What's the difference between buying at auction and by private treaty?

Auctions vs private treaty: what buyers need to know

Property is commonly sold by auction or private treaty. The biggest difference for a buyer is what happens before you commit.

With private treaty there may be more opportunity to negotiate price, terms and conditions before signing. At auction you generally need to do much more preparation before you bid, because the contract and the auction rules can leave less room to change your position afterwards.

The exact legal rules vary by state and territory.

What is a private treaty sale?

In a private treaty sale the seller markets the property at an asking price or price range, and buyers make offers, usually through the agent. The parties can negotiate on price and, depending on the transaction and the contract, on other terms such as settlement timing and conditions.

What private treaty may offer a buyer

• There may be more opportunity to conduct inspections and review the contract before committing.
• There may be more opportunity to negotiate conditions such as finance or inspection requirements, depending on the seller and contract.
• A cooling-off period may apply to some private treaty purchases, depending on the state or territory, property and circumstances.

Risks to keep in mind

• Sellers can reject your offer, or negotiate with other buyers at the same time.
• The advertised price may not be the price the seller ultimately accepts, so understand the property's market context and do your own due diligence rather than relying solely on the advertised figure.

What is an auction?

At auction, prospective buyers compete by bidding against each other. If the bidding reaches the seller's reserve and the auction proceeds to a successful sale, the highest accepted bid generally secures the property, subject to the auction terms and contract.

How an auction works in practice

• You generally need to have your finance, inspections and contract review sorted before bidding, because you may not have the same opportunity to negotiate conditions after winning.
• If you are the successful bidder, you will generally need to sign the contract and pay the deposit in accordance with the auction terms and contract.
• If the property is passed in because the reserve has not been met, the seller may negotiate with the highest bidder or other interested parties afterwards. The exact process depends on the circumstances.
• The bidding process is public, so buyers can see the bids as they happen.

Risks to keep in mind

• An auction is a high-pressure environment, which can make it easy to bid past the number you planned on.
• You may have less opportunity to negotiate conditions after winning, so important due diligence usually needs to happen before bidding.
• You may incur costs for inspections, reports or legal review even if you don't ultimately buy the property.

How the two compare

This is a comparison, not a ranking. Neither method is better than the other, they simply ask for your preparation at different points.

The rules vary by state

The legal consequences of buying at auction or by private treaty differ between Australian states and territories. Those differences can affect cooling-off rights, the conditions that can go into a contract, deposit requirements, the contract you sign on auction day, and what happens if a property is passed in.

Don't assume a rule you've heard about buying property in another state applies to your transaction. Check the rules that apply to the property and contract you're dealing with.

What changes for you as the buyer?

The underlying work is the same list of questions either way: finding and assessing a property, what a building and pest inspection looks for, offer, contract and conditions, and getting your contract reviewed before you sign. What changes is when you need the answers.

Buying at auction: understand before you bid

• your maximum budget
• your finance position
• the contract
• the relevant property searches and inspections
• any strata or body corporate information
• what is included in the sale
• the deposit and settlement terms
• the auction rules that apply

The important decisions generally need to be made before you raise your paddle.

Buying by private treaty: understand before you make or accept an offer

• the asking price against your budget
• the contract
• the relevant due diligence for the property
• the conditions you may want to negotiate
• your finance position
• settlement timing
• deposit requirements

The negotiation gives you more opportunity to discuss terms, but you still need to understand what you're agreeing to before signing.

Decide your number before the pressure starts

Whether you're holding a paddle or negotiating by phone, decide what the property is worth to your household before the pressure of the transaction starts influencing the number.

• How do you stick to your budget at auction or in negotiation?
• How do you stress-test your buying budget against rate rises?
• What's the difference between your borrowing capacity and your maximum purchase price?
• What should you do if you can't find anything in your budget?

If you need more time to complete due diligence, confirm finance or negotiate conditions, a private treaty process may give you more opportunity to do that before committing.

The bottom line

The sale method changes the way you need to prepare, but the fundamentals don't change. Know your budget. Understand the property. Review the contract. Know what you're committing to. It is also worth knowing the most common mistakes buyers make, because most of them are timing problems rather than knowledge problems.

The main difference is when you need those answers. At auction, much of the work needs to be done before you bid. With private treaty you may have more opportunity to work through the details before signing.

Good conveyancing helps you understand those details before the point where your options become narrower.