The 7 rules of bidding at auction
All of our capital cities host auctions; some more than others. Melbourne is well known as the auction capital, but Sydney has its fair share, as does Brisbane. From on-site to in-room styles, one thing is common. Buyers are generally quite anxious about auctions and most serious bidders find the process quite stressful.
There is no magic potion to take away the nerves, and if the truth be told, even experienced advocates get a rush of adrenaline when the auction pre-amble comes to a close and the auctioneer calls for an opening bid.
There are seven main ingredients though which can make all the difference to the bidders’ chance of success, degree of risk-mitigation and sense of control. Here they are:
1. Have your finance sorted
Many buyers find themselves at a disadvantage from day one because they find a property they love and then scramble with unfair time horizons and lots of stress in a desperate attempt to be in a position to buy unconditionally. Many fortunate buyers find brokers or bankers who can deliver the preapproval in time, but sadly there are many out there who are precluded from bidding on the property they love because they didn’t prioritise their finance. Bank processing times vary from 24 hours to many weeks.
Times vary based on the complexity of the application, and other external factors often undermine turnaround times. It’s naïve to assume that a lender can give priority service just because your auction is approaching. It’s always best to sort a full pre-approval with full credit assessment before you go shopping. As a buyers advocate, I’ve had many an auction go my way because my strongest competition couldn’t pull their finance together in time.
2. Know your market
What I mean is; understand what other similar properties have sold recently, and for what price. Be prepared to compare them fairly with the one you are interested in and don’t forget to factor in market growth. Once you have a reasonable idea of what the property is likely to be worth on the open market you can evaluate your chances of success and decide whether to invest time and energy in it, or let it pass.
There is nothing more frustrating than paying for a building inspection and contract review, only to find that your maximum limit was short of the reserve.
3. Find out more about the property in question
Don’t just consider the obvious factors such as location, land size and dwelling type. Look into the elements which could preclude it from being mainstream, or enhance the scarcity value. Taking into account the pros and cons is imperative; and it helps a buyer work out whether a property is likely to attract a hoard of buyers or a handful. Just remember though; a quirky-good property can perform well at auction due to the scarcity factor, but a quirky-bad property can present problems from a re-sale and ‘days on market’ point of view.
The old saying “you buy a bargain, you sell a bargain” applies, so choose with caution. Quirky-bad, even if it appeals to you is only ever OK if you plan to never sell it and never rely on its equity growth.
4. Make sure a legal professional reviews your contract
Even experienced property buyers who view contracts all day aren’t equipped to conduct the searches and understand law like a professional. We have a policy which prevents us from bidding without a qualified legal professional reviewing the contract prior to auction. From nasty special conditions to restrictive covenants, difficult terms to expensive strata issues, the list goes on.
No buyer should discount the value of a good legal professional in the due-diligence phase. As we say; “no review, no bidding.”
Auctions do not permit cooling off periods. Bidders are bidding to buy as is. The purchase is unconditional. Buyers should not take that lightly.
5. Don’t underestimate the value of a building inspection
Like a legal review, a building inspection may uncover issues that weren’t obvious to the naked eye. The invisible expenses are the ones which can really hurt. I describe invisible as the items which need to be tended to, but don’t really add any perceived value. These can include: electrical rewiring, reroofing, asbestos removal, white ant removal, re-blocking/re-stumping, excessive strata contributions to issues such as water ingress or cracking.
These items may scare off buyers who are aware of them, but in many cases the buyers are unaware unless they engage a professional to inspect the property. Buyers who assume they can ‘see’ the issues are naïve. I’ve seen plenty of cases where moisture meters have saved the day.
We don’t all carry moisture meters but good inspectors do. For a few hundred dollars, the value of the report can’t be underestimated. Obviously consideration needs to be applied to ascertain the buyer’s ‘chances of success’ before spending hundreds of dollars, but in my view it’s a valuable investment for any age of dwelling.
6. Find out about the campaign
Also gauge the level of interest, and the other similar properties on the market at the same time.
‘Competing’ properties can significantly impact the likely selling price, just as competing buyers can strength a vendor’s price. We often get excited about what we term a ‘micro glut’; a larger representation than normal of a particular dwelling type in a given suburb. If a property campaign has attracted large numbers of genuine buyers, a bidder can anticipate a tougher array of competing bidders.
Questions to ask which give insight to genuine buyer interest include:
- How many buyers have come through the property?
- How many requests for contract have you fielded?
- How many building inspections have been conducted?
This last question is often key. Buyers who invest in a building inspection are likely to bid (provided the inspection doesn’t uncover nasty surprises).
7. Set a firm ‘stretch’ limit prior to the auction.
Make sure it is based on research, and be prepared to bid with confidence (with no second-guesses).
The best bidders are those who understand;
- The likely ‘market value’ from comparable sales research
- The likely competing buyers
- The agents and their personalities
- The terms which they are bidding under
- The property facts (legal and building-related)
- The right price to walk away. This is the price at which a better property could be sourced.
The more confident the bidder, the more intimidating they could be to their opposition bidders. Those who pause to discuss price or take calls show a significant sign of weakness. Being firm, confident, audible and on time is essential. No late bidding, no pauses and no signs of intimidation are three important facets to remember.
A bidder lacking the confidence required for the task should ask someone reliable and confident to do this task for them.
