Even as our property markets slow down, many of the A Grade homes and investment-grade properties are still being put to auction.
Unfortunately, for every auction winner, there are usually three or four auction losers.
Let’s be blunt, 7 out of 10 auctions end up selling to the person with the deepest pockets, but for the other third — the winning mix will be a combination of style, guile, and savvy use of a smaller pile of savings.
So let’s talk about everything to do with property auctions and some winning tactics to help you come out on top in the real estate bidding war.
First let’s discuss clearance rates, before going through everything you need to know about winning a property at auction.
Auction clearance rate: what is it?
No Sunday morning is complete without checking the weekend clearance rates, especially for property pundits in the big auction capitals of Melbourne and Sydney.
And searching for Sydney auction results or Melbourne auction results is certainly a great place to start your pre-property buying research.
If you live outside one of the two major cities it’s obviously vital that you check your local auction results as well as any online property auctions.
That’s because the auction results are a timely gauge of conditions of what’s going on with the housing markets, especially in our 2 big capital cities.
We report the auction clearance results every weekend here at Property Update and it’s always one of the most read blogs on a Sunday.
But, how useful are these figures and how should you interpret them?
Fact is, despite the preliminary auction clearance rates being reported promptly every weekend, to get the right information from these figures it’s increasingly important to apply a few adjustments.
Firstly the number of auctions being conducted is important.
Other than in Sydney and Melbourne, auction clearance rates don’t give as good an indication of the general sense of the local market considering around 10 times the number of properties are put up for auction in the two big cities than in the smaller capitals each weekend.
How is an auction clearance rate calculated?
To calculate a clearance rate result, first, we want to know the total number of properties listed for sale by auction versus the number which was actually sold.
This includes properties sold privately, prior to the auction, or at auction.
We then adjust to take two different variables into account: early skewed results and seasonality.
Here’s the basic equation:
- (Sold under the hammer + sold prior)/(Total reported auctions) which is then presented as a percentage.
- Total reported auctions to include every possible scenario: sold under the hammer, sold prior, sold after, passed in, or withdrawn.
Great, so what is a good auction clearance rate?
A good Auction Clearance Rate would be 70–75% per cent or higher.
Clearance rates are like a barometer for buyer sentiment.
Basically, it’s a good in-time indicator of demand and supply in a particular suburb or sub-market.
If the majority of homes listed for sale by auction actually sell under the hammer it suggests the market is full of confidence, but more importantly, competition between buyers is likely to drive up prices.
On the flip side, a poor market would be one where supply exceeds demand, and you might see Auction Clearance Rates as low as 40%.
Now we’ve cleared that up, let’s take a look at everything you need to know about bidding (and winning) a property at auction.
Can I snag a property before the auction?
Sometimes the vendor agrees to consider pre-auction offers.
And I’m seeing more and more of this as our property markets slow down and vendors are more nervous about taking their property to auction, preferring the certainty of a sale beforehand.
So you can make an offer to the agent prior to the auction, and the negotiation process is the same as buying by private sale.
But be careful…you risk paying more than you need to.
Here are a number of reasons why vendors are prepared to sell before the auction.
- Nervous vendors: Particularly older people don’t like the stress of auctions
- Sensitive sellers: Selling can be stressful, especially if the vendor is going through emotional challenges like death, divorce, or illness.
Remember you’re not taking advantage of the people you’re taking advantage of the situation and you’ll be assisting the vendor by relieving the stress.
- Time-sensitive vendors: They have already bought a house and the certainty of selling their old property outweighs the potential benefit of a higher price at auction.
- There isn’t much interest in the property
- The agent is in a hurry to sell: This can be an advantage for you
- You have a premium offer on the table
If you’re thinking about snagging a property before the auction because you’re nervous or suffering from FOMO (fear of missing out), remember you can also authorise someone else to bid on your behalf.
Choose someone you trust who has some auction experience or hire a buyer’s agent.
But you need to organise this before the auction — state laws vary so ask the agent or ring your state’s Real Estate Institute to find out what paperwork is required.
Of course, that’s what our team of buyers’ agents at Metropole specialise in — we love bidding at auction.
Preparing for a property auction
Here’s everything you need to do to prepare for a property auction.
1. Do the preliminary work
The first step of preparing for a property auction is to start right at the beginning and make sure you have your finances in order.
So make sure your finance is pre-approved, that you have a budget you can stick to, understand what ownership entity you’re using to purchase if it’s an investment property, and ensure that you’re making your investment decisions based on a strategic property plan, not driven by your emotions or FOMO (fear of missing out).
