Your Guide to Auction Success
This episode is all about your guide to auction success. How to prepare, be ready, and win at auctions!
HERE’S WHAT YOU’LL LEARN FROM TODAY’S EPISODE:
- Clearance rates this past fortnight;
- What to do the week prior to auction;
- Getting your research done prior;
- How to bid effectively on the day;
- Beating the competition; And
- Much More
LINKS OR ARTICLES WE MENTIONED:
- None
SPEAKERS IN TODAY’S EPISODE
Michelle May – Sydney Buyers Agent
Marcus Roberts – Mortgage Broker
ASK US ANYTHING!
- Have a money question you want us to answer? ask@sydneypropertyinsider.com.au
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
Transcript
| Marcus Roberts: | Hi, and welcome to the Sydney Property Insider podcast. This is episode two. Michelle May and I are here with you for the week’s auction results, as well as a larger topic, today being how auctions work. You know, what the buyer’s guide to auction success is. So, Michelle. |
| Michelle May: | Hi. |
| Marcus Roberts: | First, let’s talk through the clearance rate for this last week, 20th of January 2018, in Sydney. Again, big asterisks on this, we’re still in the start of January. Most real campaigns don’t start until the coming months, so we had 26 scheduled with a 50% clearance rate; that’s from the results published on domain.com.au. We’ll also provide a link to that in the show notes, as well as the site, eventually. But, again, big asterisks over that, being let’s see what they’re like in February, and March, and April as time rolls on. |
| So, Michelle. How do auctions work, and why do a lot of sales seem to prefer them? Especially in Sydney, in hot markets, as we’ve seen over these past couple of years. | |
| Michelle May: | Oh, auctions was definitely the way to go over the last couple of years. Well, auctions are designed to be transparent, by law. Everyone can see who has registered to bid, and how much to prepare to offer by show of hands. And although agents don’t give away the client’s minimum acceptable price, the reserve, vendors are committed to selling their property once it’s officially on the market. So there is an ending to this, generally speaking. |
| A defined timeline, usually six weeks or less with standard, two open homes per week, plus possibly private viewings, too. So, obviously, in a hot market, lots of buyers out there. This type of exposure will allow as many buyers as possible to see the property. See each other as well, you know? Create that urgency, that the 30 minute window to get through it, create competition. That’s what they’re looking for. | |
| The auction date, surely, it means surety for the seller. Especially if they have committed to buy elsewhere, too. And, you know, with more buyers competing directly with each other, seeing each other, looking each other in the eye, eyeballing each other, this drives up the price. | |
| Marcus Roberts: | Yeah, it creates urgency. |
| Michelle May: | Absolutely. Absolutely. And so, you know, in hot markets, really the only way to buy is to be prepared to register at auctions. You don’t register, you don’t buy. So in the last couple of years this has been the way to go. |
| At the moment, we’re seeing a few more private treaties, as well. But still, for example, a different situation create different needs. So when it comes to, for example, deceased estates where there’s beneficiaries involved, or couples splitting up, the vast majority of those vendors will still choose an auction campaign regardless of the market, because all invested parties can then see the open way in which the auction is conducted, and there can be no argument afterwards [crosstalk]- | |
| Marcus Roberts: | Completely arms-length transaction. Absolutely. |
| Michelle May: | Absolutely, yes. That’s right. |
| Marcus Roberts: | Fantastic. And what are the … So, if you’ve never gone to an auction before, or you’ve either attended but you’ve never actually bid, what are your rights and obligations when you do bid at auction? |
| Michelle May: | Well, it’s a nerve-wracking situation, isn’t it? So I think the first place you want to start is looking at this really great bidder’s guide that Fair Trade New South Wales have created for you. So we’ll put a link on the website. |
| Marcus Roberts: | Yeah, we’ll put it in the podcast show notes, as well, so that you’ve got it handy for your next auction. |
| Michelle May: | Yeah. And in this document, it’ll explain exactly what you need to do. First of all, you need to register. So in order to be able to put your hand up, you need to register, and for that you need to bring a couple of pieces of documentations to identify yourself. So what you need to know is that, at auction, your purchase is unconditional, which means that you wave the calling off period. So normally when you buy a property in private treaty, there’s a five day calling off period, in which you can do your due diligence. It can be subject to finance, or subject to building and pest, for example. |
| At auction, this is not the case. So you need to have done all our due diligence prior to going to auction, making sure that there’s nothing there that could … that your willingness to buy it, firstly, but also affect the actual value of the property itself. | |
