Stealing a Deal at Auctions
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Advantages of Buying at Auction
Auctions are loved by agents because they operate within a fixed timeframe and usually entail a hefty vendor-funded advertising campaign. And, because a reserve has to be set prior to the auction taking place, the agents are able to draw out of the vendor information vendors would normally be well-advised to keep a closely guarded secret: the absolute lowest price he or she is prepared to take for a property. With auctions, the focus is always firmly fixed on the bottom dollar.
For the auction process to go well there needs to be two motivated would-be purchasers who keep outbidding each other and naturally forcing the price upwards. Eventually one of them will withdraw from bidding, leaving the other bidder as the auction winner for just a few dollars more.
By their very nature, auctions do not draw out the best price that could have been achieved that day.
Regardless of his or her actual spending capacity, the winning bidder has to offer just a small amount more than the second-best bidder to secure the property. All too often the price achieved at auction reflects the bidding capacity of the unsuccessful bidder – which may be significantly less than the maximum amount the winner was prepared to spend.
In recommending an auction to the seller, the real estate agents are gambling on there being two motivated prospective purchasers to ensure lively bidding. That’s the best case scenario. If there’s only one party interested in the property then it will probably go for reserve (if at all) – that is, the very lowest price the vendor will accept.
Another reason why sellers may opt for an auction instead of private treaty is that they need to sell and will meet the market. These people are not just testing the waters – time is of the essence and they must sell. They are our classic motivated vendors. I am of the view that an auction cannot achieve the best possible price for a vendor but it will achieve a sale and as such it really is a gimme for buyers. The seller is putting his or her bottom lining out there for all to see and the buyers can nibble or walk away. How powerful as a buyer. Yes, you may get an emotional bidder prepared to go higher than others but this would happen anyway with a private treaty sale. An auction is much more transparent and fair and when we reach our limit we pull out. No tricks or games.
The other great thing about auctions for us is that it knocks out a lot of the competition before they even get started. Many people are scared of auctions. It is a big commitment to have to get all of your ducks in a row to buy a property you may not even succeed in securing. On average it will cost people $800 per auction that they bid at to have a lawyer vet the contract for them, do all of their due diligence, order pest and building reports etc, have their finance approved for that purchase and so on. Not to mention the time factor which goes into all of this. In addition they also have to worry about their own fear and self-consciousness. It is quite daunting as a novice and a layman to have to turn up and publicly get involved in a jostle for a property where hundreds of thousands of dollars are at stake.
It is much easier for buyers to have an each way bet and offer to buy a place via private treaty. They can make their offers subject to finance and pest and building reports etc so that they are not having to fork out any money or waste any time on the property until they know that their offer has been accepted and that they can move forward and buy it. Indecisive buyers have an escape hatch with a cooling off period under private treaty contracts – they can pull out if they want and it is not so daunting. Remember many people have a fear of public speaking (it is up there with death on the fear list) – on top of that, we humans have a fear of failure. Combine the two and it can be most people’s worst nightmare – fear of having to speak up and fail in public where hundreds of thousands of dollars are at risk! Many potential buyers will just pass up the property and go and buy the next one in the area offered via private treaty! That’s great news for you as it means less competition.
What auctions do ensure for both sides is an immediate result – unconditional contracts are signed straight after the auction; or if the property passes in, the highest bidder usually get first right to negotiate.
- You know what the competing offer is at all times, unlike private treaty negotiations.
- You can see your competition and read their body language – watch closely to pick up signs they are close to their limit.
- The price is benchmarked in public – it’s comforting to know others have valued the property similarly to you.
Preparing to buy via auction
You can make an offer prior to auction, but you risk paying more than you need to. Pre-sales usually occur where there is lacking interest or when one buyer is offering a lot more money than the others.
