For real estate investors looking for their next opportunity, property investment auctions present unique opportunities and also challenges.
Compared to private treaty sales, at an auction you are bidding against other potential buyers and the highest bidder will win.
And if you are bidding against a competitive field, coming out on top without overpaying can be a difficult task. So here are six tips that can help you succeed negotiating at auction.
The auction process works, by getting all prospective buyers together at once and allows them to submit their offers (normally in person) to the auctioneer.
Ultimately it is the buyer who submits the best offer that purchases the property.
It’s important to note that the best offer, must also meet the vendor’s reserve price and this is normally noted throughout the auction process, as the auctioneer will suggest the property is now, ‘on the market’.
Before the auction gets underway, bidders are required to register and when the hammer finally falls, the high bidder purchases the property unconditionally and is also required to pay a 5-10 per cent deposit.
Clearly this makes auctions a very valuable tool from the vendors perspective as it encourages direct competition between bidders and they know that at the end of the process they will have an unconditional sale.
1. Research and due diligence
When markets are hot, the media likes to write stories about people continually missing out at auction.
This is also perpetuated by real estate agents who ‘underquote’ the asking price of the property in a bid to ramp up auction activity. While this is illegal, it is hard to police.
Despite those factors, most homes actually sell at a fair price within a small price range of others in that same area. The best thing you can do to secure a property at auction is to understand the real value of that property.
Potential buyers can simply conduct their own comparable sales analysis, which will give you a very clear idea of what similar properties have been selling for in that area.
That way you are not going into an auction blind and based solely on the advice of the sales agent – who in reality works for the vendor.
- Check recent sales results in the suburb to gain an accurate market value estimation of your target property.
- Research the sales history and on-the-market history of your target property. See if it has previously advertised as a private treaty or has been passed in at prior auctions.
- Check with the agent to determine how the auction will be conducted and what terms and conditions of sale apply.
- Find out what you can about the vendor’s circumstances, this may come in useful later if the property is passed in and you make an offer after the auction.
- Get a good idea of how auctions work by attending a few, simply to observe. If you do this in the area where you are looking to purchase an investment property, it will also give you an appreciation of valuations and level of demand.
2. Get finance ready
- Get the finance pre-approved before attending the auction. If you are the successful bidder it’s an unconditional sale, unless you have written agreement otherwise prior to bidding.
- If you decided on a maximum purchase price and have calculated what you can afford, you are less likely to succumb to the pressure of an auction and pay too much on the day.
3. Auction day preparation
The thing about an auction sale is that it is an unconditional sale with no cooling off period. That means you need to do your homework ahead of time.
While a private treaty sale might allow for things like a ‘subject to’ clause, you can’t do that with an auction.
That means having everything lined up ahead of time such as building and pest inspections, finance pre-approval and having your lawyer look over the contract.
By the time the auction day comes around, you should have the contract checked, building and pest inspections done and decided on your bidding tactics. If your bid is accepted, you’re committed to buying, so you need to ensure your preparation is already done.
Keep in mind that when you are buying investment property at auction, one of the biggest risks is that you get carried away in the heat of the moment and pay too much for the property.
If it’s a one-of-a-kind dream home you will live in forever, then maybe any price is OK. If however it’s an investment property, then paying too much can cause multiple problems for you e.g. negative equity through paying above valuation, lower yields and cash flows than planned and issues getting further finance approved.
Remember, there is always another deal just around the corner!
4. Bidding strategies
Here are some bidding strategies you can consider.
- Once the auction proceeds, don’t offer a bid initially but take the opportunity to watch other bidders and attempt to work out their intentions. Make sure that you start with an agreed position in terms of what the property is worth, a maximum price you are prepared to pay and don’t exceed that bidding limit.
- Don’t bid until the reserve is met. This is one tactic you can use, as you could argue it makes little sense to bid for something until it is physically for sale and by employing this strategy you are keeping your cards closer to your chest.
- Stay unemotional – Don’t let the auctioneer know when you are reaching your limit, keep your best poker face on and don’t let emotion take over.
- Bluff bidding – Bid small amounts early on, then wait for other bidders to reach their limit before piling in with a strong bid with a bigger step up in price than the auctioneer has requested (which is within your limit) e.g. that is, if bids are rising in steps of $1,000, making a bid of $5,000 to $10,000 above the last bid to put off and intimidate other less confident bidders.
- When you start bidding, do so confidently and quickly. Keeping the momentum up puts some pressure on other bidders and the auctioneer. As a slow bidder you face the added pressure of the auctioneer and the rest of the crowd constantly looking at you to see if you are going to bid again.
5. Pre-auction offers
Just because a property is going to auction doesn’t mean the vendor won’t sell ahead of time.
The auction process is an effective tool for the seller because it create competition, but it also puts an end-date on the sale.
Ultimately the seller still wants a result and if you can put a compelling offer in early in the piece, you might be able to knock out the competition, before there is any.
Owners who choose to sell at auction are generally motivated to sell quickly and may well agree to an offer beforehand to avoid some of the significant expenses associated with marketing, promoting and conducting the auction sale.
Keep your top price to yourself
Once the property reaches its reserve (the lowest price the property will be sold for at the auction) it will be sold to the highest bidder.
If the reserve price is not reached, the property will be ‘passed in’. The seller will then either try and negotiate a price with interested bidders or put the property back on the market.
But where you have an advantage, is that you know the seller’s lowest price as soon as the reserve is met and the home is effectively “on the market” but the seller does not know your highest price.
6. When the hammer falls – there are two scenarios
Scenario 1 – The property is passed in
If the property fails to reach its reserve it will be passed in. This is a time when you can approach the agent and make an offer, and the negotiating power shifts to you as the buyer.
Scenario 2 – The property is sold
If the property reached its reserve, it will be sold to the highest bidder. This person will need to sign the contract and pay the deposit by the deadline required in the auction terms and conditions.
Above all keep calm, be patient, do your research and have a top price in mind that you will not exceed.
Originally sourced from: Property Investment Blog
Keywords: Growing your Portfolio