| If you cannot exchange contracts on the day, if you’re the lucky highest bidder on the day, you will actually lose your deposit and you may be liable for damages from the vendor. So it’s a really serious thing, this going to auction. When you are the successful bidder, you will need to sign the contract and pay that deposit right there and then. It can be arranged to be less than the standard 10%, which is what normally is expected. But just like any other contract changes, that will need to be agreed to prior. And it’s becoming more and more standard to ask for 5%, because obviously we’re talking about vasts amount of money here. Absolutely. | |
| Marcus Roberts: | Big amounts of money, especially with the way that prices have gone over the past 12 to 18, 24 months, even. That 5%, 10% can fluctuate greatly on auction day, so when you see a number of people going for the same property, the price guide that’s put out often isn’t near what it ends up selling for. |
| Michelle May: | No. We can fill a whole nother podcast just on that alone. |
| Marcus Roberts: | Yes, absolutely. |
| Michelle May: | We’ll keep that for another day. |
| Marcus Roberts: | And just on that, because you mentioned paying the deposit there and then, so most people don’t, obviously … Again, if this is your first time listening, you think that 10% of a property price in Sydney. What do I take with me on auction day? So obviously not cash, but what does the real estate agent or what does the selling party expect as their deposit? |
| Michelle May: | Well, normally speaking, a check. So you will have to … And I always advise my clients of this very early on when we start off, is have you got a checkbook? Now, most people don’t own a checkbook anymore. |
| Marcus Roberts: | Yeah. Checkbooks have gone over the last few years. Yeah. |
| Michelle May: | Yes. Yeah, so there’s a couple of options there. You either go to your bank and get yourself a checkbook, a proper one, or you ask them for a counter check. So you can get, depending on your bank, get a couple of checks free of charge, usually. Blank ones, so that you can fill them out on the day. |
| The other option is to get a banker’s draft. So then you have to nominate the amount that the bank will put on the check, and you take that with you on the day. So there may be a shortfall, or it may be that you are successful in buying the property for less than you had thought, so then that deposit check will actually have more money on it. Ideally, you don’t really want to get that, because you don’t really want to show anybody how much you would have been prepared to pay. But if there’s no other option, then that’s the way to go. | |
| More and more contracts are getting into the 21st century, so there is going to be an option in the future where you just do a direct deposit, as well. But, at the moment at auctions, that’s not usually what’s done. In private treaties, yes, but not for auctions. | |
| Marcus Roberts: | Great. So if a property is passed in … So at the start of the show we talked about the clearance rate being 50%, so some of those properties are not sold at auctions. So if a property is passed in at auction, talk us through it. |
| Michelle May: | Yeah. So if the bidding hasn’t reached the reserve, so the amount that the vendor has nominated to the agent as their minimum amount of what they’re willing to sell it for, and the bidding has stalled, the highest bidder usually gets first option to negotiate with the vendors and still buy the property under auction conditions. So within that 24 hour period, there’s the option to buy it unconditionally. |
| But be aware, though, that that’s merely a courtesy, and not a right of the highest bidder. So if the highest bidder is playing hard to get, and saying, “Oh, no,” as a way of negotiation, the agent has every right to vet the other registered parties there. And I have seen it happen, where the highest bidder doesn’t walk away with the property, but someone else does. So be aware of that. | |
| And obviously, then your negotiations start, and that’s a whole different ballgame. Because, you know, generally people out there aren’t skilled negotiators, whereas agents are. So sometimes it may be better to put your hand up at auction rather than let it pass in, because at least then you’re still going to what you’re prepared to pay, as opposed to being put in a situation where you are definitely not the most skilled negotiator and then get put in a position where you end up paying more. | |
| Marcus Roberts: | And just one other point that often gets asked by people who have never attended auction. They might watch the blog, or they might see auctions on TV. But if bidding hasn’t reached a reserve, very often you’ll hear about the auctioneer going back to the seller to get a bid from the seller. So talk us through that. What is going on there? |
| Michelle May: | So by law, the vendors are allowed to put in one vendor bid, just to keep the bidding going, and to obviously get it more towards where they’d like it to be. So the auctioneer can place that bid on behalf of the vendor, and sometimes that then kick starts the bidding back into place, because especially now, buyers are a lot more weary of what’s going on, so they’re not as keen to put their hand up. And sometimes it means that’s the end of the auction and the property gets passed in. So yes, in New South Wales, the vendor does have the ability to place one bid themselves. |
