There are six key events which can dramatically change the course of an auction for property investors. Here's what you need to know before raising your hand.
BLOGGER: AMY MYLIUS, BUYER’S ADVOCATE, CATE BAKOS PROPERTY
Property is an incredibly dynamic market. At any point in time there are a finite amount of properties and buyers in a market, but an infinite number of outcomes which can occur depending on the decisions and actions those buyers take. Understanding the variables behind auction results is important to be able to accept that each property and auction campaign is unique, and sometimes we need to dig further to discover the reasons behind a sale price before we use it as a reliable comparable sale.
Your presence alone can skew the auction price
Sometimes buyers kick themselves after seeing a property sell for a price they would have been prepared to pay. It’s a hard concept to wrap their head around, but I have to remind them that it doesn’t necessarily mean that they could have bought it for that price, as they’ll never know if the other buyer had a stronger budget. They might have been lucky with their bid, or they may have nudged the other buyer up to a level above their comfort zone. Being the underbidder can be frustrating, particularly when the other buyer pays only $1,000 more, but we will never know if that was their last bid or if they had an additional $50,000 within their budget.
When the agent only has one genuine buyer
An auction could have a dozen bidders or two bidders; and the result might be the same. If an agent only has one strong buyer, they aren’t able to rely on competitive bidding and hence might throw in one or more vendor bids (or could choose to pass the property in). Having a property pass into us with no other bidders is one of our favourite scenarios, but interestingly it can sometimes have the opposite effect on a buyer as they begin to wonder why nobody else was bidding. It’s human nature to feel a purchase decision is validated by other people's desire, and in these situations we need to forget about the other buyers, appreciate the highest bidder is now in a strong negotiating position, and focus on our own due diligence, research and appraised figure to be confident that this is the right property at the right price.
Losing leading buyers
One of the reasons an auction might only have one bidder or limited bidding is that the agent has lost their main buyers in the lead up to auction day. Often it’s because the buyers have purchased something else, or perhaps they’ve simply had a change of heart. External factors like job losses, family illness and relationship upsets can also change the landscape for prospective buyers. Either way, a campaign can go from having several strong interested parties to nobody at all, regardless of how fantastic the property is. Timing plays a huge part of any auction campaign, and if there are a number of comparable properties on the market at one time there’s a higher chance an agent wont be able to rely on buyers who have flagged their interest.
A ‘walk up’ is someone who has never seen the property until the open for inspection during the half hour prior to the auction, and ends up bidding on (or buying) the property. As a buyer's advocate we’re horrified to see people purchase without doing a scrap of due diligence, but it happens more frequently than most people expect. Walk ups are one of the reasons we like to purchase prior to auction as this format often limits the competition to just those people who have already seen the property. Walk ups can be a blessing for a vendor if it bolsters the sale price, but can also be worrying for an agent as they haven’t qualified the buyer and run the risk of them not having the right deposit or desired terms.
Size of the crowd
A few years ago I was bidding on a unit in Ascot Vale the weekend before Christmas. There were only five people who turned up to the auction — and all five were bidders. No sticky beaking neighbours or passers by, just serious buyers. The property sold well above reserve. I’ve also been to auctions with so many people the agent had to stand on a fence so everybody could hear, but there wasn’t a single person who put their hand up. It can be intimidating, but there is absolutely no correlation between number of people at an auction and how many bidders there will be.
The reserve price
Vendors hold the right to change their reserve at any time, and the reserve price can be dependent on the agent identifying how many bidders are in the crowd and how strong they feel these buyers are. An agent might put a property ‘on the market’ at a price lower than the vendor originally was prepared to accept with the purpose of stimulating more bidding, or they might pass the property into a buyer above the reserve if they know that the strongest buyer has more to spend. For these reasons an agent will usually be hesitant to disclose a reserve prior to auction, however we do often get a heads up from agents we have good relationships with if the reserve is unrealistic and non-negotiable, to avoid wasting our client’s time and their building inspection costs.
The mere thought of standing in an public, crowded space with emotions running high gives most people a shock of adrenaline, let alone those who plan to bid. But remaining pragmatic and asking the agent clever, pointed and direct questions can make the difference between flying blind and having some valuable insight. Never underestimate an agent’s willingness to answer a question like “How many bidders do you feel will put up their hand?” Agents hold the clues and provided you ask nicely, most will be happy to help.