Patrick Bright, Buyer's Agent, on Australia's penchant for an Auction
A hangover from our farming history or just a subtle nuance in the Australian housing market? Australians seem more inclined to want to buy and sell their properties by auction than folks in Nestoria's other markets. We're not experts on this situation, in fact we've found we have more questions than answers, so we went back to Patrick Bright, one of our previous interviewees, and put a few more questions to him regarding auctions and the Australian market.
Thanks again Patrick.
Image by Flickr user cafemama
What are the key differences between auctions and private treaty sales?
Despite the fact that the percentage of auctions is on the rise, particularly in the metropolitan areas, many prospective buyers still feel uncomfortable buying a property that is for sale by auction. There are many reasons for this but one of the most common is that they don’t have a price to work off and if they are given a guide they are unsure if they should rely on it as some selling agents underquote by 5%, some by 15% or much more. A lot of buyers are concerned that they may pay too much before auction to try to secure it or they will end up like many people who spend hundreds of dollars on pest and building reports preparing to be at each auction only to find out that the property is not really in their price range. The most important differences that prospective buyers should know between buying at auction or by private treaty are the legal requirements. When buying a property via private treaty there is a cooling off period which means that unless you wave that right as the buyer you have five days from the date of exchange of contracts to pull out of the purchase. You will suffer a small financial penalty for doing so for example in NSW its 0.25% of the purchase price. In addition, the vendor and buyer can come to an agreement subject to stipulated conditions such as ‘my offer of $$$ is subject to a good pest and building inspection and finance being approved by my lender’. When buying at auction however, it’s important that buyers have all their ducks lined up, so to speak, in advance of the auction. They need to ensure the contract has been reviewed by a solicitor, that a pest and building inspection and or strata search has been completed and finance pre-approval is in place because if the hammer falls then it’s an unconditional sale for the highest bidder. Any variations to the contract of sale must be formally agreed between the vendor’s and buyer’s solicitors before auction day. It’s essential that prospective buyers who are not experienced in the auction environment do their research to understand exactly what their rights and obligations are well before they start to bid. Given that auctions have their own language and a unique environment, how do buyers best prepare for auction day?The best way to prepare for auction day is to get organised well in advance. Firstly buyers will need to make sure that they fully understand the legal obligations and arrange for the pre-purchase inspection reports as mentioned above. Prospective bidders should aim to view at least a dozen or more auctions and use the experience to study the bidders, the auctioneer and the selling agents. To set a bidding limit, buyers need to do their own comparable research to determine a fair market value for the property.It’s important for prospective bidders to do some study and develop a clear knowledge of the terminology used during auctions. Take the time to understand terms that the auctioneer may use such as ‘vendors bid’ and being ‘passed in’ and ‘on the market’ which are the most common ones as well as issues that may arise such as ‘dummy bidding’ and what to do if you believe there is a dummy bidder. Finally prospective auction buyers need to be honest with themselves as to whether they are able to cope with the hype and excitement of an auction or are likely to get carried away and bid above a pre-set limit for the property as many people do. They need to evaluate if they are able to keep a poker face or will they give the game away. If they concerned or know they won’t do a good job then they should organise a trusted and experienced friend or hire an experienced buyer’s agent to do their bidding for them as the stakes are too high for it to be one of those situations where they learn from their mistakes. In this case mistakes are likely to cost ten’s of thousands of dollars. Is it possible to purchase a property before auction day?It is absolutely possible for buyers to purchase a property that’s up for auction well before the bidding begins. Here, the most important thing is the timing for the best chance of success. When selling a property via auction the vendor and selling agent develop an ‘auction campaign’ which typically lasts for around four weeks. It can be quite difficult to buy in the first week or two when the vendor is very bullish and confident of a high sale price. It can also be difficult to have an offer accepted in the last week of the campaign unless there’s not a lot of interest in the property. Consequently I find the third quarter of the campaign is the ideal time to put forward an offer as they have had a few people through and the selling agent has had three weeks to condition the vendor with buyer feedback as to the actual likely sale price.As well as timing, the structure of an offer is also vital. At auction, property is sold unconditionally and so it is highly unlikely that the vendor’s agent will recommend they accept a pre-auction offer with lots of conditions attached. In this situation it is best to negotiate under auction conditions which means no cooling off period. Initially your offer may not be on a signed contract however I recommend you always submit an offer in writing to ensure that it is taken seriously.Is there a strategy that buyers can use to determine the current value of a property so they don't get caught out paying too much?Understanding current market values is an absolute must when it comes to negotiation. The best way to price a property in any market is to conduct thorough research – by that I recommend that prospective buyers view around 100 comparable properties over a two to three month period in their select areas. Major things that property hunters should consider include outlook and potential loss of outlook based on possible future developments; floor plan; block size - the usable part of the block not just the overall size; street-scape; privacy at the front and more importantly at the rear; it’s condition - old or modern renovated or unrenovated; position on the low or high side of the street; and price differentials between adjoining suburbs.By going through the research process, buyers can develop a solid understanding of values in the current market in which they are looking to buy. In addition, by doing the hard yards, buyers will be able to provide current comparables to the selling agent to back up their offer if needed during the negotiation process which I find often helps. Unfortunately a lot of buyers take short cuts and come to their offer by knocking several thousand off the asking price which often has very little to do with market value and everything to do with what the vendor is hoping to receive. Even worse I have had several buyers tell me over the years that at auction their strategy was to bid just above the other bidders by assuming they had done research on the value and set themselves a sensible limit – this was their insurance policy against paying more than the property was worth!?! If you go down this path gee you had better hope no one else has the same foolish approach.
Patrick Bright is a Real Estate Author and Sydney based Buyer’s Agent. His books include “The Insider’s Guide to Buying Real Estate”, “The Insider’s Guide to Saving Thousands at Auction” and “The Insider’s Guide to Profitable Property Investing.