It’s also very valuable to set out what you do and doesn’t want out of your property — creating a couple of lists would be very helpful here — to keep you on the right track.
2. Research, research, research
Preparing finance is only half of the work, doing your suburb due diligence is just as important.
Attend as many auctions as you can to feel at home within the street theatre of auctions.
This will also help you identify and understand how auctioneers work and the tricks they use to play in bidder emotions.
You’ll want to pay particular attention to the auctioneer who will be calling the property you’re interested in to learn their particular techniques and the words they use.
This will help avoid you feeling bamboozled when your day comes.
3. Beware of underquoting
Don’t get unravelled by properties selling well above the price guide given by the agent.
While its practise was rampant in the hot property markets a couple of years ago, it is still prevalent today.
So learn how auctions work — not all agents quote the same way or have the same difference between the price guide and the final price.
4. Don’t worry about the reserve price
It’s something that everyone wants to know but few will ever really find out.
At the end of the day, does it really matter?
Often the auctioneer won’t actually know this until the day — the vendor could change their expectations at any time depending on market feedback during the auction campaign.
While it would be nice to know, a reserve price, whether you find it out or now, should not determine the price you are prepared to pay.
5. Do contract due diligence and finalise terms
Have the contract reviewed by your solicitor and conduct a building and pest inspection.
This is a critical step to ensuring that you make property decisions that you don’t later regret.
When that is done and the inspections are complete, you’ll want to finalise contract terms.
At which point you’ll need to check with the agent how you should pay the deposit if you are successful and get a confirmation of the settlement date.
Want a longer or shorter settlement?
Looking to give a lower deposit?
This is also the point to request any changes you’d like to make — and it can also be a good way to test the market demand by seeing how flexible the vendor is.
6. Determine the value of the property and set a walkaway price
There are key differences in the budget setting process for home buyers and investors which need to be considered when you’re determining the value of the property and setting a walkaway price.
You may set an emotional premium on your estimated value of a home, but this should still sit within your Money Goals.
Here’s how you do it:
- Look for very recent comparable sale values in today’s market.
- Do your due diligence and work out what price you’re willing to pay for that property.
- Determine 3 different figures: What you think the property is worth, the price you’d like to get it for (which would be lower than what it’s worth), and how far you’d be prepared to stretch to secure it.
The above points can help you prepare for buying at an auction, especially if it’s your first time.
But there are some extra tips for buying at auction which could help you get the result you both want and deserve.
- Have your purchasing entity organised ( personal name, joint names, trust, SMSF, etc.) if you are not buying in your own name.
- Get a finance pre-approval so you know your budget and attend the auction ready to write a deposit cheque.
- Play your cards close to your chest.
Real estate agents are very skilled at prying information out of potential purchasers, including the price they’re prepared to pay for a property.
After all — it is their job! Sometimes you can end up revealing things to them that you never intended to and that might be detrimental to your negotiation power.
By keeping your cards close to your chest and revealing very little about how much you might pay for a home, you maintain an advantage and ensure the agent cannot use your information to sway another potential buyer or to help the vendor set his reserve price.
- Consider getting an experienced buyer’s agent like the team at Metropole to bid on your behalf and level the playing field.
4 things the selling agent knows, that you don’t
Remember, while the selling agent is keen to sell you the property, because that’s obviously the way they make their commission, their job is to get the highest price for their client the vendor and while they won’t be dishonest, the selling agent may not always tell you the full truth.
For example, the agent probably knows but won’t tell you…
- The “real” reason the vendor is selling.
- The reserve price — or at least the price range the owner wants.
- How many other buyers are really interested and possibly the range they are likely to pay.
Often they have seen potential purchasers bidding at other auctions and know what the limits are from that.
- Why you shouldn’t buy the property — things that are wrong with the property that may not be obvious.
And these are really other reasons to get a proficient buyers’ agent on your side.
They speak the language of Real Estate and can usually even the odds — in fact, they can give you a competitive advantage by knowing the selling agents personally and they’ll get different answers from you.
If you’re considering buying your next home or an investment property why not get the experienced buyer’s agent team at Metropole on your side to bid on your behalf and level the playing field.
What will happen on the day of the auction?
On the day of the auction, the property will be open for inspection.
Each state has different regulations to protect purchases at auction back in New South Wales agents must give all potential bidders a copy of the Bidder’s guide before the auction which contains important information you need to know, such as how you register to bid and what kind of identification you must provide to register.
In NSW agents are also required by law to have a list of the following auction conditions clearly visible to all potential bidders:
- The highest bidder is the buyer, subject to any reserve price.
