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Don't Let Auctions Scare You Off

Looking to buy property? Veronica Morgan explains why you don't need to be afraid of the auction process.

Fabrice and Meggie were total newbies when it came to Australian real estate and they found it really difficult to get their head around the auction system, which is prevalent in many of our capital cities.

The first hurdle is learning how to interpret the agent's quoted price.  It is generally accepted that agents quote less than the vendor wants.  This is because they are trying to build interest in the property and a low price creates more competition than a high price. In response, various buyers apply various rules here.  I have heard the following: "just add $50K or $100K", "add 10%", etc. 

But these rules of thumb don't always serve buyers well, because different agents have different approaches to quoting, some will be lower than others, some adjust their quoting during the campaign and others doggedly refuse to budge.  Then there is room for human error.  Sometimes agents simply get their quoting wrong.  So, it is dangerous to use the agents guide as a basis for determining what you ought to pay.  You need to work out values for yourself and the best place to start is by looking at recent sales of comparable properties.

Private treaty negotiations seem so much simpler! But this is not necessarily the case.  One of the benefits of an auction system for a buyer is that it is transparent. You can actually see who you are bidding against and know the exact amount that they have offered for the property.  This is not the case when you are negotiating for a property that is "For Sale" at an asking price.  It is completely up to the discretion of a selling agent whether the amount of other offers is disclosed or not.  And then you don't even know if they are bluffing.

We found a property that Fabrice and Meggie loved.  it was going to auction and their initial reaction was to express fear that they would miss out.

I gave them their "homework" which was to prepare themselves for auction day.  These were their tasks:

- Do some price research (use the Internet to look up recent sales of comparable properties, take a close look at the pics and floor plans and also drive past each house).

- Go out every weekend before the auction and look at every property on the market that could possibly compete with the one you like.

- Speak to your bank contact or mortgage broker and ensure that your finance approval is up to date and will cover the amount you think you might need.  Ask also whether you need a bank valuation prior to auction.

- Get the contract reviewed by a solicitor or conveyancer and ensure that they request any changes that they recommend.

- Get a building and pest inspection by a licensed inspector.  If possible, meet them at the property so they can point our any areas of concern.

This was such a steep learning curve for Fabrice and Meggie.  Not only were they coming to terms with a whole new country and climate, but they had to trust a buying method that was completely foreign to them.  I had many conversations with them as the auction drew near and spent a lot of time explaining the mechanics of this sales process.

I had come across many of their fears before.  Buyers often panic about auctions and can develop a sense of paranoia that comes from feeling powerless.  This can be compounded when they read building inspection reports that have page after page of disclaimers and very little content that relates to the actual building they inspected. 

Sometimes all this can become so overwhelming that buyers end up hearing only the warnings, not the real content in what solicitors and building inspectors say.  And so it was for Meggie and Fabrice.  They got to the point where they seemed to think that the auction process was favouring the vendor too much.

Less than 2 days before the auction they ended up deciding not to bid. I know that they had some rational reasons for deciding not to go ahead, but I couldn’t help but wonder whether their fear over this unfamiliar sales method was the deciding factor.  And when the property ended up selling for only $2500 less than their top bid was going to be, I am not sure whether I imagined it, but I thought I detected a tinge of regret.  Such a shame if that was the case.

Auctions can be scary, there is no doubt about that.   But buyers don’t have control over the method of sale chosen by the vendor.  So if you like a property that is going to auction, the best thing to do is to arm yourself with information.  Do the same homework I gave Meggie & Fabrice and also go to as many auctions as you can so that you familiarise yourself with the process.  The most important thing to do is work out what the property is worth to you and set your upper limit before you go to auction: think of it as your “walk away price”.  And then, walk away with confidence if the bidding goes beyond your limit.

Veronica Morgan also blogs on her website: www.gooddeeds.com.au/buyers-tips-and-the-property-market.

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