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Advice on deposit funds at auction

23 November 2017

Deposit funds at auctions commonly cause concerns and problems for both buyers and agents.

Leading auctioneers Damien Cooley of Cooley Auctions, and Jesse Davidson of auctionWORKS, held a webinar with REINSW to discuss their best practise tips on how to handle auction deposits. Watch it in full here.

Jesse explained: “At nearly every single auction I experience an issue related to deposits and the biggest concern for agents is a lack of understanding on what they can and can't do.”

How can you pay a deposit?

In New South Wales, a 10% fixed deposit is required unless otherwise stated, which can be paid by a personal or bank cheque, cash and other methods by arrangement between all parties.

Deposit do’s and don’ts

Damien explained: “It’s best practise for auctioneers, and the real estate industry to ensure we get consideration, which is any form of financial payment towards the deposit, or an instalment towards it.

“If the purchaser pays with a bank cheque, we advise sales agents to agree to a fixed amount that can be written into the contract that is 10% of the price which has been quoted.

“Auctioneer’s and agent's point of view don't want to change any clauses in the contract. We want to make sure that the agent’s or vendor’s solicitor drafts any changes to the deposit clause which is inserted into the contract.”

Jesse added: “It is essential the vendors solicitor drafts the changes to the deposit because it is protection for agents. It's really important we don't get into position of giving advice in areas we can’t.”

Should auctioneers and agents discuss deposit funds prior to the auction?

Jesse said: “The more hurdles agents put in front of buyers with deposit issues, or not communicating what they need on auction day, makes things more difficult.

“It’s vital to have conversations early in the campaign when you're qualifying buyers and preparing them for the auction and what they need.”

Damien said: “Pre-auction, every auctioneer should have a meeting with their agent about deposits and ask as many questions as they can. The two most important to ask a buyer is, "who's signing the contract?" and "how are you paying the deposits?".

“Often auctioneers will only find out the reserve and how many registered bidders there are, and won't find out information about the buyers and possible scenarios that might arise. The more prepared you are, the better-quality auction you will conduct.”

What are reduced deposit clauses?

Frequently an owner will accept a lower deposit than 10%, most commonly 5%. However, if you allow a deposit less than 10%, there's a couple of important things to check when exchanging the contract.

Damien explained: “You should get the lower deposit confirmed in writing from the purchaser to say they acknowledge the amount they're paying, and when they will pay the balance. The figure on the front page of the contract should be the equivalent of a 10% deposit.”

He says that the auctioneer should note the amount deposited on the front page of the contract in the black box which says and it is an error to write the lower deposit percentage agreed. Damien added that the contract should note the instalment, or reduced deposit clause, and outline the reason why it has been allowed, and what they’re liable for.

He added: “We can't draft our own clause because it’s the owner's contract. We're the marketers of real estate and it's best practise not to get involved, however if a solicitor gives you a clause, you can write that out word for word.”

Jesse added: “Reduced deposit clauses are a wonderful way for an agent to look good to their vendor and advise them to put, or be prepared to put, a reduced deposit clause into the contract so that everybody's prepared on auction day."

What do you do if a buyer doesn’t have a deposit?

Damien said: “You need to notify your vendor and tell the purchaser the vendor is entitled to sell the property to someone else.

“The problem then is how you start negotiating with the underbidder, because they might say their offer is now less because the winning bidder pushed their bid up.

“An auctioneer can't leave at that point because by law you have to bind that purchase on a contract. If you don't and the vendor sells to somebody else for less money, you're opening yourself up to potential litigation, even from the person who bought it. You need to tread carefully and make sure that you do everything by the book.”

What are the risks around deposit funds?

Jesse added: “My biggest issue with the real estate industry is the lack of understanding and care about contracts.

“There's so many things we can do and understand contractually and my advice to all agents is to read the contract thoroughly.”

Damien: “You need to mindful of the dialogue you use because I hear a lot of sales agents say to the owner everything will be fine. You should pre-frame it that if something goes wrong and they are not at fault, there is legislation in place to help them recoup the deposit."

He added: “If the buyer is not present, and they're having someone represent them at the auction, usually the auctioneers would sign on behalf of that buyer and we would ask how they are paying the deposit.”