Property negotiations: private treaty versus auction

Whether you are a buyer or a seller, it is important to know the processes around negotiating and settling private treaty and auction sales.

Some homebuyers, for example, don’t realise that there is still plenty of room for negotiation in the terms of an auction sale.

Private treaty

Most residential properties in Australia are sold through private treaty. Under a private treaty, the owner sets the price they would like to get for their property at what they consider to be fair market value, often with the help of a real estate agent. Then the owner negotiates with prospective buyers  to close the deal.

According to Malcolm Gunning, President of the Real Estate Institute of New South Wales, the price should be set just above the market value to allow for negotiation. “In most cases, you don’t tend to get offers above your asking price – people tend to negotiate down from the asking price, and there’s not the same level of competition as an auction,” says Gunning. “Some agents try and create competition by having buyers bid up on themselves, but REINSW does not condone this at all.”

The contract for sale and purchase of the property is entered into when the buyer and seller agree on a price and exchange contracts. The buyer pays a deposit, commonly 10 per cent of the selling price, and there is generally a cooling-off period. The cooling-off period allows the buyer to complete final legal, building and financial checks, but if they do back out of the sale they will most likely forfeit a small part of the deposit. The length of the cooling-off period and the cancellation fees, if any, vary between the states and territories.

Richard Harvey, property law specialist and Law Society of New South Wales representative, points out it has become common for cooling-off periods to be removed from private treaty deals. “Many sellers require the purchaser to waive the cooling-off period at exchange, which means the buyer should obtain all legal advice, do all relevant inspections and secure finance approval before exchange.”

Normally in a private treaty sale, once the buyer has agreed upon terms, the contract will go to their legal representative for exchange. “Your agent can also exchange, but only once your solicitor or conveyancer has checked it out and given you advice accordingly,” says Gunning.

“People can be lured into signing a contract, perhaps due to the pressure of another buyer, but you should offer to pay a deposit and agree with the owner on a due diligence period, even if it’s 24 hours–your lawyer should always look at the contract.”

Auction

A property sale by auction is a competition in the open market. The owner sets a reserve price – the minimum for which they will sell the property – and prospective buyers make their bids, with the property going to the highest bidder.

“In a rising market, the vendor may benefit from an increased price, but in a subdued market, they may have the unpleasant experience of finding their asking price is above what the market considers reasonable,” says Gunning.

The most important thing to remember is that there is no cooling-off period.

“If the gavel comes down, the highest bidder is usually bound to go through with the purchase and sign the contract for sale and purchase of land as prepared by the seller’s solicitor,” says Harvey.

The finality of an auction does not need to be the cause of unnecessary angst explains Harvey:“So long as the buyer has their solicitor look over the contract and the buyer obtains all relevant inspections and secures finance approval before auction, there’s no reason an auction needs to be any riskier than buying by private treaty.”

The other important thing to remember is that you can negotiate the terms of an auction contract,  but this must take place prior to auction day. The buyer may negotiate on a smaller deposit (5 per cent instead of the standard 10 per cent), a longer settlement period (12 weeks instead of the standard six weeks) or other terms they may consider unfavourable.

“If the seller agrees to make certain changes to the contract for a buyer, the vendor’s solicitor will inform the real estate agent that – in the event that particular buyer is the successful bidder – the agreed changes need to be made to the contract before it is signed and exchanged at the auction,” says Harvey.

In auctions conducted in New South Wales, the difference between private treaty and auction negotiations is that auction negotiations must be made publicly, says Gunning. So if you achieve certain contractual changes prior to the day, the broader market will be notified at auction and have access to the same conditions, such as a reduced deposit.

“A prudent vendor should be aware that they have a legal obligation to make the terms that are available to one buyer available to all buyers at a public auction – there needs to be transparency,” says Harvey. If you are buying or selling outside of NSW check with your legal advisor as to whether this applies to your state or territory.

Due diligence

Relying solely on external advice is a risky property tactic and not recommended.

“We often see complaints to NSW Fair Trading about underquoting and overquoting – that sort of thing. I consider any buyer, whether through private treaty or auction, unwise if they haven’t done their own research before they buy a property,” says Gunning.

“Research is now readily available through portals and data providers, so any prospective purchaser should do their due diligence and have confidence in their own research on prices.”

Remember, the sale contract is the vendor’s contract, so it must be reviewed carefully.

From the seller’s point of view, if you are not receiving robust offers, you need to assess whether there is a problem with your property’s presentation or whether the asking price is out of touch with the local market.