We look into the question about buying before auction. No doubt many buyers would prefer not to put themselves under the competition of auction day.  Cate Bakos from the Real Estate Buyer’s Agents Association of Australia points out that there are three different ways to buy before auction.
Transcript:
Kevin:  We’re definitely seeing more and more auctions being conducted, particularly in Sydney and Melbourne, but we’re also seeing it in the other in the other cap cities as well that traditionally probably haven’t been as pro-auction as Sydney and Melbourne. It raises the question about buying before auction. No doubt many buyers would prefer not to put themselves under the competition of auction day.
So, what are the rules about buying before auction? It might seem attractive, but maybe there are some things that you should be aware of. I was interested to read an article by the Real Estate Buyer’s Agents Association of Australia – and they were quoting their vice president Cate Bakos – about this. And Cate joins me.
Cate, firstly, congratulations once again.
Cate:  Thank you.
Kevin:  Your Investment Property’s Buyers Agent of the Year makes you the best buyer’s agent in Australia, doesn’t it?
Cate:  You’re too kind, Kevin, thank you.
Kevin:  That’s okay. Let’s talk about this, because in the article you point out there are three different ways that a listing agent can actually manufacture the selling of a property prior to auction. I always thought of only one. So, let’s deal with these.
I think Kate there is a very important point up front, isn’t there? And that is many buyers who think if they try and buy a property before auction that theirs is the only offer that’s going to be presented to the seller.
Cate:  You’re absolutely right. People are often naïve when they decide to be aggressive and try and push an offer through. And there are some auctions that can’t be stopped. There are some legal reasons why some auctions have to run publicly.
So, first and foremost find out if the possibility exists for the property to sell prior to auction. And then before you go ahead and put your offer in, understand how the agent wishes to deal with competing buyers.
Your point about assuming your offer will be presented as the only offer is so naïve, because most agents want to do the right thing by their vendors and they want to give every buyer a fair opportunity to throw their hat in the ring.
Kevin:  Yes. They have a legal obligation, too, to make sure that if they’re going to try and sell the property before auction that they at least contact all the other buyers to let them know to give the seller the opportunity to get the best possible price, Cate.
Cate:  Yes. The word “legal” is an interesting one. I think “moral” is very important. And our legislation varies from state-to-state but the reality is that any good agent who is aware that there are competing buyers on a property will give everyone an opportunity or a heads up that it’s happening quickly at the very least.
Kevin:  In your article you mention that some agencies actually have published how they handle this process. Is that fairly common, or is that more common in the southern states?
Cate:  I think it’s very common in Melbourne and Sydney, particularly for the larger franchise groups as well. They like to have a really clear process. And I’ve seen situations where different sales offices have different processes and even different sales agents have processes.
The key point is that it is up to the agent and the agency as to how they’d like to deal with competing buyers when it’s outside of that public auction environment. But many agencies do have a published process, just to avoid confusion and to avoid having angry buyers pointing fingers if they feel that they haven’t been dealt with fairly.
Kevin:  Yeah, it’s a very difficult thing especially for buyers to understand that when they’re put in competition like that they could feel like they’re being a little bit cheated. We’ll deal with that in just a moment, but I do you think that good agents when they’re listing of property for auction, should actually say to the owner “Look, I the event someone wants to make an offer prior to auction, how would you like me to handle that?” In other words, have that conversation with the seller right up front.
Cate:  Yes, I think even to take it a step further, to describe to the seller with the various options are and why they have a particular preference for one over the other.
And different situations might create different opportunities and outcomes. It could be a property that was hard to put a figure on, or it might be a property that the agent anticipated to be a difficult one to sell, or it could be a crowd-pleaser where they know they’ll have lots and lots of willing buyers. So, every situation can be unique as well.
Kevin:  You name three styles. One is the boardroom auction, the second one is a round robin style, and the third one is the best and highest. Let’s deal with each one of those.
The boardroom auction: you say here the following day. Is that if a property is passed in, is that what you’re talking about?
Cate:  A boardroom auction doesn’t necessarily mean a simulated auction takes place in the boardroom, but more often than not, that is what happens. And it doesn’t have to be the next day, but generally the agent will give a deadline and they’ll say “In the absence of any other offers, we’ll sell the property to you at 6:00 tomorrow, but if there are other offers, we’ll host a boardroom auction in our office.” Or they could host a simulated auction at the property.
They’ll let people know exactly what’s going on, but the point of it is that buyers will be seeing each other face-to-face, so it is one process that eliminates that feeling of “Am I being bluffed, or is there really another offer or really another buyer?” And that’s why a lot of agents like doing it. It’s visible. It’s transparent.
Kevin:  And in that situation, the boardroom auction, is it likely there may be some conditional offers put on the table?
Cate:  Generally, they’ll make sure that everybody’s offer is unconditional, or if there are conditions, they’ll make sure that the conditions are the same. So, for example, if they have three buyers and they’re all putting forward offers that are subject to finance for two weeks, they’ll make sure everyone is on the same page and agreeing to that. Because otherwise, you do create a bit of unfairness because someone with a strong offer will be bidding against someone who has a condition.
Kevin:  Is it typically run like an auction? Is there an auctioneer who actually calls it?
Cate:  Generally. It doesn’t necessarily have to be quite the same style as an auctioneer, and it doesn’t necessarily have to be someone who is well practiced and qualified to conduct an auction.