- The auctioneer is entitled to make one bid only on behalf of the seller.
- Before the auction, the auctioneer must announce that the auctioneer is permitted to make one bid on behalf of the seller.
- The auctioneer must announce immediately before, or in the process of making the bid, that he/she is making a vendor bid.
- The auctioneer can refuse a bid that is not in the interest of the seller.
- The auctioneer has no authority to accept a late bid (a bid after the fall of the hammer).
- If there is a disputed bid, the auctioneer is the sole arbitrator and makes the final decision.
- The successful buyer’s name must be given to the auctioneer as soon as possible.
There are similar requirements in other states.
What to do on auction day
The auction day has finally come around and you’re eager to get your teeth sunk into bidding.
You’re prepared, you’ve done your due diligence and you know what to expect.
Here are the 7 things YOU need to do on auction day to put you in the best position.
- Arrive early, survey the landscape and see who else is there.
If you can, also have another inspection of the property. Do they look like serious bidders (they’re inspecting the contract, saying the right things) or are they just onlookers?
- Have a realistic but well-thought-out limit.
You don’t want to have found yourself having money forced out of you by a clever auctioneer.
- In today’s strong auction climate, use the psychological advantage of projecting confidence.
I.e make the other bidders think you have deep pockets and no limit.
Your aim is to scare the other bidders not to go to their extended price by making them think you’ve got a much bigger budget.
If you give the impression that you’ve got lots more money left in your kitty, the competition sometimes gives up.
- Open the bidding high, close to where the reserve will be (the property won’t sell below this), and make your bids fast and assertive.
Starting with low bids and then moving up in small increments only encourages more people to bid.
The larger the increment rise the more you are likely to scare away the competition.
- Call out your offer in full (in other words say $850,000 instead of the increments just $5,000).
It’s worth remembering that procrastinating or agonising over your next bid is a sign of weakness.
- If the property looks like it’s going to pass in make sure you are the highest bidder, as this allows the first right to negotiate with the vendor.
- Be prepared to miss out. Stick to your ‘walk-away price.
By the way…
No bidding is not a smart strategy — some bidders wait till the last moment or two when they hear the properties on the market — that makes no sense to me!
Remember, you’ve done your homework and you know what this particular property is worth to you.
If you miss a property at auction, you need to quickly accept that it wasn’t meant to be and look forward to finding something better soon.
That’s it, leave your emotions behind and let your head rule this one.
Because, while no one likes to consider themselves the ‘loser’ in any sort of negotiation campaign, it’s far better to walk away and live to fight another day than over-commit to a property you’ve become emotionally blinded by.
Buying property at an online auction
Online property auctions or virtual auctions have quickly become a popular way to buy and sell a property.
This was especially the case when COVID-19-related social distancing measures stopped on-site auctions, but now hybrid auctions are a thing.
So with more auctions now being held via video link, it’s easy to get confused as to how the whole thing works, after all, you can’t be there to put your hand up at a certain price or gauge if your competing bidders are going to knock you out with their next offer.
What is the best online auction site?
How do online property auctions work?
First, buyers can register their interest by creating an account on an online auction platform.
If you want to bid, you will need to submit identification and credit card details and be approved by the property’s listing agent.
Once a bidder has been approved by the property’s listing agent, the platform will put a hold on the bidder’s credit card, which could be anywhere between $1,500 and $2,500 (this is to make sure only genuine buyers are bidding).
From there, an online real estate auction works by having registered buyers able to bid on online auctions via phone or via a virtual auction platform.
There are two ways this can happen: via live streaming or via a ‘genuine-time online auction’ where an auctioneer oversees the auction process during a set time online.
Regardless of the platform, the experience is very similar to telephone bidding at a live, in-person auction.
It’s like watching a live video of the auction and not complicated.
In both Gavl and Auction Now, the successful bidder can sign contracts online or in the app.
Gavl allows you to transfer deposits directly into the agent’s trust account.
Can you watch an online house auction?
If you’re curious about how it all works or want to watch an online house auction for research you can simply register for the online auction platform being used for that property.
All you would need to do is enter your name, email address, and phone number to create a profile.
What are the advantages of an online auction?
Online auctions put buyers in the box seat if they can’t attend the property on-site.
Buyers can complete their property search, monitor the market, and buy their dream property online from anywhere in the world.
The online platforms enable buyers to watch, register, bid, buy and exchange live property auctions on any device, from the comfort of their own home or even at the beach.
Of course one of the disadvantages of online auctions is that you can’t really see the competition and feel the mood and emotions.
