Help, I bought at auction and my preapproval fell through

Putting your hand up at auction and being the last person standing can be both an exciting and stressful experience. It certainly will be one you will remember.

However, in a world where preapprovals appear harder to come by, what does it mean if you buy at auction and for whatever reason, your loan approval after the fact falls through?

Firstly, when a loan is assessed by a bank many things come into play; your income, your living expenses, your ongoing financial commitments, your deposit and the type of property and area you wish to buy in to name a few.

Then, when you have purchased a property at auction, while in days gone by, many lenders would have relied upon the actual contract price to determine the value of the property, valuations are now being requested even though a signed contract exists. Depending upon what the valuation comes in at and how much you are hoping to lend against the property, if the valuation falls short - and significantly short - this can affect whether your loan is approved or perhaps whether you might have to find a way to come up with more money to complete the sale.

The point to remember is that when you buy at auction, there is no getting out clause. You cannot make your purchase subject to finance or subject to building or pest inspection like you can when it is a private sale. When you buy at auction, you are buying no matter what.

In a perfect world therefore, buying at private sale rather than auction could be viewed as the safer option for home buyers, especially if you have not had your preapproval assessed. You can then build in your clauses to get out of the contract if things go wrong.

But in an increasingly competitive Melbourne market when many properties are going to auction rather than private sale, what can you do?

Firstly, work with your broker to actually have your preapproval fully assessed. In this current market, it means allowing 3 weeks or more before you want to buy at auction for a bank to assess you. It often occurs that home buyers stumble across a property at an open and then there is a mad rush and angst if preapprovals are taking a long time to be assessed. Be prepared and in this market it means allowing sufficient time for this to happen.

Secondly, decide whether there is scope to make an offer pre-auction. If you know what you are willing to go to at auction to secure a property and it would be attractive to a seller, ascertain with the real estate agent as to whether it might be possible to make an offer prior to auction. In this way you can add your clauses to your offer when it reverts to an off market transaction.

Thirdly if you have already bought and for example there is an issue with the valuation, your broker can go into bat for you to see if the valuation can be reviewed. Not an ideal situation but one that your broker can support you with. A broker can also liaise with the bank on your behalf to see if there are any aspects of your loan application which can be re-jigged to get you over the line. Sometimes a small change could be made which makes all the difference.

Buying at auction and then having issues with your loan approval is certainly never a position you want to find yourself in. Surround yourself with the right people to guide you and help you make the right decision,, even if sometimes it means walking away from an auction of a home your really like.