| Marcus Roberts: | Yeah. Really interesting. So that’s really the rights and obligations when bidding at auction, so let’s narrow it down here. So auction day itself, what are the things that we want to check for before auction day? So before that Saturday morning, what are the things that we’d like to make sure that we’ve checked of that sort of checklist that you want to go through prior to showing up and registering? |
| Michelle May: | Yeah. So obviously, like I mentioned before, when you are the successful bidder at auction, you’re really locked in, and it could cost you a lot of money if you then change your mind afterward. So there’s a couple of things you definitely need to make sure they’re in place. First off, is your preapproval still current, and does it cover you for the amount that you’re thinking of putting your hand up for? You know, because the banks are very strict with their lending, and you want to make sure that you don’t run into problems once you’ve put up your hand and you’ve signed on the dotted line. |
| Marcus Roberts: | And I can certainly say from experience that there have been times in the past where people have had pre-approvals up to the full amount of their borrowing capacity, which we can get into another occasion. But for the sake of the argument, they’re allowed to borrow $1,000,000 exactly, and they show up on the day, and emotions take the better of them, and suddenly that $1,000,000 that they had approved from the bank, which is all that they could afford, well, those emotions really get into peoples’ mind when they’re bidding and all of a sudden they need 1.05. And going over that preapproval amount is not the end of the world, but it will most likely require going back to either that lender, or seeing other lenders to make sure that you can meet the commitment that you’ve made to the vendor in exchanging and settling in a few weeks time. |
| So really important to make sure that you’ve got your preapproval current, up to date, and covers the amount that you’re willing to go to at auction, and not going over that figure. | |
| Michelle May: | Yeah. And am I right in thinking … I usually hear the preapproval length of time is three months. |
| Marcus Roberts: | Yeah, usually it’s three months. I mean, there have been occasions and there have been lenders that have done slightly different terms, but three months, 90 days, is typically most of the ones that we do. If you come up to sort of 75 days, 80 days, it’s very simple. Go back to your mortgage broker, go back to your bank, and seek a new preapproval or seek an extension. They may require some further documentation, but the last thing you want to do is have that expire, and 10 days later put in a bid without a preapproval in place. So, important to know not just that you have a preapproval, but when it expires. |
| Michelle May: | Yeah. Well, because the first thing I always say to my clients is, “We don’t go shopping without your wallet.” There’s no point going to an auction- |
| Marcus Roberts: | Yeah, absolutely. |
| Michelle May: | … without having that in place. |
| Marcus Roberts: | Which is completely different to what I say when my wife goes shopping at Westfield. We can go shopping all we want, as long as we don’t take the wallet. |
| Michelle May: | Oh, funny, that. So yes, so make sure your preapproval is current and covers the amount that you’re thinking of spending. Now, the second thing is your due diligence. That’s a whole different ballgame. So part of that is the contract. Have you had the contract reviewed? So, have you had someone professional look at it, either a conveyancer or solicitor, and are you happy with the terms, and have the terms been explained to you? |
| So for example, 90% of the contracts that I see … And I’m not a solicitor or conveyancer, but I see a lot of contracts along the way … will have what they call a release of deposit clause in there. So 90% of solicitors put them in, 90% of solicitors take them out or ask to have them taken out. Because a release of deposit clause, for example, that means that your deposit does not go into the trust account of the selling agent; it goes directly to the vendor. So should the purchase fall over, you have to pursue the vendor, not the trust account. So it’s a lot riskier. So if you don’t know that that is in your contract, you sign a contract which could have consequences for you if the purchase doesn’t happen. | |
| Other things to think about, building and pest report or a strata report. It’s really not worth saving your money on not having one. I buy properties for a living. I have done for a long time, and I still always want my clients to have a building and pest report or a strata report done. You really cannot do without one. We’re talking about huge amounts of money that you’re about to invest into the biggest investment in your life, and therefore, you need to know what you’re buying. | |
| Marcus Roberts: | Something that I often see at open homes is that the building and pest report is already pre-done by someone that’s aligned with the real estate agent or the selling agent. What are your thoughts on using that as a guide, verse going and finding your own building and pest inspection provider and having it done, I guess, independently of the person selling the property? |
