Even if you are fiercely determined to avoid being caught up in an auction when buying, you still may find yourself having to bid at one to secure your dream home. At an auction, the property sells to the buyer who submits the final bid above the vendor's reserve price. Most people attend auctions without a bidding strategy.
The good news is you may win an auction without having reached your predetermined maximum price. The bad news is you may be the under-bidder at a few auctions before you win one. But there are bidding strategies that you can adopt to give yourself every chance of winning an auction. While you may have watched many auctions, there is a different element at play when you are bidding.
Patrick Bright is one of the original buyer's agents in the Sydney property market.
His experience is invaluable in understanding the undercurrent at play and how best to manage the auction, the auctioneer and the competing bidders.
Bright reports that there has been a noticeable increase in the number of buyers that now employ someone to bid on their behalf at auction. A vendor will readily employ a selling agent to maximise their price.
Therefore it makes sense that more people are hiring someone of equal knowledge and skill to save them money when buying; he says Bright encourages those that think registered bidding has killed off the dreaded dummy bidder to think again. From experience, he is convinced that dummy bidders are still very much apart of many rampant auctions.
It is conceivable dummy bidders could be placed by either the vendor or the agent; however, Bright believes few sales agents would take such a risk.
Auctions need competitive bidding to perform. As a vendor, it is so simple to ask a friend to register and bid up to the reserve price, creating the illusion that the property is in demand.
How do you have an auction with one buyer? If you are an agent, you under quote the price to attract more bidders.
According to Bright and others in the industry, you may also be bidding against a dummy bidder, placed by the owner or agent!! Each auction is a fluid and unpredictable event.
The simple advice for buyers is to avoid bidding unless the property has met or exceeded reserve.
In the past, less skilled auctioneers would call the property on the market as soon as it hit reserve.
Skilled auctioneers won't immediately advise the crowd when the auction has been met. A good aggressive bidder will have no qualms in asking the auctioneer if the property is on the market yet? You may or may not get an answer to that question, but it is worth asking and continuing to ask during the auction.
For simplicity sake, there are two types of auctions. Auctions where the pressure is on the buyers, due to buyer competition.
Auctions where the pressure is on the vendor, due to insufficient competition above the reserve price.
To adopt the right strategy, you want to get a handle on which category the auction you are bidding at falls into.
Out bidding the competition
If there are more than 5 or 6 genuine bidders at the auction, it is either a really desirable property or the agent has under-quoted the price. Remain calm in the face of multiple bidders. Many are there looking for a bargain, because that is what the agent price guide suggested was on offer.
To flush out the serious buyers, Bright suggests that one strategy you could deploy is to bid early and relatively close to fair value. He recounts the story how his first bid on a property with a price guide of $850,000 was $1 million.
Many of the under bidders were misled into being there on the day and I just wanted to knock them out early and send a message to those that were left recounts Bright.
The selling agent told Bright that he made him look bad in front of the under bidders because Bright's opening bid was so strong. When you know that fair value is $1 million and beyond, why waste time bidding at $800,000 in any event? You are in a far stronger position by bidding decisively early as a means of dictating terms.
If you are in an auction with intense buyer competition, Bright says bid assertively, quickly and confidently. By starting strongly, you rob the seller's agent and the auctioneer of the spectacle.
While Bright may only win 20 to 30% of the auctions he bids at on behalf of clients, he bids confidently on every one up to the agreed maximum price. You need to be equally confident in your last bid as you were with your first.
The reality is inexperienced bidders can become easily perturbed in the auction environment. It is almost a cliché that under-bidders will remark. We knew the other guy was going to keep bidding, so we just stopped.
If you can bluff the competition from bidding against you, the amount you save becomes a saving for you and a loss for the vendor. It happens all the time at auctions.
Project confidence down to your last bid and never look as though you are near your limit counsels Bright. Spook competing bidders with the ferocity of your bidding; people don't want to bid against a crazy.
Stand in a position where you can see the entire field of bidders and look for signs of distress amongst your competition. If this sounds savage and unnecessarily confrontational, welcome to the auction system. Remember, as a buyer, you are only responding to the vendor's selected process of sale.
Bright insists that every client provides him with a written maximum prior to the auction. He refuses to speak with the client during the auction and does not allow a client to increase their maximum price once the auction has started. We have the tough conversation about price before the auction begins.
