Why you should have 3 pre-auction prices
Facing an auction when buying a property is tough on any buyer, but having three pre-determined prices in your mind can improve the outcome of the auction.
Blogger: Cate Bakos, director, Cate Bakos Property
Most people assume that the reason for formulating an upper limit before the auction commences is to avoid last-minute panic and heart-driven madness at a high-pressure moment. But in fact there is another reason for doing so; and it’s one that only an experienced auction bidder or buyer’s advocate will know.
When a client has decided upon a property to pursue, we facilitate a robust set of due-diligence steps so that our buyers understand;
- What the property’s price is likely to be based on recent comparable sales in the area
- What the competitive conditions are for that type of property, at that particular time of year in the specific suburb/locale
- What terms are required/permitted by the vendor
- Numbers of other likely bidders and interested buyers
- Other professionals or advocates who are ‘on’ the property
- The vendor’s requirements in relation to settlement times and any conditions they may request or enforce
- Whether the vendors and their agent will seriously consider a pre-auction sale
- and sometimes (more often than buyers can imagine), we also glean insight into what the reserve is likely to be at auction
Before commencing pre-auction negotiations or gearing up for auction, we sit down with our clients and ask them to consider not just one, but three price tags for discussion.
1. The first price tag I ask them to share with me relates to the price in which they’d like to set as their limit. I call this price x. Price x relates to the figure which they feel is fair and reasonable. This price represents a happy result for them and doesn’t really rely on them stretching.
2. The second price tag I ask for is price y. This price is the competitive price which takes into account competing buyers, a strong seller’s market and a house which ticks all of the important criteria boxes. This price doesn’t make the buyer feel so good, but in the cold hard light of day, it is their sensible stretch price in the face of a competitive bidding situation. As I say to every buyer; “in this seller’s market where values are rising, someone has to break the last record in order to secure the property”. It is naïve to assume that a sales figure in a strong seller’s market will be the same as the last comparable sale. However, this is where caution and sensibility needs to be exercised. A generally acceptable ‘stretch’ for a home will often be somewhere around one to five per cent above the sales range which the property is appraised at based on ‘recent comparable sales analysis’. The magnitude of ‘stretch’ must be carefully weighed up and often comes down to;
- The ‘fussiness’ of the client’s requirements (if their requirements are so restrictive that the chances of the ideal property coming onto the market again is down to many months or years away, the buyer needs to weigh up the lost opportunity in a moving market)
- The timing for the buyer (some buyers need to purchase quickly based on many factors; from an imminent baby birth, recent sale, to changing jobs and hence reduced lending options)
- The rarity of the house and how much they love it
- The other properties at or above this self-imposed limit that represent better value to the buyer
3. The last price tag we discuss is price z. Price z is their absolute stretch, which under tough, fast, emotional bidding conditions, is the price at which they will not have regrets. It’s sometimes only one thousand dollars above price y, but it is the figure at which they accept that the other bidder can have the property for one dollar more, and they accept that they are better placed to find an alternative property.
Once armed with prices x, y and z, an experienced advocate can not only avoid blundering bids, emotional discussions under highly intense pressure, and post-sale regret; but they can make a better decision about how to play their cards. When a buyer gives us a price z figure, only to change their mind and increase the limit mid-auction, we often find that the outcome could have been far more advantageous for them if they’d just been clear from the start. The way that we lay down our bids, the pace at which we fire back fast-bids, the intimidation we can apply, and the time pressure that we can place competing bidders under are all things in our bag of tricks which we carefully determine and pull out at precise moments. If we are checking our phone for panic-texts, or consoling buyers during the half-time break, our position is weakened and our ability to focus clearly with one absolute limit in mind is jeopardised. My buyers are often unidentified as my clients because I stand apart from them and channel my full attention onto the competing bidders and the auctioneer.
But most importantly, when buyers share prices y and z, we can often negotiate a pre-auction price which is in fact somewhere between x and y, because our benefit of foresight, determination of market conditions and agent conversations can give way to a buying opportunity which is advantageous for our buyer.
Nobody likes to overpay, and nor do we want our buyers to overpay, but NOBODY likes to miss out for a price which is less than the price which they could have bought the property for; whether it be prior to auction, or under a better bidding strategy.
