5 different ways to buy a home
Buying a home is a big decision and it can be a confusing process at the best of times with all the different ways of going about it in New Zealand.
The first place most people go to start looking for a house is online - realestate.co.nz is a good website, as is www.trademe.co.nz - then there’s the Property Press or the property pages of local newspapers.
Wherever you look, there are pages and pages of houses, all being sold in different ways - auctions, buying at a price, negotiation, tender and deadline treaty - confused?
All the options can sometimes blur together, so understanding them will help you navigate the market and get on the way to securing your dream home. Before you dive in, here are some tips on the various methods and what they mean.
Auction - Highest bidder takes the cake
At auction, a property is sold through a public negotiation process held at a specified time and place. This means that you and others bid in a public setting for the property you want.
Once a reserve is set as a minimum purchase price, the highest bidder’s offer is final and the sale is unconditional, as long as it goes over the reserve. So if that’s you, you’re legally obliged to purchase it. Once you sign the contract, the home is officially yours. Job done!
If bidding doesn’t reach the reserve price, the property is “passed in.” This means the property isn’t sold immediately to the highest bidder and then a negotiation can take place. During this process, the sale is no longer unconditional.
Negotiation after a property is passed in, involves the auctioneer speaking with the vendor, and the real estate agent, to see if the property could be sold to the highest bidder, even if it didn’t reach reserve. That person may offer a bit more outside the auction process, or not. It’s then the vendor’s decision to either take what’s been offered or decide to sell the property at another time, possibly using a different method.
Practise makes perfect
If you are a first time buyer, going to auctions in a neighbourhood you are interested in can be good practice and very beneficial. Observing auctions in action, will give you an idea of the types of properties available, what people are willing to pay for them and how people operate in an auction setting. Seeing how an auction works is always a good idea as you may end up bidding in one at a later date.
The benefit of bidding in a public setting is that you know exactly what other potential buyers are offering for the same property - this is very different to negotiations or tenders, that are more secretive.
Also, if you’ve done your homework and had the property valued, you will understand if the bidding is overheating and have the ability to pull out if the value goes over your limit. Auctions will give you assurance you’re paying the true market value for a property but they can also be very disappointing if you are outbid.
Auctions favour the seller
An auction, by design, favours the seller of the property. The reserve price is set beforehand, and if it isn't met, then the property won’t be sold. The process encourages counter bidding and can escalate a price when two or more parties are emotionally invested in securing a house. A seller can also set the reserve price, regardless of the true value of the home.
The best way to manage your own bidding at auction is to enter the process with a very firm idea of your bid limit and stick to it. The best way advice on making sure you do this, is take your partner, a friend or property professional with you, who is able to stop you bidding more!
Your winning offer at an auction is unconditional, meaning you have to buy the property. You aren’t able to revoke the bid if you change your decision. This can be scary for a lot of first time buyers as it is binding.
Buying a house at an auction can be exhausting because of the adrenaline of public bidding, it can be fast-paced and intensive. You also need to be very prepared - here are some of the things you’ll need:
- Home loan pre-approval, including lender acceptance of the property and insurance
- Land Information Memorandum (LIM) report
- Certificate of title
- Pre-contract disclosure statement
- Auction terms and conditions for your review
Apart from all this paperwork, you’ll also have to secure your finances since you’ll be required to pay a deposit on the day of the auction, which is usually tagged at 10% of the purchase price.
Buying at asking price - price tag transaction
This method is relatively straightforward. You find a house that you want, carry out the appropriate due diligence on the property (eg: survey, valuation, LIM etc) and, assuming the listed price is within your budget, you contact the real estate agent and make an offer at the selling price.
Potential for less competition
If a house has just gone on the market at a price, there is likely to be less competition. However, a house with a sale price can also attract multiple offers, but some of these will be people trying to negotiate a lower price. In this case, you may be able to lock out other offers because you are willing to pay the seller their asking price.
If you are competing for the property with other buyers who have all offered the sale price, the seller has final say about which offer they will accept. This may come down to their personal preference for whom they find most suitable to own the property. For instance, the seller may have lived in their family home for years, their neighbours have become good friends and would prefer it’s sold to another family. In that case, the final decision is out of your control.
You might encounter a seller whose asking price is above the property’s actual market value. They may not be in a hurry to sell the house and just want to test if someone would buy at their inflated starting price.