But it needs to be a process where the person who submitted the offer that got the property on the market agrees that that’s the price that they submitted, and then everyone has the chance to go around in circles.
The person facilitating that process might say “We have a minimum of $1000 bids.” Sometimes they’ll have people in separate rooms and they’ll go around with a clipboard and you have to write your offer down and initial it.
It just depends on how they want to handle that process, but it’s handled by usually the listing agent or someone who’s handling the campaign, and it’s transparent. That’s the point about the boardroom auction; you can see the other buyers.
Kevin:  Yes, that’s right.
The second one was the round-robin style. Describe to me how that works.
Cate:  It’s literally a phone call, or it could be driving around with an offer and getting it updated, but it’s an agent going backwards and forwards, not necessarily with the buyers seeing each other, so it does rely on trust.
But as I say to most people if an agent is saying the property is about to sell prior to auction and you have competition, it would be a very dangerous game to play to be bluffing without officially having another solid offer.
It might be a case of an agent calling backwards and forwards to various buyers until they have one person left standing, and sometimes those phone calls can go past midnight – and I’ve been part of that on many an occasion – or it could be calling people to come back in and initial offers and upgrade offers. It just moves backwards and forwards until one person is left.
Kevin:  Do you run the risk in that situation of gazumping?
Cate:  That risk is always there, but it’s a low risk if it’s a transparent process in terms of knowing that it’s happening right now and tonight, and in the absence of anyone else, it will sell tonight.
You generally don’t find that there’s gazumping unless there’s a bit of foul play at hand or people trying to knock out another agent who has another offer so that they get a commission. That’s a whole new story and it’s not often that you face that. When it happens it’s horrible, but I prefer to focus on agents to do the right thing.
Kevin:  Yes, so do I, but I raise that question because I think that’s a question that many buyers would ask as well. Is it likely in this scenario that you’d have different agents running with different buyers? Or is it just generally one agent?
Cate:  You do find that. Agents can have different buyers, and it depends on the internal policies within an office. With round-robin, you often find that someone else’s buyer is on something but the fact is that it is back and forth and the offers are disclosed means that the buyers are reliant on that transparency.
Kevin:  And the final one was best and highest, which is the one that I’m most used to because everything is fairly clear but describe to me your understanding of how that works.
Cate:  I don’t like best and highest very much because it’s not transparent. What happens with best and highest is everybody gets one shot to submit their offer with the terms, conditions, and price that is their best.
It’s meant to go in an envelope and presented to the vendor along with all of the other offers at the same time. No one is meant to describe what the others offers are, and in the case of multiple agents handling the offers, the agents aren’t meant to tell each other, either.
Now, it can be a difficult process because if someone is privy to a best and highest offer, then they’ll have time to tip off a buyer, they might be able to increase, but the whole point of best and highest is that the buyer stretches into deep pockets as deep as they can and gives their best offer.
And that’s one reason why I hate it really. Our job is to try and buy as optimally for our clients as possible, so we don’t want to give them everything we’ve got.
Kevin:  Yes, two edges of the one sword here because from a buyer’s agency point of view I can understand how that would not be appealing to you, working on the emotion of a buyer. But for an agent working on behalf of a seller, it gives them the opportunity to actually maybe get a premium price.
Cate:  That’s right. There is one time when a best and highest can work well for a buyer, and it’s when you think that that perfect property for you is on the very cusp of your affordability and you’re happy to throw absolutely everything at it and if you get it for that price, you’d be ecstatic. That’s when it can work and if it goes above that, then you have no regrets.
But the challenge with best and highest is if you do try and work out where the pin could land and you give an offer that you’ve thought about that isn’t your best and highest and then someone gets it for $500 more, you can be devastated. And likewise, if you beat someone by $40,000 that’s a horrible feeling as well.
Kevin:  Yes, hopefully you’d never find that out. But if you do miss it for $500 and you were prepared to pay that $500, then you only really have yourself to blame, haven’t you? That’s as I understand it in the best and highest because it’s full disclosure, letting everyone know that they’re in competition, “We’re letting you know now that we may not come back to renegotiate.”
So, it’s really difficult. And you can see this debate between you and me, how difficult sometimes it must be between the agent and the buyers.
Cate:  Very difficult and it gets really difficult if there isn’t a comparable sale and the window of where you think it could reasonably land is wide. If you don’t really want to go in at in at the very upper end of that window, then maybe if you throw the pin somewhere in the middle of it and then another buyer is slightly above you, you’ve lost the property in an effort to save a little bit of money.
But it is a hard one, and it often results in remorseful buyers. But what it does do is if it’s done properly is it takes away that emotion of competing agents in an office, because everybody’s buyer gets the same shot, and it also allows people to have a conditional offer and have the vendor judge that offer fairly. So, for example, a vendor might take the second-highest offer but it’s the one that has no condition.
Kevin:  Such a good conversation, this one. But I guess the bottom line is pretty much what you said right at the start, and that is understand if you’re going to be doing this what the ground rules are. Ask for them up front.
If you’re a little bit confused about this, certainly an option for you would be to employ a buyer’s agent like Cate who deals with this all the time. They know what the rules are and they know how to operate.
Hey, Cate, great talking to you as always. Congratulations again on being the Buyer’s Agent of the Year for Your Investment Property, and look forward to catching up again real soon. Thanks Cate.
Cate:  Thanks, Kevin. It was lovely to chat.