Have you ever wondered what happens if you bid at a house auction and don’t pay either the deposit or the final amount? Do you have to flee the state, change your name, and go into hiding? Or is at as simple as facing up to your mistake and moving on?
If you win at an auction, you’re legally bound to pay the agreed-upon amount. Make sure you do your homework before you bid to be aware of this and other potential pitfalls. Once that hammer falls and your bid is the highest, you’ll be required to first pay the deposit, usually around 10% of the purchase price, pretty much on the spot.
If you’re unable to pay the deposit upon winning, it will be an automatic and instant breach, enabling the seller to terminate the contract.
The ramifications of not paying the deposit are:
What the seller choses to do varies from one case to another but a smart vendor will only push something through the courts if they believe they’ll be financially rewarded for the effort. Considering most people are in this position because they don’t actually have ‘the money,’ it might make pursuing them for ‘the money’ a bit of a moot point.
It’s fair to say that it’s something you want to avoid though. If a seller did decide to come after you, it has the potential to destroy your credibility, as well as your finances.
Let’s explore what happens in the event that you bid and win the auction, pay the the deposit on the day, and then can’t secure the finance for the remaining balance.
Firstly, if you’re unable to pay the balance of the amount owed within the required time frame outlined in the contract of sale, then, in almost every case, you’ll 100% forfeit the deposit amount. That‘s one big hit and only the first of the possible outcomes for reneging on a sale.
Plus, there are other potential consequences for being unable to pay the funds owing:
If property has to be resold and there’s a shortfall between what the original sale price was and what the new sale price is, the seller could sue you for the difference.
You may also be required to cover the seller’s additional costs, such as legal fees, holding costs, and the costs of a new auction.
The seller is well within their rights to pursue legal action to recover losses caused by your failure to complete the sale. We live in a litigious world and you may find yourself involved a lawsuit, potentially resulting in a court judgement against you.
If the seller does take the route of seeking legal action and then obtains a judgement in their favour, it could negatively affect your credit score and make it harder for you to secure financing in the future.
Some auction houses or real estate platforms might even blacklist you from participating in future auctions!
Reading that list of outcomes might just leave you asking...
Bidding at a house auction and then being unable to pay is not always intentional. There are various factors that could lead to this situation, stemming from good old human error to unforeseen circumstances. Below are a few examples.
You might assume you have enough funds or can secure financing, only to find out later that your loan application has been denied.
Auctions can be high pressure environments, and sometimes you might get caught up in the excitement. It’s easy for a competitive streak to rear its ugly head, leading you to make an impulsive decision that exceeds your budget.
It’s dangerous to not understand the auction rules. You may show up thinking you have more flexibility to arrange financing after the auction, without realising you’ll need to have funds ready upfront.
Unexpected events, such as losing a job or a sudden medical or financial emergency, can arise after placing the winning bid. The only plus side of this is that you might garner some sympathy from either the seller or the court.
If you were pre-approved for a mortgage but failed to inform your lender of the particulars about the property, this may affect your eligibility for financing (e.g. if it’s a fixer-upper or non-standard construction).
If you go into an auction without having done thorough research, win the auction, and then discover issues with the property (e.g. title problems, zoning restrictions, or structural issues), this might make you unwilling or unable to proceed with the sale.
Also, if you underestimated the additional costs, like stamp duty, legal fees, or renovation expenses (thereby pushing the total cost beyond your capacity), backing out and taking a one time hit might actually be a better option than committing to years of debt.
In rare, unethical, and illegal cases, someone might bid on behalf of another party to drive up the price, not intending to buy the property themselves. When they win, they’re left holding the contract with egg on their face.
After winning, you might just simply regret the decision, feeling that you overpaid or made a mistake and try to back out. Unfortunately, there’s no cooling-off period and auctions don’t have a ‘change of mind’ clause attached to them.
To avoid any of these pitfalls, always, always prepare yourself thoroughly before you bid on auction day.
In the event that things spiral out of your control for any one of the reasons above, here are some pointers that will hopefully help to lessen the impact.
If you realise you can’t complete the purchase, notify the seller or auctioneer immediately. They may offer solutions, such as extending the settlement period. Be aware however that this might involve penalties.
Explore all possible options to secure funding, such as personal loans, bridging finance, or even asking for help from family by means of a loan or an outright gift.
No one’s going to trigger your need for legal representation by reading you your Miranda rights (especially not in Australia!). But consulting your property solicitor or conveyancer will help you understand your rights and obligations should this situation arise. They can also help you to negotiate.
Sometimes sellers may be willing to negotiate with you in order to recoup their loses should you renege on the contract of sale. If they’re amenable, then it’s best to get your legal representation to step in on your behalf knowing that the vendor will likely do the same.
All of the consequences and options available to you will depend on the terms of the auction contract. These may differ depending on the laws in your state or territory, so make sure to review the auction terms carefully before bidding.
