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Pre-auction negotiations: the rules of the game

November 14, 2017

With reduced bidder numbers at auctions in our capital cities, more properties are being sold by agents before the planned auction day.

Sometimes this is driven by a nervous vendor who has lost faith in the auction process and is fearful of not getting a result; on other occasions, the estate agent makes a judgement – typically only a few days before the auction – that there are only one or two potential buyers and the chance of anyone else emerging by auction day is lower than the risk of losing one or more of the known likely bidders. Or, pre-auction negotiations can be initiated by an assertive buyer who insists they will only make an offer pre-auction.

Regardless of the cause, agents will inform all those who have expressed an interest in the property. This presents a challenge to the prospective buyer who was expecting to battle for a property under auction rules: there are no universal rules for pre-auction negotiations. The rules are set by the agent. The rules vary from one estate agency firm to another and even within different offices of the same firm.

Some agencies opt for a boardroom auction, which is a far more intimate version of the traditional one it supplants. There is no crowd, no sticky-beaks, no long-winded warm-up speech by a theatrical auctioneer and no auction property as the backdrop. Instead, they take place in the agent’s office, and the time between the first and final bids is often just a few moments.

Other agents undertake negotiations over the phone or via email. Each party is asked to submit their ‘highest and best’ offer as a sealed bid. It’s a one-shot game. The highest bid wins.  Sometimes, potential buyers are a little nervous to submit a bid, fearing that the agent might tell other parties the bid in order to obtain higher ones. So, a variation on this approach is to reward the party that goes first by allowing them an opportunity to bid again if there is a higher bid. Usually they aren’t told what the higher bid is. 

The last main approach is to put no limit on the number of bids and share the current highest bid with all parties.  Effectively, it is a slow-motion auction over the phone or email.

Unfortunately for buyers, these pre-auction methods (with the exception of the boardroom auction) are not transparent. The buyer is entirely reliant on the agent to abide by the rules.

With pre-auction purchases increasingly a possibility, buyers can take a few steps to maximise the chances of a good result.

First, if you are seriously interested in a property, make sure the agent knows you will be at the auction several days before the event. Prospective buyers who are too ambiguous about their intentions towards a property often miss out because the agent doesn’t contact them when a decision is made to sell early.

Second, ask that the agent provides you, in writing, the terms of the pre-auction negotiations. If you are at all unclear about the information they supply, ask for clarification.  An agent who is somewhat vague or sounds like they are making up the rules as they go along might not be committed to a fair process.

Third, if you don’t like the terms, push for a new method. On occasion, agents will agree to, say, a boardroom auction if one party insists that’s the only way they will engage.

Don’t be afraid to walk away from a pre-auction negotiation if you aren’t satisfied it will be conducted fairly. There will always be another property that meets your needs, marketed under more transparent terms.

Richard Wakelin