An idiot’s guide to auctions

By Alex May

Auctions frighten everyone.

Selling agents worry that no-one will bid. Vendors bite their nails and hope their dream price will be reached and buyers are scared they will get carried away and pay too much.
This weekend is Sydney’s first true taste of the 2005 auction market, with hundreds of properties heading under the hammer.
CPM Research managing director John Wakefield says the auction market is still very much in the buyers’ favour, with clearance rates averaging less than 50 per cent.
“While 50 per cent or more of houses are still hanging around after auction, it means people should not be so anxious about the bidding battles that can happen,” he says.
“I imagine that those clearance rates will have to start picking up before we start seeing price improvements.”
So what does all this mean for buyers? Alex May has compiled a 10-step guide to buying at auction in 2005.

STEP ONE: TAKE A GOOD LOOK AROUND

McGrath Estate Agents director of sales Shane Smollen says recent sales results in a local area tell the entire story when it comes to pricing auction properties.
Christopher says buyers should inspect as many as 50 or 100 properties in the local area as research property to get an idea of fair market value.
Buyers can also check published sales results in newspapers and buy sales data reports from companies like Home Price Guide or Residex.

STEP TWO: SORT THE FINANCES

Most people can’t afford Sydney real estate without a mortgage, so finance should be pre-approved before attending an auction.
Finderskeepers.com.au buyers agent Lisa Bradley says pre-approved finance is no licence to bid large amounts.
“Most people don’t want to pay more than they have to, but I have seen it happen time and time again that people reach their limit and then pay five or ten per cent more thinking they will pull the money from somewhere,” she says.
Bidders will also need access to deposit funds or a deposit bond – which is usually 10 per cent of the price – and can be paid by bank cheque or personal cheque on the day.

STEP THREE: ENGAGE THE PROS

When the serious house-hunt begins, you will need to call a solicitor or conveyancer to look at a contract promptly and professionally.
Once you have inspected a property you are interested in, the selling agent can send you or your solicitor a copy of the contract before auction day.
The contract needs to be checked to ensure penalty interest rates, settlement dates, inclusions (curtains, light fittings, clothes lines etc) and terms are agreeable to you.
Finderskeepers.com.au buyers agent Lisa Bradley says most people don’t realise it is easy to change a contract on an auction property, provided the vendor’s solicitors have agreed to new terms in advance of auction day.
“People change things like deposit amounts – five per cent is usually OK nowadays – and settlement dates all the time, but it must be done in advance,” she says.
It also helps to have the name of a good building and pest inspector you can call on to carry out pre-purchase checks. You want someone affordable, reliable and thorough – your solicitor can often recommend someone.

STEP FOUR: DO YOU – AND OTHERS - REEEEALLY LIKE IT?

All an auction needs to get going is at least two people who are prepared to bid. If there aren’t two interested parties, then the agent will work hard on the single interested party to extract the highest possible price.
The key to keeping the bidding at auction in control is working out how many other bidders will be there on auction day, competing to push up the price to make the house theirs.
Fiona Bampi, a buyers agent who operates Fiona Bampi Property Solutions, says it is extremely difficult to predict how the competition will unfold on auction day.
“The agent might tell you15 contracts have gone out, but who knows if all of those people will bid on the day,” she says.
“What I actually say to buyers is: what’s your upper price limit, and are you prepared to pay $5000 or $10,000 over that to make sure you don’t have to go and start the whole house hunting process again.
“I always get the buyers to write an auction reserve letter outlining their absolute price limit so they don’t go over that price once the competition heats up.”

STEP FIVE: GAME, TACTICS, PLAN

Smollen says each property and auction campaign will throw up a unique set of strategies or tactics to engage in.
“There is no single tactic that works for a buyer other than really soul searching as to the last cent you want to pay for the property prior to the auction and staying true to that,” he says.
Christopher says the best research an auction buyer can do is read up on real estate tactics and strategies.
“People usually come to an auction with minimal negotiation skills and I would advise people to research auction negotiation tactics in advance,” he says.
“Small bids, large bids, making an offer in advance are all things that can work but every property is different,” he says.

STEP SIX: SHOULD YOU MAKE AN OFFER BEFORE AUCTION?

Bradley says the worst thing an interested buyer can do is put a low offer in on a property before auction day.
“There is no point in putting in an offer that’s wide off the mark early in a campaign, it usually aggravates the vendor and makes them reluctant to deal with you,” she says.
“Really, to secure a property with a very low offer you may have to wait until it has passed in on auction day.”
Christopher says selling agents love receiving offers before auction as it confirms interest in the property, which the agent hopes will bid up the selling price on auction day.
“If you do want to make an offer before auction, it is good to make it conditional for a certain period of time – that puts the pressure on a vendor to seriously think about the offer rather than take it to auction,” he says.
“And in a strong market, a nice offer before auction day will usually do the trick to secure a property.”

