a licensee.
The reserve price is set by the vendor and is usually the lowest price they are willing to accept.
The reserve price is typically set just before the auction date and is confidential to you, the auctioneer and the vendor. After the reserve price is reached at auction, the highest bidder becomes the successful buyer.
Here are some tips to help you make sure that all parties have a clear understanding of the auction process and what to expect:
- Explain the auction process clearly to the vendor and any potential purchasers.
- Make sure they understand the terms used, for example, the reserve price, on the market, and vendor bid. This is especially important for anyone who has not been to an auction before, has never sold property by auction, or for who English is a second language.
- Check their understanding of what is going to happen at the auction (based on what you have told them). This will give you a chance to clear up any misunderstandings.
- Keep communicating and checking they understand what is happening throughout the auction process.
- Refer buyers and sellers to the information about auctions on settled.govt.nz.
Vendors should understand that not every property will sell on the auction date. Some will sell before the auction and others may sell after.
You should have a conversation with them before the auction to discuss what the next steps should be if their property doesn’t sell on the day. This may help reduce stress on the auction day, and your vendor will be reassured to know you have a plan in place.
Pre-auction offers and your responsibilities
A pre-auction offer is often the starting price for an auction, and the auction may be brought forward when a pre-auction offer is received. If the vendor is happy to receive pre-auction offers you must include ‘unless sold prior’ on all your advertising, so all buyers are aware.
Agencies should have their own forms and processes to manage pre-auction offers.
Can pre-auction offers be withdrawn?
A 2016 Real Estate Agents Disciplinary Tribunal considered the impact of a purchaser signing a pre-auction offer.
The purchaser of a property for sale by auction signed a pre-auction offer which restricted him from withdrawing the offer for a set period. The purchaser subsequently attempted to withdraw his offer, but this was refused by the agency. The auction for the property was brought forward, and the purchaser’s offer was used as the opening bid. There were no other bids on the property, and the property was sold to the purchaser.
The Tribunal found that the licensee and the agency had not given a proper explanation to the appellant of the meaning and implications of the pre-auction offer process, and the form he was required to sign. The hearing found that two rules were breached: Rule 9.7 (as to obtaining legal advice) and Rule 9.8 (which provides that a licensee must not take advantage of a customer’s inability to understand relevant legal documents).
Sections 36ZA and 36ZE of the Fair Trading Act 1986 state:
36ZA Start and end of auction
(1) An auction starts when the auctioneer invites the first bid from potential participants.
(2) An auction ends when the auctioneer makes it clear that bidding is closed.
36ZE Bids may be withdrawn until end of auction. Any bid at an auction may be withdrawn before the end of the auction.
After reviewing the pre-auction offer form, the Tribunal found that it was "at least arguable that if a pre-auction offer has been announced as the ‘opening bid’ at the auction, it may be withdrawn at any time before completion of the auction”. The uncertainty of the law on this point heightens the need for licensees to carefully explain the pre-auction offer process and the pre-auction offer form to vendors and prospective buyers.
The explanation should be detailed and tailored to the buyer’s circumstances. If you are facilitating a pre-auction offer, you must deal fairly with all parties to a transaction and must not mislead or withhold information from them. You should also ensure that prospective buyers obtain their own legal advice before they make a pre-auction offer.
Read the full decision here.
Vendor bids at auction
A vendor bid is made by or on behalf of the vendor during an auction. It is usually made by the auctioneer to start the bidding, keep the bids moving, or to persuade buyers to raise their bids to get to the reserve price. There are rules about the use of vendor bids.
When are vendor bids allowed?
Vendor bids may be made when all three of the following conditions are met:
- The property at auction has a reserve price.
- The reserve price has not been reached.
- The bid is clearly identified by the auctioneer as a vendor bid.
Bidding that's not allowed
- Dummy or shill bids: These are bids made by people who appear to be genuine bidders but are in fact bidding on behalf of the vendor to persuade genuine bidders to raise their bid. Dummy or shill bids are illegal.
- Vendor bidding at or over the reserve price: The auctioneer (or anyone else acting for the vendor) cannot make a vendor bid at or over the reserve price.
- Not identifying who is making the vendor bid: If the vendor, their agent, or anyone else makes a vendor bid, they must clearly identify themselves.
To avoid any confusion, the auctioneer should say ‘This is a vendor bid’, rather than using industry jargon such as ’The bid is with me’ or other language that may not be understood.
If the property is not sold during an auction, a vendor bid cannot later be referred to as the amount at which the property was ‘passed in’. The only amounts allowed to be quoted are bids from genuine prospective buyers.
Read more about vendor bids in the Fair Trading Act 1986, section 14A(external link).
When bidding ends
If the property is sold both the buyer and the vendor will need to sign a sale and purchase agreement and confirm that the deposit has been paid. If either the buyer or vendor is absent or unable to sign the agreement the auctioneer may be able to sign on their behalf (if this is stated in the auction conditions).
If it is not sold, it's typical for the agent to negotiate with the highest bidder in private and possibly come to an agreement. This usually takes place immediately after the auction has ended. The auctioneer (if licensed) or listing agent can help facilitate the new sale.
If the property is not sold on the day, you may need to re-market the property for sale.
When a person is granted a mortgage, they are the mortgager and the lender is their mortgagee.
If a mortgager doesn’t meet their repayment obligations, the mortgagee may claim the property to recover the funds. In this case, the mortgagee becomes the vendor of the property and is, therefore, your client, not the mortgager. Mortgagee sales are typically done by auction.
Common auction complaints we receive at REA
Here are examples of complaints about auctions:
- The complainant, a potential purchaser, was the highest bidder at auction but the reserve had not been met. The auctioneer asked the complainant to step into a separate room. After a discussion, the complainant thought he had negotiated successfully and purchased the property. However, the auctioneer returned to the auction room and re-started the auction. The complainant did not understand the bidding would re-open after negotiations and was left feeling disappointed.
- The complainant was the vendor of a property being sold at auction. The property had not reached reserve, and the auctioneer asked the complainant whether the property was ‘on the market’. English was the complainant’s second language, and she did not understand the question. She said ‘yes', thinking the question meant ‘is the property for sale?’. The property then sold below the reserve price, leaving the complainant upset and with a lower sale price than she expected.
- The complainant was a first-home buyer and had never been to an auction before. She was confused to see a licensee from the vendor’s agency helping another bidder when no-one from the agency had offered to help her. The complainant felt that the licensee was favouring the opposing bidder and considered this unfair.
- The most frequent complaint from vendors who have sold or attempted to sell their property by auction is that they felt pressured by the licensee to accept a lower price than their reserve price.