The other thing you risk in making a pre-auction offer is showing your hand too early. It is an uncertain time for a vendor when going to auction. The agent gives them feedback as to who has asked for contracts and how much interest is there but agents will be careful to warn vendors that nothing is certain until the auction happens. It’s like throwing a party – everyone gets the invitations but you don’t know whether it will be a hit until the night! It could rain and no one turns up. People could have been being polite to the agent saying they loved the place and then found something better and not show up at the auction. It is a bit of a slippery slope for a seller.
If you show your hand too early then the seller may get cocky and you have just lost your advantage. If you make an offer before auction then this will be a benchmark for the seller – they will know you are keen and what you will go to and this may make them want to have an each way bet and push on to auction and then you have not kept your powder dry for the real battle at the auction. Try and think strategically on a deal by deal basis and the best way to do this is via the agent. Get as much information as you can to help you form a view as to what will work best for you in the circumstances. Don’t blow your cover too early if you don’t have to. What if you are the only bidder on the day? You just may get a bargain!
You can also authorise someone else to bid on your behalf. Choose someone you trust who has some auction experience. You need to organise this before the auction – state laws vary so ask the agent or ring your state’s Real Estate Institute to find out what paperwork is required.
Alternatively, get ready to do the bidding yourself – here’s how:
Prior to the event
- Use your research and budget to help you identify a ‘walk-away’ price. It’s in your interest to keep this a secret from the agent so they don’t use this information to help the vendor set their reserve.
- Have your finance already in place and attend the auction ready to write a deposit cheque.
- Attend some auctions beforehand to experience the atmosphere and observe different bidding strategies.
- Organise any amendments to the contract, such as a longer settlement period, prior to the auction. Talk to the agent and get agreement from the vendors in writing.
On the day
- If you’re going to start the bidding, start low.
- Project confidence – make the other bidders think you have no limit.
- Make your bids fast and assertive. Agonising over your next bid is a sign of weakness.
- Call out your offer in full (that is, say $350,000 instead of the increments such as $5,000).
- If it’s going to pass in, make sure you are the highest bidder, as this usually allows first right to negotiate (whether this is a legal right or courtesy varies between states).
- Stick to your ‘walk-away’ price. It’s better to feel the short-lived disappointment of missing out on a property you love than the long-lasting remorse of paying too much.
In my experience, fate can play a hand in these things. I’ve seen many under bidders walk away miserably only to find a more suitable property just a few weeks later. If you miss a property at auction, accept that it wasn’t meant to be and look forward to finding something better soon.
Quick Start Tips and Tricks for Auctions
- Timing. When several bidders are jockeying for a property, wait until the bids start to die down before making yours. There’s no sense fueling the fire.
- Dress (and act) the part. Some buyers like to dress like bankers and arrive early to position themselves near the auctioneer. That’s so other bidders will assume they are wealthy with unlimited funds and be afraid to enter the fray or else that they’re representing wealthy buyers (buyer’s agents) and possibly shrink back from a bidding war.
- Multiple Auctions. Where there are several properties being sold in the one sitting at an auction house (as opposed to one-offs on-site) be ready to jump in on early auctions. Often people are self-conscious or timid and do not jump in early, meaning that those listings auctioned off early on the docket tend to go for less.
- Make big Jumps. If you are getting closer to your top line and there are still other bidders in play consider taking a big jump, eg. Going up in $5K or $10K increments when everyone else is going up in $500 bids – this gives the illusion that you could go all day and have no upper limit which causes the competition to give up.
- Research multiple homes. Don’t miss those open houses; they typically run from one to three weeks. Do your homework on a lot of properties, try to come to auction in love with 10 properties instead of just one. Bring detailed information and photos of each house you’re interested in to avoid confusion.
- Research the market. Find out the recent — in these troubled times, no more than the past three months — selling prices on neighbouring homes. Real-estate agents will often try to win your business by providing these “comparables” for you to save you time. They will look very official and legitimate (all bound up and pretty) and will ostensibly show what comparable homes in the neighbourhood are selling for. Do not trust them as they will be selective to support the price the sellers and their agent are aiming for. Do your own research and don’t let anyone put a spin on anything for you. No short-cuts.