Conversely, they may offer the house at a lower than market value because they are in a hurry to sell because there is something wrong. Buyer beware. Once again make sure the house is surveyed and have it valued to determine the property’s true market value.
To help, read our previous post about house surveys.
Negotiation - reaching a deal
With this method, you negotiate with the seller through the estate agent. This involves both parties, you and the seller, signing a standard sale and purchase agreement, which contains the legal obligations of both parties involved.
Before you sign, consult your solicitor to make sure that both you and the seller are meeting all the required legal obligations. You’d typically go back and forth with different offers until a suitable arrangement is met and any conditions are agreed. An example of a condition would be you will buy at a named priced as long as the property meets your expectations after a survey.
A negotiation is a longer process so you’ll have more opportunity to get professional advice from the real estate agent, your solicitor or mortgage broker who will all be familiar with the process and can advise you accordingly. This is especially important when you make an offer - getting some advice will give you confidence you aren’t overpaying to suit a seller’s asking price.
Range of approaches
Because each side is negotiating, you can choose what to offer every step of the way. If you don’t feel you are getting a fair deal, you can back out at any time and choose not to continue.
If you negotiate an offer that is too low in the seller’s eyes, they may choose to halt negotiations with you. Additionally, you have limited control because you may not be told how many others are negotiating with the seller for the property.
Tender - all submissions are final
In this process, you submit a confidential written offer (a tender) to the seller by a specified date. Your offer should include a deposit cheque worth 10% of the purchase price as well as a sale and purchase agreement. The seller’s solicitor will have a copy of all these documents, and if your offer is not accepted, they will be returned to you.
The seller is not required to accept any tender submitted, and it’s completely up to them to negotiate with you or not.
All tenders submitted by prospective buyers are completely confidential, so both you and the seller have the benefit of privacy. Terms remain confidential until the sale is final.
Chance to appeal to the seller
Purchasing a home through tender gives you the opportunity to give your best offer to the seller. Conditional tenders can be made, but unconditional cash offers are the most attractive to sellers because it means they can sell quickly. But before you go down this track, make sure you do your homework on the property.
If a seller doesn’t like your offer, they may decide not to negotiate with you. Once your tender documents are returned to you and no negotiation is attempted by the seller, the process is over.
Like auctions, tenders require a lot of paperwork and financial preparation beforehand. You have to make sure that you have your deposit ready as well.
Only submit a tender if you are positive that you can do all the necessary homework, including the financial arrangements.
Deadline purchase or deadline treaty - a time sensitive bid
This is similar to a tender since a seller offers their property for sale with no fixed price. As a prospective buyer, you are required to submit your offer on or before the deadline date. Like tenders, a deadline treaty requires you to pay a deposit if your offer is accepted. In contrast to a tender, though, the seller has the right to accept an offer before the deadline.
Less restrictive for buyers
There is no fixed price to the sale, so sellers do not impose any terms and conditions.
When an owner decides to sell property via deadline treaty, that means they want buyers to make the best possible offer. If you make an offer undesirable to the seller, you will most likely lose your chance to buy the home.
Sellers set few, if any, terms and conditions to a deadline sale to make it more attractive to potential buyers. If you’re considering this method of home buying, expect plenty of competition.
Make your method work for you
There is no single perfect way to buy a home. Everything will depend on your personal preference, and most importantly, your financial situation. Each method requires a lot of attention to detail and financial prep work - in short there is no easy way to buy a house, it takes a lot of hard work and if you are unsure about the process, ask questions.
While these five methods are the most common ways to buy a home in New Zealand, it is worth mentioning that you may also see private sales. This method varies depending on the case, but for the most part, no real estate agents are required and a seller will speak directly with buyers to work out an agreed price. As there is no commission to the real estate agent, there is the potential for a better price. However, it still requires a lot of work and we would always advise to involve the necessary professional experts.
There are perks and drawbacks to each buying method, but at the end of the day, our mission is for you to walk away with your dream home.
If you would like to talk about the different ways of buying a home, we would love to buy you a coffee and have a chat. Please get in touch with Taurus Home Loans today. We want nothing more than to help you get the home you’ve always wanted.
Mobile: 027 352 6262
Phone: 03 366 6087
Posted 18 Jul 2018