A buyer cannot get caught up in the drama of the auction. The property's value has been researched and the buyer's finance has been approved. The question that bidders ultimately need to ask themselves prior to the auction is.
What is our walk-away price for this property? No matter how special a property may be, every buyer has a walk-away price. The price may be governed by common sense, good judgement or finance restrictions.
Regardless of the reason, you need to establish your walkaway price prior to the auction. You need to enter every auction knowing you may not win it. You need to win an auction on the right price and terms. Bright says that in his experience, even in a strong market, about 33% of sales are above market value.
About 33% are at market value and the balance are sales where the vendor drops their price on the day to get a sale. Given that about 1 in 3 auctions will sell above market price, you need to be clear on your predetermined limit going into the auction.
Just because you set a predetermined limit above fair market price, it does not mean you will necessarily be called upon to pay that amount. Bright says that in 20 years, he has never reached his authorised maximum on the auctions he has won. The only time I reach the client's maximum price is at the auctions I lose.
So I inform clients upfront you will likely kiss a few frogs before you win one when it comes to auctions. The auction you win will likely be won below your maximum bid though.
Gavin Norris as the CEO of Chinese real estate website Juwai was interviewed about Chinese bidding tactics at auctions in August 2016. Norris was quoted as saying, Chinese buyers are the most sophisticated at auctions. Its not because they overpay, its because like every smart buyer, they fight for every dollar.
If a Chinese buyer doesn't feel comfortable at an auction, they will ask a friend to bid on their behalf. That tends to produce individuals who are very cool and comfortable under pressure.
In the same article, auctioneer James Pratt offered buyers advice. Don't be afraid to slow the auction down or to bid in uneven increments. At auctions, buyers used to be too nervous to challenge the pace or the increments that bids are going in, but not anymore.
Bidding and buying at a slow auction
Fortunately, not every auction that you bid at will be vigorous. Even though the vendor has been told an auction will put pressure on the buyers, the pressure often rests with the vendor. A slow auction is an excruciating and agonising event to witness.
The vendor has gone to auction with visions of 5 bidders trying to knock each other out with a big cheque. The buyer's belief and resolve that the owner wants too much is hardened when they see a lack of buyer competition. A slow auction with only one or two registered bidders is more like watching a negotiation than a competitive auction.
When an auction is struggling to get started, Bright's preference is to place a bid as opposed to seeing the auction pass in. If the auction passes in, the owners resolve around their reserve price tends to firm up. While the auction is still alive, the owners are more likely to make a price concession under pressure to gain a sale. Once the auction has finished and the crowd has left, the pent-up pressure the owners have been feeling dissipates.
If you make a bid, even if it is below the owner's reserve, you are likely to elicit a counter bid from the auctioneer and/or the vendor. This counter bid is usually in the form of a vendor's bid. Depending on where the vendor's bid is in relation to your bid will govern whether you strike a deal or walk away.
A lot of buyers actually reduce their predetermined limit mid auction in a slow market and/or a slow auction. They go to the auction prepared to pay $1 million but watch the competition drop out at $930,000. Suddenly, $950,000 seems like a fair offer in the buyer's mind. Why would we pay $1 million when everyone else has dropped out at $930,000, they reason? In a slow auction, the agent has a lot of work to do to get the sale together.
The agent will aim to bring the seller down in price and the buyer up in price. At a strong auction with multiple bidders above the reserve, the agent can afford to simply watch proceedings. They don't need to have any heavy conversations with their vendor. This luxury does not exist if all the bidding is below the reserve price.
If the auction is struggling and you are the highest bidder, ask the agent to disclose the reserve price to you, so that you can make a decision on it. By doing so, you will gain a specific number that will buy the property at that moment in time. If the bidding stalls below the reserve and the owner won't drop their reserve to meet the market, it may be best to move on to another opportunity in the market.
The good news is you won't have to pressure the owner to drop their price. The agent is likely to be employing every conditioning and crunching tactic they know to get the vendor down in price. Remember, the objective is to buy a good property at a fair price. If you attempt to steal the property for a bargain price, the vendor will likely relist on the market as a private treaty.
In summary, it is reasonable if you aim to work the vendor down from an above market price reserve to a market based reserve. If you attempt to work the price down from a reserve price to a bargain level, another buyer is highly likely to come in over the top of you.