STEP SEVEN: BIG DAY PREPARATION

Auction day is tense for all parties involved – buyers, sellers and selling agents will all be biting their nails to find out what the outcome will be.
At this stage, potential buyers should have had the contract checked, a building and pest inspection done, organised their finance and deposit, set their price limit and organised their bidding tactics.
Some tactics to use on the day could include:

• holding bids: don’t bid until the auctioneer announces the property is on the market, which means reserve has been reached;
• showing little interest: don’t let the selling agent or auctioneer know when you have reached your bidding limit – stay as unemotional as possible;
• breakaway bidding: wait until bidding has slowed right down to $1000 increments and go in hard with a $10,000 or $20,000 bid to intimidate other bidders;
• bluff bidding: bid small amounts early in the auction, then wait for other bidders to reach their limit before re-entering the auction with a strong bid.

Bradley says every bidder has to be prepared to go to an auction knowing their limit and realizing that they can be beaten by $100 to the house they want.
“There are only two bad outcomes for a buyer – one is that you get carried away and pay too much and the other is that you play it cool and the house sells to someone else for a price you were prepared to pay,” she says.

STEP EIGHT: JUST BEFORE AUCTION DAY

Bradley says she often negotiates a property sale on the night before an auction, which is a critical negotiation stage in a campaign.
“The day before the auction is when the selling agent knows how many people are interested in the property and they might just be willing to do a deal if they don’t think the day will go well,” she says.
Christopher says if a vendor is prepared to sell the night before auction, it is usually a sign that the auction won’t bring a price higher than is being offered.

STEP NINE: ON THE DAY

The NSW auction regulations require all bidders to register on auction day, and if someone else is bidding for you then they need to register on your behalf.
Century 21 Prestige Living agent Pam Kendell says the laws introduced in 2003 have helped ease buyers’ fear of auctions and make the process less traumatic.
“People fear being ripped off and getting carried away and paying too much … and I’m sure it happened during boom times before the regulations came in,” she says.
Some buyers are too nervous to even attend the auction, and will send someone in to bid and deliver the results to them.
“Being nervous is natural but there is absolutely no need to be intimidated. As I said, set your price and be prepared to walk away,” Smollen says.
The auctioneer will call for opening bids and cajole and encourage bidding to reach – and possibly exceed – the vendor’s reserve price. When the hammer falls, the property will be sold to the highest bidder or passed in.
The highest bidder needs to pay the deposit and sign the contract as soon as practicable after the auction (this is called “exchange”) and the agent holds the deposit in trust until settlement, which is usually six weeks later.

STEP TEN: WHAT IF IT PASSES IN

Christopher says auction clearance rates hovered in the low 40 per cents during 2004, which means more auctions than not ended up passing in.
“It was not at all uncommon during last year for there to be four or five parties interested in a property, but no-one would actually put their hand up to bid,” Bradley says.
Kendell says most agents “want to die” when no-one bids at an auction, but a skilled selling agent will extract offers from interested parties to secure a sale within a few days of the auction.
Christopher says that once a property passes in, the negotiating power shifts to the buyers.
“Once an auction has failed, that’s a good time to put in a realistic bid,” he says.
“Essentially, it then becomes a dutch auction and will sell to whoever puts in the highest offer.”

CASE STUDY

Chantal Kershaw and Dan Banyard played a stressful waiting game to become the successful buyers of a Clovelly semi up for auction.
“I hate auctions. It feels like there are so many tactics to it that half the time the game is being played on you,” Kershaw says.
The couple made an offer of $750,000 in the second week of the campaign but refused to attend the auction in the hope that the property would pass in.
“We had our fingers burnt bidding on a unit in September and I just wasn’t prepared to go through that horrible process again,” she says.
Kershaw had spoken to neighbours, had a solicitor look at the contract, organised finance and researched local property prices before making the offer and then used the remaining time before auction day to ask for some changes to the contract.
When the agent rang them after the unsuccessful auction, Kershaw and Banyard had to up their offer to $760,000 and be ready to exchange contracts that afternoon.
“Our tactics worked in our favour this time, probably because we knew the guy (vendor) had to sell and that there was only one other interested party,” she says.
“But it could have easily blown up in our faces and we could have missed out.”