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Bushy Martin’s Bush Bite – Avoiding Auction Shocks Part #1

In the property boom of 2021, we’ve seen a big increase in auctions as sellers look to optimise speed and price. So how do you play the auction game and come out on top?

Transcript:

Welcome!

Now, as Australian property continues to enjoy the highest period of growth in over 30 years, many of the limited number of properties for sale are being sold at auction, with clearance rates of between 80% to 90% continuing to be well above the average.

So in this light, this week I thought would actually extend our recent feature on property negotiation to discuss the exciting adrenaline filled world of auctions. Given that in a decided seller’s market, vendors and agents are understandably turning to auctions to optimise the speed and selling price of their properties.

As a buyer, how can you improve your chance of securing a property when it’s being sold by auction? Let me share with you a range of auction tips and tricks that I’ve collected over the years and also borrowed from some of the industry leaders in this respect. And you know what my number one tip is in relation to auctions? Don’t. Don’t buy under conditions unless you absolutely have to. I’ve been actively involved in property for over 35 years and I’ve never bought a property under the hammer, at any stage. I’ve attended a lot of auctions, and I’ve certainly successfully negotiated the purchase of properties immediately after an auction when the property’s been passed in, but I’ve deliberately never bought a property at auction.

On the flip side, I’ve certainly sold properties at auction because it stacks the odds in my favour, particularly for a good property in high demand. So why have I never bought at auction? Because the entire auction process is designed to disadvantage you as a buyer and slump the playing field totally in the seller’s favour. Auctions are an emotionally charged, high-pressure public environment that’s actually akin to the stress of public speaking, which is right up there in the stress levels with death and divorce. Would you believe?

This environment is totally controlled at the discretion of the auctioneer. Auctions are what I would call a David versus Goliath struggle, where you as a buyer are like David with your little slingshot and you’re up against the auctioneer giant with the playing field well and truly slanted in their favour. Auctions are great for sellers as auctions create the perfect setting to up the ante on the emotions of FOMO or fear of missing out, we’re all competing with each other to win the property on the day.

Auctions are also great for the selling agents because they often condense the selling period down to a month, and it tends to flush out all of the interests of buyers and get them to fight against each other to secure the property for the best possible price on the day. It also creates a perfect backdrop for agents to promote their business to big crowds of local buyers and neighbours and to secure more property listings where the seller or vendor is footing the bill for the advertising. But the losers in all of this are the potential buyers who have to openly compete with each other in a very public setting where everything’s on show and a good auctioneer will use the emotion and the FOMO to entice you and other buyers to pay a lot more than you expected.

So how can you improve your odds of winning at auction? Well, let’s consider this in the context of the two main stages of the auction process, which are pre-auction and auction day. Today, I’m going to focus on your pre-action preparation. We will next week dive into winning bidding strategies so you can give yourself the very best chance of winning the property on the day.

So let’s start with the pre-auction preparation stage. A lot of these tips are a bit of a case of stating the obvious, but it’s amazing how many auction buyers just don’t implement them. The first step is to attend as many auctions as you can prior to the auction, where you want to purchase the actual property. And I’m talking about attending lots of them prior to the auction day, particularly with properties that are similar to yours in the same area. By doing this, you get a real sense of what’s actually happening in the market, and you’ll be able to gauge how many bidders are at each property and the level of genuine interest that’s being demonstrated from serious buyers. This allows you to get a much better sense of what the true pricing and market value properties are, as the price guides that are provided by selling agents are often deliberately slanted to the low side in order to entice as many potential buyers to attend the auction, knowing that the property is likely to sell for a much higher price on the day. You’ll also get comfortable with the auction environment, how auctioneer auctioneers perform and gain confidence in how you need to act and make sure you attend a number of options with the actual auctioneer. They’ll be conducting proceedings on the property you’re looking to buy so that you get to know how they act, their body language, the actual language and their lingo, and the strategies that they use to get the highest price. Knowledge is absolute power here, and this way you get a good feel for what the auctioneer says and their body language when the property isn’t on the market, what they say when it’s getting close to the reserve price and then how they respond.

