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 someone who has English as 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 buying by auction on settled.govt.nz(external link)
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 auction day, and your vendor will be reassured to know you have a plan in place.
Pre-auction offers and your responsibilities
If the vendor accepts a pre-auction offer, the auction may be brought forward and the pre-auction offer will be the first bid at the auction. Vendors may choose to take the property off the market if they accept a pre-auction offer and are happy to sign a sale and purchase agreement.
You should talk to the vendor about their options when presenting a pre-auction offer and about the interest from other buyers so the vendor can make an informed decision about what they want to do.
If the vendor is happy to receive pre-auction offers, it’s recommended you include ‘unless sold prior’ on all your advertising so buyers are aware that they can make an offer before auction or that the property may sell in advance of the auction and be removed from the market.
If the vendor accepts a pre-auction offer, you should notify all buyers who have registered their interest in the property and advise them that a pre-auction offer has been accepted by the vendor and whether the auction will be brought forward or that the property has been withdrawn from the market.
Agencies should have their own forms and processes to manage pre-auction offers.
Can pre-auction offers be withdrawn?
Withdrawing a pre-auction offer either before or during an auction depends on the auction's terms and conditions. Buyers should make sure that they seek legal advice before making an offer.
You should make this clear to any interested buyers who want to make pre-auction offers.
Read more below about the impact of a purchaser signing a pre-auction offer.
Disciplinary Tribunal decision on pre-auction offers
A 2016 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 was accepted by the vendor and 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.
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.
Remote bidding at auction
If buyers can’t attend an auction on the day, they may ask to participate remotely. If they’d like to participate over the phone and have a licensee bid for them, make sure you receive the buyer’s permission to bid on their behalf in writing. This might require them to sign a telephone bidding authority form, which should be provided to the auctioneer.
You should make sure buyers are prepared for telephone bidding by:
- emailing or posting the auction pack, including the auction terms and conditions, a copy of the sale and purchase agreement and the record of title, ahead of auction day
- checking the buyer can print, sign and return the sale and purchase agreement if they are the successful bidder
- agreeing who will call who and at what time
- clarifying with the buyer the maximum price they are willing to bid to
- checking whether they have any questions about the process.
Auctions can also take place online, with buyers either placing bids directly online or telephone bidding via video conferencing software. In both cases, make sure buyers are comfortable using these methods and clearly explain how each works, especially if they are unique to your agency. Talk to buyers about checking that they have a reliable internet connection and the possibility of doing a test run by watching another online auction before they bid on their chosen property.
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.
What happens when bidding pauses?
If bidding pauses and the price isn’t acceptable to the vendor, the highest bidder may be given the opportunity to negotiate with the vendor and increase their bid. This negotiation is usually done in a side room, away from the auction floor.
You or the auctioneer may be representing the vendor in these negotiations. If the vendor agrees to lower their reserve to meet the top bid, make sure to confirm this in writing before the bid is taken back to the auction floor.
What happens when the property is passed in?
After a property is passed in, vendors are able to sell the property to anyone at a price they are willing to accept and with terms they agree on. It's a common misconception that, if the vendor negotiated with a particular bidder during the auction, that bidder gets priority to negotiate with the vendor after the auction.
A sale completed after the property is passed in at auction would normally be completed as a private treaty sale. However, it may still be sold by auction if someone who attended the auction submits an offer under the terms of the auction within one working day of the auction date.
If the property does not sell after the auction campaign, talk to your vendor about what your next campaign or marketing strategy might be.
When a person is granted a mortgage, they are the mortgagor and the lender is their mortgagee.
If a mortgagor 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 your client, not the mortgagor. Mortgagee sales are commonly done by auction.
Common auction complaints we receive at REA
Here are some 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 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.