Risk of bidding at auction at high LVR

Hi PC.

I have another question as you guys have been tremendously helpful so far.

• 720k pp
• QLD
• 98% LVR
• approx 70k deposit
• Shopped around a lot to find loan at a somewhat reasonable interest rate (approx 3.4% var) - there's not a lot of high LVR loans it seems

Lets say hypothetically, we bid at auction and win. We win the property for 720k which is our max borrow limit given our deposit size and LVR.
We have done thorough comparison sales analysis and are quite certain this is the value of the property given similar sales/block size/location features.

1. What are the chances a valuation will come in short? We will have no extra cash to cover the shortfall.
2. If it does fall short, would having a guarantor help? What would the ramifications of this be for the guarantor (this could be an option for us)
3. Would you bid at an auction given our circumstances? Why/why not?

 

There are very limited options at that LVR% so the risk is amplified over and above a normal scenario. You will need to make sure all elements of the property also meet the lender policy (not just the potential valuation shortfall issue on its own).

Given there is no contingency funds, if I were in your position and had a guarantor option available then I would fully explore this before going to auction to ensure it is a viable option.

 

Thanks Morgs, what would happen if the value falls short and we have a guarantor?

 

Bidding at auction with a high LVR is very risky.
I've personally never seen a valuation come in low after an auction, that's not to say it doesn't happen I just haven't seen it, generally the auction determines the value.
It's an added risk as a buyer though, which is already risky at 98% LVR - you would certainly want to have a fully credit assessed pre-approval in place before you bid at auction to try to reduce your risk a little.
You should use a broker for this transaction.

Definitely do as Morgs said and explore the guarantor option first, (assuming you mean security guarantee) better rates, no LMI etc.
The risk to the Security Guarantor depends on the lender used eg. with some lenders the guarantor is only liable for the portion they provide as guarantee.

 

There is no way I would be bidding at auction under those circumstances.

 

You would need to put together a full new application with a lender who will consider a guarantor. In my experience it'd likely be a different lender to one who would consider 98% inc LMI.

 

Incidentally what happens if someone wins the auction, contract says 10% deposit unconditional, and the buyer only has 3%? If the contract is actually exchanged, wouldnt the buyer be in default, and the vendor could take the lower deposit and go after them if for further costs esp if there is another sale at a lower price?

if the buyer pays the 10% but then doesnt have the cash for stamp duty, even worse?