- Spoil the Auction – At the start of the auction the auctioneer will ask if everyone understands the terms and conditions of the auction. If there is something negative about the property, and you are brave enough, you can use this as an opportunity to scare off others eg you could say “What about the illegal structure at the back of the property. Will the owner be making that comply?”. The auctioneer will shut you down and say you take the property as is and to make your own inquiries but it is too late to take back what you have put out there and it may scare others off!
- Negotiate terms BEFORE the Auction – when you attend the open for inspection, if you like the property you should get a copy of the contract emailed to you by the agent. You should then give it to me (or your solicitor if you elect to use a local lawyer) to check that all is in order and do searches for you (eg pest and building). The reason you need to do all of your due diligence up front is because you will need to commit on the day of the auction if you are the successful bidder. There is no way out of this. You cannot buy “conditionally” at auction. You are bound when the hammer falls. What we can also do up front is negotiate special terms for you so if you want to exchange on a 5% deposit instead of the standard 10% or have a longer settlement period than usual (or indeed shorter) or perhaps early access to the property then we need to write to the vendor’s solicitor and get their approval. If you are the successful bidder on the day then the day then you will sign YOUR pre-negotiated contract after the auction. If you do not pre-negotiate changes to the standard contract prior to the auction then you will be bound by that contract.
- Participate – Participation in the Auction is essential. Do not wait until the property is declared to be “On the Market” before making a bid. The property may not be placed on the market and may be passed in and you need it to be passed in to you to have the right to negotiate after the auction. If you have not made a bid no one will include you in negotiations post auction when the property is passed in.
- Plan Figures – Have a figure you will go to in auction bidding but then have a fall-back position. Some people will draw a line in the sand at their maximum figure, say $200K without exploring a tiny bit more. What if $201K would have gotten you the property? You need to have had that conversation the day before the auction “We will go to $200K but if we can get it for $202,500K we will keep that in reserve. Your fall back figures should be odd numbers as auctions tend to jump in $5K’s. So you should set your outside reserves ending in $2,500 or $7,500.
- Take a Stand at the Start – Keep your powder dry on when and how you are going to bid. Lots of novices will stand at the back and then when the property they want comes up for auction or the auction is about to start they will come forward and jostle into a better position signalling their intention to enter the fray. Be cool, get in the right place at the outset where you can see the auctioneer and other bidders and stay there. You will also signal your intentions or any anxiety if you are in a bad position and craning your neck to try and suss out the competition who keeps bidding against you. Pick a position of power where you can see all you need to from the start and then stay there.
- On the Market Tactics – Once the property is declared as being “on the market” (this means that it will sell at auction on the day – ie the bidding has reached a level which the seller will accept and it is just a matter of the active bidders fighting it out. The reserve has been met and the highest bidder will definitely walk away with the property when the hammer falls – the seller indicates that it will not be passed in) then decrease your bidding increments and slow things down.
- Know your Competition – Remember you are not bidding against the auctioneer and s/he is not in control – you need to be so assert yourself with fast, confident bids. When you watch a few auctions you will see newbie bidders wait for the auctioneer to come back to them and invite them to go higher – they will umm and ahh and agonise and then the auctioneer will coax them up a tiny bit each time. Don’t do this – put your offers in quickly and loudly before the auctioneer comes back to you and asks your intention – this shows you are assertive and could bid all day and the competition don’t know where you will end and think “This guy’s got such deep pockets – he’s a rich developer and I can’t go up against him!”. If you slow down or deliberate about whether to go higher at any time, the competition will infer that you have reached your limit and may push the price up that bit higher. It’s amazing how intimidating it can be to have someone against you who wants the place so badly that they will stop at nothing.
