What you need to know before you buy a property before auction

Buyers don’t tend to like auctions. Many worry about getting caught up in a bidding war and will do anything to avoid the pressure of a public auction. But is it always in the buyer’s best interests to buy before auction?

We’ve interviewed a number of agents and auctioneers on “The Elephant in the Room” property podcast and gained valuable insights into the whole pre-auction sales process. But before I get into that, let’s look at a couple of auction campaign fundamentals.

In a hot market, it’s really hard to buy a property before auction. Agents prefer to hold an auction rather than face messy negotiations from multiple buyers via email and phone.

On the other hand, in a slow market, it’s usually very easy to buy a property before auction. In fact, one of the agents we interviewed said that her office has sold 90% of their listings prior to auction so far this year. Of course, you have to wonder why.

One agent explained:

“You get a better price before auction sometimes, but I would say in the overwhelming case and probably more so in a current market, you’re taking [the offer] because there’s no other buyer and you have to get that deal done or otherwise that thing’s not going to sell.”

The question this raises is whether the buyer realises they are the only buyer. Are buyers making the first move because they are scared of auctions? Or are agents first planting the seed in buyer’s minds? Here’s what another agent revealed:

“In a changing market, I’m finding that I am closing probably 80% of deals prior to auction because I find as soon as I have that buyer in the emotional state and they are focused on my listing and that property, I need to get an offer from them.”

What are some of the things agents will say that encourage buyers to make an offer?

Be on the lookout for an agent suggesting the vendor has seen something that they’d like to buy, so they’re motivated to take an offer. Another common clue is when they say that other buyers are interested but they want an extended settlement.

“As agents we can skirt around the truth, you know, “oh how many other people that are interested?” “Ah it’s three or four” … “Oh what are they going to do?”  “Oh you know they’re mucking around they want  longer settlements”…  you can string out conversations…”

Once you make an offer, if the agent says somebody else is interested, you’ll have to take their word for it. If you call their bluff and that buyer does exist, there is a risk that they’ll sell it to them and not you.

“If there’s a number of interested parties the offers are going to go backwards and forwards until you get to that final, last man standing and that’s when a 66W goes on a contract.”

That “66W” is the certificate your solicitor or conveyancer provides in NSW that allows you to waive the cooling off period. If you buy anywhere before auction you’ll be expected to buy under auction conditions, which means you need to have your finance ready and due diligence done before you sign on the dotted line.

If you keep your cool and hold your fire until the auction, there’s a good chance you won’t have to compete and even if you do, it’s less likely to be frenetic.

Now that you know all this, if you still want to make an offer before auction, it’s important to get the timing right.

Week one in an auction campaign is usually too early. The owner won’t have had enough exposure to the market to be inclined to sell unless your price is ridiculous.

The last week of the campaign is not a good time either because there’s a greater risk of competition. Any other buyers that are interested in this property have also had the opportunity to get ready to act.

However, if the agent is encouraging you to make an offer in the final week it’s a clue that you might be the only buyer or at least the strongest buyer. In this case, you’d be in a better position if you actually wait and go to auction.

The optimum time, if you are going to make a pre-auction offer, is in the middle of the campaign, usually the second week. The vendor is more likely to feel that they’ve had enough exposure to the market. It’s also before most other buyers get themselves ready to compete with you.

Whether the buyer is initiating this offer process or the agent is engineering it, buyers need to know that all agents manage offers differently. To maximise your success, ask what process the agent will follow once you have made an offer and don’t try to play games.

Source: API/Ripehouse – Veronica Morgan