What happens if you overbid at a property auction? Home loans & deposits explained

Overbidding at a property auction can have disastrous financial consequences and make it harder to take out a home loan in future. It's a worst-case scenario for an auction: depending on your situation, it might be far better to lose the auction (and the property) than overbid.

So what actually happens if you overbid at a property auction? And what can you do about it?

A property auction is a public bidding war between home buyers on a property for sale. Auctions are relatively common Australia, especially if the agent believes an auction will mark up the property's value. 

For home buyers, property auctions require a bit of homework before hand. This isn't like a private sale because auctions have no cooling-off period. This means it's extremely hard to change your mind and back out of the property purchase after you successfully bid at auction.

Before attending the property auction, make sure you prepare. Preparation includes:

• Establishing your borrowing power.
• Arranging a way to pay the deposit (usually at least 10% of the final purchase price).
• Getting a property valuation done. 
• Inspecting the property, including pest inspections.
• Applying for home loan pre-approval.

Once you have your ducks in a row, it’s time to bid.

Auction bidding process

Auction rules can vary by state and territory, so make sure to get across what’s standard practice in your local market.

For instance, in NSW, Queensland, South Australia, Tasmania, and the ACT, it’s mandatory to register your details and intent to buy with the vendor beforehand using a valid ID. However, registration isn’t compulsory in Victoria or the Northern Territory.

On the day of the auction, the property will open for final inspections. Now is the time to do last-minute checks, review the contract of sale and associated documents, and ask the vendor any questions. There should also be a copy of any auction rules or conditions for you and your solicitor to review. 

Next, the auctioneer will gather everyone to begin the auction. The auctioneer will remind everyone of the rules then open it up for bidding. 

An auctioneer will confirm the bid of any bidder before escalating – this is your one chance to back out of a bid scot-free. Otherwise, by bidding, you’re entering a legally binding agreement where if your bid wins, the vendor will wave in you to sign the contract and pay the deposit immediately. 

Again, unlike other property sales, auctions have no cooling off period. If your bid wins, it’s time to pay. 

After you pay the home loan deposit and sign, you don’t own the place outright just yet – that happens when you complete settlement. However, you have legally committed to buying the property ‘as is’, and from now on, it’s extremely difficult to back out.

Ideally, any successful bidder should have a way of immediately paying the home loan deposit and enough funds to cover the rest of the final sale price, usually through a home loan. 

But what if your bid wins and you can't afford to buy the property?

There are serious financial and legal consequences for overbidding at a property auction. If your bid wins and you cannot pay the required deposit, you breach the contract of sale. The vendor could terminate the sale contract, meaning you lose out on the property, or seek court orders to compel you to pay – even if this is a moot point because you don’t have the money.

If you can’t pay the deposit in full, speak to your solicitor about your options. You may be able to negotiate a partial payment on the day and pay the rest later. Keep in mind doing this still means you're in breach of contract, and the vendor may seek settlement for damages.

If you pay the full deposit but back out of the sale contract because you can’t afford to finance the property, the vendor may resell and sue you to cover any shortfall. The vendor is also entitled to keep your money, which means you may lose your home loan deposit. 

Losing your deposit can also seriously hurt your chances of buying another property. Not only could you struggle to afford one financially, but your relationship with your home loan lender, solicitor, and real estate agent could be damaged. 

All things considered, it's better to lose the auction outright than endure the grisly financial and legal fallout of overbidding.

Sometimes auction bids don't meet a vendor's price expectations. If this happens, the property may get ‘passed in’, meaning the agent and auctioneer will invite the highest bidder to privately negotiate a final sale price.

If you overbid at auction but the property gets passed in, thank the stars: you just got very lucky. Let your solicitor know where you stand financially so they can help you negotiate the best price. You may be able to bring the sale price to a level you can afford, but this will depend on the seller. 

If the seller isn’t happy with the price you settle on, they may walk away from the sale that day. While losing out on a property hurts, it’s far better than overpaying for one.

If you’re worried about overbidding at auction, here are a few ways to rein in your enthusiasm. 

• Pre-write a bank cheque. Bank cheques act like cash: they’re prewritten, and their value is predetermined. This is an excellent way to keep yourself honest because you literally cannot go any higher than what your bank cheque says.
  
• Let someone else bid on your behalf, like a solicitor or agent. A third party won’t have the same emotional investment in the property you do, so let someone you trust bid for you. 
  
• Leave emotions off the table. No property is so perfect you can’t risk losing it at any cost. Property grief can be real, too, but be kind to yourself, stay hopeful, and leave emotions to the side. Take a moment to ground yourself before the bidding starts and practice acceptance if you lose. There will be another chance down the road. 

Alternatively, buying off-market bypasses the auction process altogether – this can be a great way of finding exclusive homes sellers are keen to offload.

Get more advice on navigating the property market with our home loan guides hub. Browse and compare home loans below.