- Play your Poker Face – Auctions are like poker – you don’t have to have the best cards to win – you need to have a bluff strategy though to play off the competition. Do not give away anything. Do all your research, agonising, price setting and deliberation the night before so that nothing can surprise you on the day. If you are surprised don’t show it. What is relevant is your bid and your auction strategy. If someone comes in and starts bidding large amounts for example, don’t look shocked or angry. Don’t whisper or turn around to check them out. Don’t stop to strategise as to whether you will keep bidding. Nothing can knock you off your perch if you do all your planning before the auction in your war room. If things don’t go to plan eg the bidding accelerates beyond control just opt out and walk away from this one. There will be some absolute bargains at some auctions and then at others there will be emotional bidders who push prices higher and you need to know, to quote Kenny Rogers “ …when to hold them and know when to fold them. Know when to walk away and know when to run. You can’t count your money when you’re sitting at the table there’ll be time enough for counting when the dealing’s done”.
- Call out your Full Bid – Do not just shout out the amount you are going up by eg $5,000 – call out your full figure each time eg “$355,000”.
- Have a cheque book – I know it sounds obvious but in this day and age many people rely on EFT’s and don’t own a cheque book. Getting bank cheques for every auction is costly and time consuming. You will need a personal cheque for 10 % of the purchase price on the day of the auction if you are the successful bidder (or less than 10% if you negotiate that beforehand with the seller or his lawyer or agent).
- Observe – Having watched just a couple of auctions is not sufficient to become an expert on the auction process. As no two auctions (or auctioneers/selling agents) are ever alike, you need to really watch at least 15 to 20 auctions in your target area in order to be fully exposed to the workings of the different “actors” and possible scenarios that can unfold during an auction.
On auction day
It’s natural that auction day can cause some anxiety. You can minimise stress by understanding the auction procedure.
Here’s how the day’s proceeding will unfold:
- Before auction day: An auction can happen very fast – so it’s really important you are clear and agreed on the process of your auction day. Things like your walk-away price and your “passed-in” strategy are critical. You need to have checked out the property thoroughly and looked at the contract (or had us do it for you) under a magnifying glass as you will be buying unconditionally when you buy under auction conditions and this will have legal implications. Don’t be afraid to ask questions.
- Rules of engagement: At least 30 minutes before the auction, the agent is required by law to display documentation regarding the property. As the auctioneer begins, he/she will make an announcement detailing the information: the state laws applying to auctions in general; the rules applying to this particular auction, including whether vendor bids and/or co-owner bids will be used. Auction laws may vary from state to state so discuss the legal requirements with the agent.
- Registration of interest: Once you’ve found a property, by law, you need to contact the real estate agent and register your interest (laws vary state by state; for example, bidders don’t need to register in Victoria).
- You will need to show proof of identification so take your passport, driver’s license, credit card and bill with your name on it. You will then be issued with a bidder number which you will show every time you bid.
- Registering interest does not mean you are obliged to bid. If you haven’t registered beforehand with the agent, you can do so on the day.
- If you are bidding jointly, only one person needs to register but they will also be the only one allowed to bid.
- Opening bids: The auctioneer will then ask for an opening bid, setting an amount by which all bids must rise, such as in $5,000 increments. Alternative amounts can be bid – such as $1,000 – however it is up to the auctioneer’s discretion if the amount is accepted.
- Going once: Once the reserve price has been reached the property is considered to be ‘on the market’ and will be sold to the highest bidder. If the reserve price isn’t reached the auctioneer will privately ask the seller if they wish to sell at a lower price. When the final bid is reached and the seller is happy with the price, the auctioneer will announce “going once, twice, three times…” and if no more bids are offered he will then call, “SOLD”.
- If the reserve is not met and the seller does not wish to sell under auction at a lower price, the property will be “passed-in” and the auction will conclude with the property not being sold and remaining in the hands of the seller. The agent will then approach the under-bidder (the bidder who made the last bid before the property was passed in) and seek to negotiate a sale with them.
- Show me the money: An immediate deposit – usually 10% of the purchase price – is required after the auction. The balance is paid on settlement, normally set by the seller at 30, 60 or 90 days. The sale is finalised when the contract has been signed by both seller and buyer and all relevant cheques and transfers have been made. Once this has been completed and the balance of the purchase price paid, the property is officially considered sold.
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