Your Investment Property explores the pros and cons of buying and selling under the hammer in today's real estate market and shows you how to come out ahead.
Auctions are popular across Australia because the process takes price out of the equation for the pre-auction period, leaving buyers to evaluate the property independent of price. The auction process then provides buyers and sellers with a good idea of what the market is prepared to pay.
With a private sale, vendors run the risk that buyers will turn their back on a property they are interested in because the initial asking price is too high. This is why a spot-on asking price is crucial when selling by private sale.
Like any sales method, there are pros and cons to selling or buying a property via auction - and issues that you should be aware of.
Upsides of selling via auction
With some property markets still slowing and showing lower than previous clearance rates, it is natural that vendors are questioning the advantage of selling through auction.
While auctions are not ideal for all properties, a slow market is no reason to shun the system. Many high-quality, inner-city properties are still sold by public auction today.
Consider also that properties passed in at auction should not be viewed as failures; auction clearance rates are not necessarily accurate reflections of sales success. This is because the auction process does not stop when the hammer comes down - even when a property is passed-in, it will usually have generated enough interest throughout its campaign to attract offers afterwards. Again, the auction process highlights current market value and buyers and sellers can come to an agreement in a faster period of time than through a private sale.
The deadline of a four-week auction campaign tends to force buyers into make a decision in a tighter timeframe than a private sale situation: an auction creates an unconditional sale where there is no cooling-off period applicable and no terms and/or special conditions can be negotiated.
You are also likely to sell your property faster through the auction process, as property sold this way typically has fewer 'days on market' than other private treaty methods of sale.
Downsides of selling via auction
In general, auctions have a more expensive advertising campaign than private sales, with a $5,000 to $10,000 average minimum budget. If the property does not sell, the vendor is still responsible for paying these costs from their own pocket.
Agents can also pressure vendors to dramatically reduce their reserve price during the high-pressure environment of an auction: the vendor may or not be pleased with their decision in a more 'rational' moment.
The auction process may not suit private people, who are uncomfortable having their home publicised across the internet and other advertising media, or hosting public 'open for inspections' that can also raise security as well as privacy issues.
Pros for buying via auction
Auction clearance rates are generally still lower in all capital cities compared with a year ago - which means there is now a greater opportunity to negotiate after auction below the vendor's reserve price.
The continuing uncertainties in the global and local economy have also dampened demand for property. This means fewer bidders (or competition)at auctions.
Vendors' prices have typically had to be lowered. This means that overpriced properties will linger and the longer the property is on the market, the more advertising expenses the seller will incur, not to mention an increased pressure to reduce the price.
Cons for buying via auction
As the market recovers, good quality properties are in high demand. They can create intense competition and sell at auction for high prices - especially in well-located properties in blue chip, inner suburban areas of most capital cities.
Buyers can waste money commissioning building reports and having contracts reviewed professionally and then find the property sells well above their budget anyway.
Vendor bids are unlimited in a number of states so that the auctioneer can push the price up towards the vendor's reserve.
Buying at auction - how to excel in the current market
Bidding at auction can be emotional and stressful. It can be a roller-coaster ride where, just as you think you have beaten the competition, other bidders re-enter the fray or new competition emerges. There are many different strategies that can give you an advantage at a public auction.
1. Dress to impress
Wear a suit to create the perception that you have the money and budget to beat the competition.
Park your prestige car (if you have one or can borrow one) at the front of the property so that you can stand next to it and create the impression that you are 'cashed up' and have the funds to buy the property.
2. Position yourself towards the front of the auction near the auctioneer
This gives you a bird's eye view of your competition so that you can see who you are bidding against.
3. Ask a question at the beginning of the auction to direct attention towards you
Specifically one that may make other buyers hesitate. For example, has the body corporate raised any special levies? What about the development plans next door? Is the car park on title? Hopefully these questions may unnerve inexperienced bidders.
4. Keep your body language and gestures positive and confident at all times
Try to make direct eye contact with competing bidders with a confident 'ice-cool' stare.
5. Ensure you have a pre-auction limit and stick to it
There is no use getting emotional at an auction and overpaying by tens of thousands of dollars.
6. Ask the agent how many contract requests and building reports have been commissioned
If it's likely there will be a lot of competition, wait for someone to make a low bid before placing a higher one about $10,000-$20,000 below your estimated reserve price. For example, if the agent is quoting $270,000-plus and someone opens at $250,000, you should increase the bid to $300,000 to show you mean business. This also cuts out the bargain hunters, as even lower bidders can get emotional and increase their bidding levels - which has a snowball effect of increasing everyone else's budget.
7. Ask the auctioneer "Is the property on the market? Has the reserve been met and are you selling?"
Hopefully, the bidding will stall and the auctioneer and agent will go inside for a break. They may try to convince the vendor to lower their reserve price and put the property on the market for an unreserved sale. (Hopefully, they tell the vendor that there are bidders who won't bid until the property is on the market.)
8. Call out all your bids with full numbers
For example instead of '$1,000' call '$301,000' so other bidders hear exactly where the bidding stands. Call out all your bids confidently and assertively like you are not going to stop and will continue until you buy the property. Volley bids straight back without hesitation so it looks like you won't stop.
9. Break down your bids to slow the bidding if required
For example, if the auctioneer asks for $5,000 bids, offer $1,000 or $2,500 bids so that the momentum is slowed.
10. Use knockout bids
Double or triple another bidder's amount to try and psyche them out. You can also pretend you are out and wait until the third call, before coming in again with a knockout bid.