What happens if you back out of an auction bid?
If you want to withdraw your auction bid you absolutely can do so provided the bidding hasn’t yet ended.
BUT, if the hammer has gone down and you’re the winning bidder, things get a lot more tricky.
This is because, unlike most residential contracts which have a cooling-off period, there is no cooling-off period for properties bought at auction.
It is an unconditional sale!
This means that you cannot cancel the contract if you change your mind without being in breach of the contract.
And the likely consequences of breaching the contract are losing all of your deposit and having to compensate the seller for other costs or financial losses.
If you are the successful bidder at the auction, you must sign the contract and pay the deposit immediately.
This also means that you accept the contract and all of its terms and conditions, regardless of whether you are aware of or understand those terms and conditions.
What to do if the property passes in at auction
It’s a common question: What does passed in at auction mean?
During an auction, a property might not meet a vendor’s reserve price, so the property is then “passed in.”
It is common practice at this stage for the vendor to negotiate the price with the highest bidder, but they are under no obligation to sell their property.
They may just put the property back on the market for sale by private treaty.
So that leads to the question: What do you do if you’re the highest bidder for a property that is passed in at auction?
When a property passes in, the highest bidder is generally given the first right to negotiate with the vendor’s agent.
So the first thing to do is to put yourself in the position of being able to negotiate with the vendor and this means you should be the highest bidder.
It’s not always easy to manipulate the order of the bidding, but it’s important to put yourself in that position.
What happens next is the selling agent or auctioneer usually invites you to step inside the property and commence negotiations, while other agents approach the under-bidders to explore their level of interest and keep them “hot” in case the negotiations with you fall through.
Remember, the agent is acting on behalf of the vendor and it’s their job to get the best price for their client and many of them do it very, very well.
You can bet your deposit they are highly skilled at emotion-based selling and will employ tactics to make you believe they are going to help you.
But, however convincing the agent appears, they’re not on your side.
Now it’s time for your negotiating skills.
Of course, if you’re not an experienced negotiator, this is when you really need a buyer’s agent on your side to level the playing field.
Step 1: Stay put
Unless it is pouring rain, do not follow the agent inside.
This puts you on their turf and isolates you from what’s going on outside.
I prefer to stand outside where I can assess whether there is any real competition or just friends who are pretending to be buyers hanging around.
The perceived pressure of having competition outside, breathing down your neck, and waiting for an opportunity to negotiate is a powerful negotiation tool that agents use against you.
So I’ve found the tactic of displaying strong body language, standing on my own turf (even though I still might have butterflies in my stomach) surprises the agents and returns the negotiating power to me.
Step 2: Find out what the vendor wants
What is the vendor’s reserve price?
Remember… the reserve is the minimum price the vendor told the agent (prior to the auction) he would accept for his property but that doesn’t mean that now that the auction has failed that he won’t accept a lower price.
So when you hear the reserve price you should balk, seem surprised at how high it is and ask:
I understand that’s the price the vendor was hoping for before the auction, but NOW what is the lowest price he will sell for?
Your next steps will depend on what the vendor wants and what you believe the property is worth based on your pre-auction research and your ‘walkaway price’.
Step 3: Make a counter-offer
What happens next really depends at which end of your price range the property is passed in for.
If it is at the lower end you have more flexibility and clearly knowing if there is any competition (waiting outside) will influence how flexible you are.
I would say something like: “I’ve already offered you the upper end of what I think the property is worth” even if it’s not the case.
Obviously, if there are no other buyers waiting in the wings you can minimise the amount you are willing to counter-offer.
Now don’t fall into the trap of making the same counter increments as the vendor.
Often the agent will say something like “would you meet the vendor halfway” — but obviously you’re not obliged to do so.
If you’re considering buying a property at auction, why not level the playing field and have a professional buyer’s agent at your side representing you.
Are property auctions worth it?
You might read through this and then resign yourself to this question.
After all, it seems like a lot of work (and it is) to buy a property at auction.
Wouldn’t it be easier to do it another way?
The reality is that buying a property at auction may be stressful, but it can also be an exciting process that can be your ticket to a great property.
The competition is clear-cut, and you are able to register and plan well in advance.
The nature of auctions also means that the price is gauged by the crowd, rather than dictated by a seller across the negotiating table which means there are some excellent opportunities out there to be had.
It’s also a quick process which means you’ll be in your dream home faster without having to delay for cool-off periods etc.
So while it might be a bit of a psychological battle to participate in a property auction, it’s one that could pay off handsomely if you’re well prepared and play all your cards right.