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Picture this: you’re at a bustling property auction in Melbourne. The energy is electric, bids are flying, and finally, the hammer drops you’ve won! That dream home in a vibrant Melbourne suburb is yours. But then, a few days later, you get a call from your lender: your finance has fallen through. What started as a triumph could quickly spiral into a nightmare.
In Melbourne’s fast paced real estate market, auctions are a thrilling way to snag a property. Yet, they come with a catch. Once you win, you’re locked into a legally binding contract with no chance to back out. If your finance doesn’t come through, the fallout can hit hard. This blog post will walk you through what happens if finance falls through after an auction, why it might occur, how to avoid it, and what to do if you’re caught in this bind all tailored for Melbourne buyers like you.
Understanding the Auction Process in Melbourne
In Victoria, auctions are public events where buyers compete by bidding on a property. When the auctioneer accepts your bid and the hammer falls, that’s it a contract is born. You’ll need to pay a deposit, usually 10% of the purchase price, right then and there, and sign the contract of sale. The clock starts ticking towards settlement, typically 30 to 90 days away.
Here’s the kicker: unlike private sales, there’s no cooling off period. You’re committed from the moment you win, no ifs or buts. This makes auctions exciting but risky. If you can’t follow through because your finance collapses, you’re in hot water. That’s why getting your financial ducks in a row beforehand is non negotiable.
The Role of Pre-Approval
Before you even think about bidding, you’ll want finance pre-approval. This is when a lender looks at your finances and says, “We’re likely to lend you this much.” It’s a lifeline, giving you a budget to work with. But don’t get too comfortable pre-approval isn’t a done deal.
It’s conditional, meaning the lender can still say no later on. Maybe the property’s valuation doesn’t stack up, or your situation changes. A property expert puts it well: “Having finance pre-approval is important when buying a property at auction, but it is not a guarantee of finance approval.” So, treat it as a starting point, not a safety net, and dig deeper to ensure your finance is solid.
Consequences of Finance Falling Through
If your loan falls apart after you’ve won the auction, the consequences can sting. Here’s what you might face:
Losing Your Deposit
First up, that 10% deposit you handed over? It’s gone. For a $1 million property, that’s $100,000 down the drain. It’s the price of breaking the contract you signed.
Extra Costs and Liabilities
It doesn’t stop there. If the vendor has to resell the property and gets less than your bid, you could owe the difference. Say you won at $1 million, but it resells for $900,000 you might be on the hook for that $100,000 gap. Plus, you could be liable for costs like legal fees, marketing for the resale, or even the vendor’s mortgage payments while they wait. A real estate expert explains, “In the event the property has to be resold, if there is any shortfall, the vendor can sue the purchaser for the difference.”
Legal Trouble
The vendor can take you to court to recover their losses. That might mean a judgment against you, which isn’t just a financial hit it’s a legal mess too.
Credit Damage
If the court rules against you, your credit rating could take a dive. That makes borrowing money later on a lot tougher, haunting you well beyond this one deal.
Auction Blacklist
Some real estate agents or auction houses might refuse to let you bid again, shrinking your future options in Melbourne’s property scene.
These risks paint a clear picture: you can’t afford to wing it at an auction.
Why Finance Might Fall Through
So, why does finance crumble after the hammer falls? Here are the usual suspects:
Changes in Your Finances: Lost your job? Took on a new loan? Any shift in your income or debts can spook lenders.
Valuation Woes: If the bank values the property lower than your bid, they won’t lend you enough to cover it. Auctions can get heated, pushing prices beyond what the bank sees as fair.
Lender Rule Changes: Banks tweak their lending rules all the time. What worked for pre approval might not fly later.
Paperwork Slip Ups: Missing payslips, wrong details, or incomplete forms can sink your application.
Other curveballs, like hidden debts or property flaws (think dodgy titles or structural issues), can trip you up too. Knowing these risks is half the battle.
Preventing Finance Issues
The good news? You can dodge this bullet with some smart moves:
Get Ready Early: Secure written pre approval and know its limits. Set a bidding cap below your max loan amount for wiggle room. Check out the property beforehanddon’t bid blind.
Team Up with Your Lender: Keep them in the loop about the property you’re eyeing. Ask how they value homes and get your paperwork sorted early. Stay chatty with them to catch any hiccups.
Know the Contract: Before auction day, have a conveyancer or solicitor review the contract. Understand the settlement timeline and your duties. A pro can spot red flags you might miss.
Plan B: Have backup cash or a family guarantor ready. A financial cushion can save you if the valuation falls short. As an expert advises, “Ensure that you have pre-approval for your finance and that you fully understand the terms and conditions of the contract of sale.”
Preparation is your shield don’t step into the ring without it.
What to Do If Finance Falls Through
If disaster strikes and your finance vanishes post auction, don’t panic. Act fast:
First Steps
Call your lender to find out why they pulled out can it be fixed? Tell the real estate agent and vendor pronto. Get your conveyancer on speed dial for legal advice.
Talk It Out
Be honest with the vendor. They might not have to help, but some will. A longer settlement or deposit plan could buy you time.
Find New Funding
Scramble for alternatives: try other banks, dip into savings, or ask family for a loan.
Legal Lifeline
Your conveyancer can negotiate with the vendor or guide you through your options. Quick action can turn a crisis into a manageable hiccup.
Tips for Auction Success in Melbourne
Melbourne’s auction game has its own flavour. Know the market, bring in the pros, and prepare well.
For tailored guidance and a free Section 32 contract review, contact Pearson Chambers Conveyancing:
Phone: 03 9969 2405
Email: contact@pearsonchambers.com.au