Once the sellers reserve price has been reached and the property is, then seriously up for grabs, for example, auctioneers often try the old going once, going twice tactic early in the pace to try and create some fear that you’re going to miss out. But it’s not necessarily where the market price is at and it’s not where the reserve price is actually being set. So get to learn the lingo and know what you’re allowed to say so that you’re feeling calm, comfortable and confident on the day.

The other thing that you can do when you visit auctions, particularly in the vicinity of the property you want to buy, is that you can talk to the locals and the neighbours to get a better sense of what the area’s like to live in, what’s good and bad and ugly about the location, and or is there any future development happening that may impact on the area? This is great intel, but you often can’t glean from a real estate agent, so attending a lot of auctions has lots of benefits. The next auction tip is to set your property price limits well before you rock up on auction day on top of the pricing research that you can collect from attending multiple local auctions. If you’re using an investment savvy mortgage broker to assist with your finance, like our KnowHow team, they may be able to share with you core logic data on the property that confirms when and what the property actually last sold for, and what the current value estimate guide is for the property. You also need to ensure that you have a full finance pre-approval in place so you know what price you are actually able to achieve and to afford, which I’ll discuss in more detail in a minute.

I suggest that you set yourself free price budgets. Firstly, your dream price, if you get the property at this price, you’re going to be over the Moon. Secondly, the fair price, the reasonable price you think that the property is worth and actually might sell for. And lastly, and this is the important one, the buffer or the absolute walk away price. If the price goes past this point, you’re out and you’re going to feel absolutely sick to the stomach if you bid. Now, I stress that you need to base these price budgets based on doing homework on what similar properties in the area have actually sold for, and you’ve got your finance pre-approved, so you know what purchase price you can actually achieve and afford. This means that you’re very clear on your position before the auction starts and before the emotion and the adrenaline kicks in and clouds your thinking when the crowd spotlight is on you as a bidder. It’s also important to remember that when you set your limits, don’t do it in easy to remember round numbers that others are also likely to be using. For example, if your limits $700000 for the property, then set your walk away price at $707000. If you can afford it, of course, or at the very least $703000 because often potential bidders will get bank pre-approval for these round number limits at, say, the $700000 limit that I spoke about. So if you just give yourself just a little more, then you can often put them at the post when they hit their upper limit. So never end on a round number or even number and avoid numbers that end with a zero or five, if possible, as that’s where everyone else is likely to be.

The third tip is to get all of your other ducks in a row prior to auction day. Now, the most obvious one is to have a full bank pre-approval at or above the expected property price level. Now, I’m not talking about the quick and dirty pre-approval that many banks now provide, where they haven’t actually assessed your income or liabilities, your deposit or done a property valuation. Quite simply, the system generated finance pre-approvals aren’t worth the paper they’re written on, and the days of talking to a bank or broker after you’ve bought a property unconditionally under auction conditions are gone because your likelihood of getting a loan approved and settled within 30 days are now extremely slim. You need to be banking on a minimum six week finance processing period, so you need to get a full pre-approval completed well in advance of auction day.

Also, keep in mind that if you’re only looking to borrow up to 80% of a property price, then you don’t want to be buying the property at auction at a higher than normal premium price when you get caught up in the emotion of the day, as the bank’s valuer may estimate the property at a lower value than what you’ve paid, which may push you into a much tougher and longer lender’s mortgage insurance territory as far as the loan goes, or worse still, mean that you have to find the loan shortfall money yourself from elsewhere. This is a very stressful situation to wind up in, and it’s not uncommon in today’s rapidly rising market.

You need to be ensuring that the price you end up paying at auction is reflective of prices paid for similar properties in the area at the time. Remember that it’s worth re-emphasising if you end up buying a property at auction, then at the fall of a hammer, your offer is totally unconditional. There’s no subject-to’s, no cooling off periods and no escape clauses. This means that you need to get full independent building and pest inspections done prior to the auction and foot this expense regardless of whether you end up winning the property. And be careful of a sunk cost phenomenon that can often occur here. If you’ve sunk a considerable amount of time, energy and cost into the property prior to the auction, you’re running the risk of becoming more emotionally attached to the property with the risk of going over your limits and paying too much for the property on the day.

