We’re now starting to see the Melbourne property market stabilise after the volatility caused by the sharp and ongoing interest rate rises over the last year.
The market volatility over the last 12 months has seen many potential vendors hold off, which in turn has limited supply and pushed up demand, thus leading to a more balanced market. As a result, we’ve seen recent clearance rates hovering around the high 60% to early 70% marks.
Given there is solid competition for good quality properties, but also lack of competition for compromised properties, many vendors and agents are considering selling a property before auction.
So from a buyer’s perspective, let’s take a look at both the positives and negatives of purchasing a property before auction, as well as the key considerations before choosing to go down this route.
The positives of buying before auction
The main reason buyers tend to put in an offer before auction is to catch their competition off guard. Making an offer before others have had the chance to carry out a more elongated due-diligence and purchasing process may dissuade others from counter offering, leaving the early mover in prime position.
Another good reason to make an offer before auction is to take advantage of low expectations from an unconfident vendor or agent. If a quote is well below market value, there could be an opportunity to purchase lower than would have been achieved had the property been taken to auction. This especially applies to buyers with an in-depth understanding of the marketplace, when up against an inexperienced vendor or out-of-area agent.
Another reason is to remove the emotional elements that auctions tend to bring up in buyers. Buyers can get carried away at auctions, caught up in the competition and fear of missing out. White line fever can kick in, resulting in overpaying for properties. By buying beforehand you can remove the emotion from the equation which results in a more clinical and measured process.
Another consideration is that some buyers may not be able to purchase at auction. If you require conditions to be made as part of your offer, you may be prevented from being able to bid at auction, where generally all parties are required to bid in an unconditional manner.
Whereas submitting an offer more than three business days prior to the auction, may enable you to circumvent this process and make a conditional offer that is acceptable to the vendor. A common example of this is the need to make an offer subject to finance.
The negatives of buying before auction
The major problem is the lack of transparency that can come with putting in an offer before auction.
The wonderful thing about the auction process is that it allows for absolute transparency. As a buyer and bidder, you can decide when and how much you want to bid, as well as seeing who you’re bidding against, and how they’re bidding.
Conversely, the pre-auction sales process puts the agent in absolute control. While as a buyer you’re in the dark, the agent will know how many other parties you’re competing against, and what their level of interest is. They can drip feed that information to you, giving you as little or as much as they like.
Another major risk is that buyers may end up paying more for a property than they would have had it gone to auction. Putting in an offer before auction means a buyer doesn’t have a true understanding of the demand and competition for a property. That may result in a much higher offer being put forward, than would have been needed in an auction setting, where the buyer can see the offer volumes and price levels in real time.
The best approach
The first issue that needs to be addressed if you are planning to put in an offer before auction is understanding how the process will work with that particular agent. Every agent has their own approach, so it’s important to know their method, so you don’t get wrong footed.
If there’s other parties interested, how are they going to handle the negotiation? It may be a highest and best scenario, where you get one shot at putting in an offer, and the best wins. It may be that the person with the first acceptable offer, gets the last shot at putting in a final offer. The offers during that process may or may not be disclosed. Other agents will simply go back and forth between competing bids, with buyers left with no choice, but to trust they are indeed genuine bids.
Another important question that needs to be understood is how the offer needs to be submitted. The offer may need to be made on the contract of sale, which these days can be digitally sent out, signed and sent back with minimal fuss. Whereas other agents are happy for buyers to simply document all of the details of the offer in an email.
Others agents are happy for the offer to be made via text message and some happy for it to be made verbally over the phone.
It’s also important to ascertain whether they have a contract ready, because if not, any offer that’s made is non-binding. That means by the time the contract is drawn up, you may be informed you have to increase your bid, as several other offers have been received in the interim.
Timing wise, the most successful tactic when submitting an offer before auction is to do it well ahead of the auction date. Submitting an offer days out from the scheduled date is unlikely to catch other buyers off guard, and merely shows your hand.
Take home message
Early movers tend to be rewarded in life, and so too in the property investment space. However, like most things in business – knowledge, planning and strategy are all essential components to a successful outcome.
When deciding whether to make an offer before auction ensure you understand the process, have your priorities and particulars in order, as well as have your approach and tactics sharpened and set to deploy. Thus, helping to make your first move one that delivers lasting financial rewards within your property portfolio.