Can you buy at auction subject to building inspection?

Auctions are interesting. People assume that all auction purchases must be unconditional, but technically this isn’t correct. However, if an agent has interested buyers who plan to bid, they will almost-always insist on bids being unconditional.

This can be difficult for buyers who aren’t feeling confident about their chances of success. Buyers don’t like to invest hundreds of dollars in building and pest inspections and legal reviews, only to miss out at auction to a stronger bidder. Those who have spent due diligence on multiple auction attempts will be particularly sensitive to this.

Although, it’s not only the financially sensitive buyers who don’t line up for building inspections. Sometimes a buyer will discover a property quite late in the campaign and have insufficient time to coordinate a building and pest inspection. Not every buyer arranges the inspections, but when properties are dated, many do so for peace of mind.

In these situations, navigating the auction process requires a careful approach.

Yesterday, this happened for us. Our clients made a very late decision to pursue an auction property. We had conducted our analysis and local due diligence, and a contract review had been completed, but circumstances at the time precluded our clients from pursuing the property to auction. A late twist on Friday evening changed all of that, but the missing piece of the due diligence was the building and pest inspection.

Knowing that we potentially had competition for the property, the odds weren’t looking favourable for us. I explained the probable process if real bids ensued. This took into account the chances of the property selling at the vendor’s reserve price to an alternative bidder. I also cautioned them about the implication of placing a bid, only to have the property declared “on the market”. If this was to happen, our clients would have risked buying unconditionally, without their building and pest inspection clause.

The only two ways that they could technically purchase with their clause were as follows:

• Agree upfront with the agent that in the event of a successful bidding effort, our contract could include a condition for the inspections within a few days, or
• Secure the opportunity to negotiate exclusively with the vendor via a pass-in to us.

Rather than guessing where the reserve would be called, and chancing the situation with guess-work, I called the agent. She understood the situation and understandably rejected our request to include the clause as a live bidder. Given we could have been bidding against unconditional buyers, I respected her position. Any vendor would be reluctant to entertain a conditional bidder under the circumstances. I explained that we were only able to bid if it appeared that the property wouldn’t reach reserve, as we would then rely on post-auction negotiations to incorporate our clause.

The auction commenced and she called for an opening bid. I waited, anticipating that other buyers would show their hand and jump in with a bid. Surprisingly, nobody did, so our clients’ bid opened the bidding. Again, after several auction calls, it became obvious that the pass-in scenario may go our way.

After going inside and referring that first bid to the vendors, the auctioneer returned.

“Ladies and Gentleman, if we don’t receive further bids, I’ll be dealing with the highest bidder exclusively at the vendor’s reserve.”

Luck went our clients’ way that overcast, dreary, wintry day. They conditionally secured a beautiful home against all expectations. The contracts were amended with their clause, the building and pest inspector was booked in for the inspection early in the following week.

Real estate can throw up all kinds of surprises and twists, and this exciting day was one they’ll never forget.