Also, make sure that you get the property contract and associated disclosures checked out by your conveyance or solicitor prior to auction day. Because if you want to change any conditions in the contract, it must be done and agreed to well before the day. You can’t vary anything after the fall of a hammer. For example, as leading buyer’s agent Bryce Holdaway suggests, if you’re an investor wanting to use the sales agents campaign photos to advertise the property for rental after the auction and prior to settlement, then you need the agents and their vendors permission to do this, as typically the property is not yours until you get the keys in four weeks time. Now, while bank approval, building and pest inspections and contract reviews and condition negotiations are obvious, it just never ceases to amaze me how many auction bidders don’t take the time to get this organised prior to auction day and then suffer the consequences after the event. Remember, at auctions options is a lot about your comfort and your confidence, and this preparation contributes a lot to your auction day bidding performance, particularly when you’re in the heat of battle and under the spotlight when your pulse and your adrenaline are running hot.

Now, the next step is not to be over-awed or scared by the option day process itself because in reality, it’s actually a more open and transparent process than normal private sales or the current fad of best of offer buy campaigns where you’re never really sure who else is interested in the property and what they’re actually offering. At an auction, there’s no guesswork as everything is actually fully out in the open and you can see the warts of the eyes of both the auctioneer and all of the other bidders, which means that your winning bid is only likely to be just above the losing bidders. So in this light, embrace the open nature of options. And if you’ve done all your preparation, as I’ve already mentioned, then you can go in feeling completely calm and confident.

Now let’s talk about making pre-auction offers or making an offer on the property prior to auction. Know this can be a potentially dangerous approach, depending on when you make the offer and how much you offer. If you make an offer too early or at the wrong price, then you’ve declared your hand in terms of how much you’re prepared to pay, or you’ve just provided the selling agent with the ability to pre-condition the seller to accept a lower price than what they may be expecting. Either way, the agent and the seller are unlikely to accept the auction offer if they’re confident about the interest level and what the property is actually likely get. But if you’re going to make a pre-auction offer during the usual four week auction campaign period, they’re unlikely to consider an offer in the first two weeks as it’s just too early, nor the last week as it’s too close to auction day.

So the best time to do this may be in week 3, where a knockout offer might just be enough to be taken seriously if the seller is up for a quick sale. Or they also don’t like the high stress and anxiety of the uncertainty created on auction day and leaving the best until last. My number one tip to maximising your chances of an option is to engage a professional, independent buyer’s agent to act on your behalf, to bid and negotiate the property purchase. If you’ve exchanged and engage the right buyer’s agent, then they will know what the property’s likely to go for. They’re not emotionally attached, and they’re professional negotiators who’ve attended and bid at multiple auctions in the past. So I know how to calmly and comfortably bid in a way that the auctioneer and the other competing bidders are going to know that you’re a very serious contender. And often, this independence not only protects yourself from allowing your emotions to get in the way and paying too much, but their very presence and the way they present the bids can often scare off the competition, and some buyer’s agents offer a bid only for. So it’s no longer that expensive to have a professional negotiator on your team to level the playing field. And if you want to investigate this, further reach out to buyersbuyers.com.au who have a panel of national buyer’s agents, plus a heap of property research that can assist you with your auction purchase.

So to summarise your pre-auction preparation. Firstly, attend lots of auctions for similar properties, especially with the auctioneer that’ll be selling the property that you’re interested in. Secondly, preset your dream price, your fair price and your buffer walk away price budget limits, avoiding round or even numbers. Thirdly, get a full finance pre-approved with a comfortable buffer. Fourthly, complete professional independent building and pest inspections. Next, get the property, contract and attachments reviewed by your conveyancer or solicitor and negotiate and agree any condition variations when in advance. And finally, to give yourself the absolute best chance of securing a property at or below your desired price. Engage a professional, independent buyer’s agent to act on your behalf. This combination will ensure that you’re fully prepared. You’re calm, comfortable and confident when it comes to the the heat of auction day. Next week, we’ll dive into more great tips and tricks for the actual action day action so that you know what to do when once you’re on stage and in the heat of battle.

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