Many home buyers and investors are a little intimidated by the thought of bidding for a property at auction.
Michael Yardney points out that if you avoid properties that are up for sale at auction, you’re going to miss out on a lot of good buying opportunities as many of the best properties are offered for sale by auction, particularly in Melbourne and Sydney so he has some tips on bidding.
Kevin: As the auction concept grows in popularity right around Australia – it’s very well engrained in some of the southern states already, but it is growing in popularity in some of the other states, Queensland, Western Australia, South Australia – there are still buyers, both home buyers and investors, who are intimidated by the auction process. I guess it can be a fairly daunting process, so let’s give you a bit of a hand.
If you find that that’s what you want to do or that’s what you need to do, here are some great tips. Michael Yardney from Metropole Property Strategists joins me.
Michael, I know that you like auctions. Why is that?
Michael: Kevin, I believe if you have a good property for sale, auction is really the best way to sell it, and as a buyer, I think auction is the most transparent way to buy property. I can see who else is interested in the property, I can see what they’re prepared to pay. I like to see my competition where I can read their body language, watch the signs that they’re coming close to their limit.
I know a lot of people don’t see it that way. I know a lot of people get intimidated by it, and to be honest I still get butterflies when I go to an auction. I think it’s more butterflies of excitement, though, in my tummy than nerves. But I think that keeps me on my edge and makes me work well at auctions.
Kevin: There’s nothing worse than being underprepared, and that’s probably why a lot of people do get nervous – because they don’t know what to expect, Michael.
Michael: That’s right. If you’ve done your pre-auction due diligence – such as getting your finance in place, checking the contracts, determining the maximum price, understanding how the auction works – then you’re going to be in a much better position to buy well. And if you’re not able to bid yourself, I always think it’s good to authorize somebody else to bid on your behalf – a trusted friend or probably best a buyer’s agent because that’s their business, Kevin.
Kevin: I guess you can’t discount the amount of research that you need to do to put yourself in that right position to know how far you want to go and what your walk-away price is, Michael.
Michael: Let’s go through what some of the pre-auction due diligence should be then, Kevin.
Michael: I think first of all, you have to understand in which entity you’re going to be purchasing the property. Is it in your own name, is it in a superfund, is it in a trust, is it in a partnership with your life partner or your spouse? And then you have to get finance pre-approval.
I believe because an auction is an unconditional sale – you don’t have a chance to get out, there’s no cooling off period – you have to have your finance pre-approved and you have to know your budget before you attend the auction. And you have to go with a check or a checkbook – some people still have those, Kevin – because you have to actually give money across on the day when you’re successful.
I think you should also attend lots of auctions to experience the atmosphere, observe the different bidding strategies. I’d not only be going to the auctions of the company that’s selling the property that you’re interested in purchasing but most big companies have a number of different auctioneers. I’d be watching the auctioneer, specifically the one who’s going to be conducting/calling the auction – if you can find out who that is – because they each have their own particular techniques and words they use, and that will give you a level of comfort if you’re familiar with them, Kevin.
Kevin: Michael, I know doing your homework well in advance is very important. Any other thoughts?
Michael: Apart from getting the due diligence so that you understand what the highest price you’re prepared to pay or your walk away price is, I’d also be getting a solicitor to check the contracts, and you can organize amendments to the contracts. You’re allowed to, Kevin. You’re allowed to ask for different terms. They don’t necessarily have to accept them.
And then come to the auction prepared to bid and bid strongly.
Kevin: And on the day, Michael?
Michael: I like to arrive early. I survey the landscape. I see who else is there. I look to see, are they serious bidders? They’re the ones who look at the contract, they say the right things – not just the neighbors who are looking at it.
I like to stand up front, face the rest of the crowd rather than with my back to them, and I like to look like I have deep pockets, stand strongly and firmly, bid loudly – I’ll often start very close to where I think the reserve is – and make my bids in full. I don’t procrastinate, I don’t agonize. My last bid is going to be as strong as my first bid to make sure that I’m not giving away any signs that I’m reaching my limits, Kevin.
Kevin: Michael, what do you do when it passes in or if it passes in?
Michael: Kevin, I want to be in the position that if it doesn’t reach the vendor’s expectation and the property passes in, that I have first right of negotiation. So I want to be the highest bidder at that point. But I’d never bid even higher to get it on the market because auctioneers will often tell you to do that. The trouble is when you do that, all of a sudden, somebody else comes in and you lose it. I like to be in the position that I negotiate with the vendor.
Often they ask you to come inside and talk with them on their turf, and I say, “No, actually I’d rather stay outside.” That puts them off a little bit. But I stay outside on purpose because I want to see who else is hanging around. Are there other underbidders who are still interested or not?
And then the negotiation starts all over again, Kevin.
Kevin: During the bidding sequence, good auctioneers are very good at giving a strong inference of sale. In other words, they make you believe even though it’s not at the reserve that it could be and that they’re going to sell it. How do you overcome that? Do you ask them, “Have we reached the reserve?”
Michael: A lot of purchasers or potential purchasers ask have they reached the reserve, and auctioneers have clever ways of wording it. They won’t say no; they’ll say things like “I’m not going to sell it without telling you.” “You’ll know when it’s on the market.” So what you have to do is do your homework early and understand when it is on the market by hearing the words the auctioneer says.
I wouldn’t be pushing it above the price I’m prepared to bid to get it on the market, as I said before. If it doesn’t get there, let it pass in. You then have a despondent vendor and you’re in a better negotiating position. You’re going to negotiate when it passes in with a position of strength.
Remember, even in great times, at 80% auction clearance rates, 20% of properties pass in. On average, when the auction clearance rates are in the 70%, 30% of properties pass in. So have a good strategy to work when that happens to you, Kevin.
Kevin: Great advice. Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure, Kevin.