| Michelle May: | Yeah. Look, there’s several schools of thought on that. Obviously there is a school of thought that the building and pest inspectors and the strata reports that are done through the agents tend to be a little bit more lenient than others. So being in the industry, I know who those operators are. So if I see them at an open home, and the report’s there, I always advise my clients to get their own one, because it’s really not worth the paper it’s written on. So you have to be very careful out there. So- |
| Marcus Roberts: | And we’re not for a second saying that those wouldn’t be valid and those wouldn’t hold up in a court of law, but that some things may be seen more leniently to a selling agent rather than to someone that has been engaged by a purchaser or by a prospective bidder who has no relationship with the real estate agent selling or the vendor whatsoever. |
| Michelle May: | Yeah, absolutely. Great on that. The building and pest inspectors that I use, for example, their level of details far surpasses any other reports that I see sometimes. |
| Marcus Roberts: | Yeah, absolutely. |
| Michelle May: | But, that doesn’t take away from the fact that a medium quality report is better than no report at all. |
| Marcus Roberts: | For sure, for sure. |
| Michelle May: | So then, other than that, there’s the more practical things that you need to have ready for your auction. Obviously we touched on it before, have you got your checkbook, or have you got an alternative arrangement arranged to pay for the deposit, if you’re the successful bidder? Because that can be really an issue. I spoke to an agent last year, and he said that the successful bidder had no idea, and they gave him $50, and the agent just had to go on that. Quite unusual situation. |
| Now, have you got a current ID with your address on it, such as your driving license? Or do you have a combination of, say, a utility bill and a passport, for example, to show them? Because that’s what you will need to register at auction. So even if you have preregistered, which is sometimes available now, you will still need to bring that along to the auction with you to confirm who you are. | |
| And also, if you are thinking of bidding on behalf of someone else, you need to have that authority paperwork signed by both yourself and them, which will allow you to do that. | |
| And then, finally, I would say bring the agreed contract changes with you. So that contract that you’ve had reviewed by your conveyancer or solicitor, if there are any changes that were requested and agreed to, just print it out and take it along with you. The more organized you are, the more confident you’ll feel as well, and it will just help the agent just make sure that they do the right thing with the contract changes. | |
| Marcus Roberts: | Fantastic. Okay. So we’ve now gone to the morning of. It’s bright and early. We’ve had three coffees. We’re thinking about throwing $1.3 million into a one bedroom property somewhere, the biggest decision we’ll ever make in our lives. It’s the morning of auction. What is it we’re looking for? |
| Michelle May: | Okay. So I’d stop at one coffee, but go through the [inaudible] property again, and just make sure that if you’re on your own or if you’re with your partner, you’re absolutely sure of your maximum bid. So don’t go changing it. Make sure you have that number ready before you start. Because for me, as a property buyer or professional, I can see that you’re having a conversation during the auction to change your maximum bid, which means that I know that I’ve got you. So always make sure you have that before. |
| And look at the property. Do you still love it as much as you thought you did? In the cold light of day, sweaty palms, you’re about to spend an enormous amount of money. Do you really want to go ahead with this? Because, look, there will always be other properties. This doesn’t have to be the one. | |
| Marcus Roberts: | So really being objective with it. So, again, we keep mentioning it, we’ll mention it again I’m sure, but taking the emotions out of the decisions and going through the property, seeing it warts and all, seeing what the good points are, what the bad points are, where you can improve things, where you can’t, and making sure that it still gives you … it still ticks the boxes that it ticked when you were looking at it the first, the second, and even the third time prior to the day. |
| Michelle May: | Absolutely. Because, you know, things like lack of internal light in an apartment cannot be changed. So if you’re even slightly worried about that, think again. You know? So I would just look at that again. |
| Then punctuality. Always be there before registration opens, and this is especially important when it’s an auction on site. When it’s in auction rooms it doesn’t really matter that much, because they obviously have many more properties at auction that night, so you can’t really tell. But I always say before there before registration opens on site, because you can watch people register. It’s important to check out your competition. Who are they? | |
| Bidders all have their own story. There’s the first home buyers. They’re of a certain age bracket, usually. They usually come with an entourage of parents, and friends, and … Then you have the empty nesters, also usually of a certain age. They have sold their large family home, and they come usually with an air of confidence, and that’s usually because they have very deep pockets. They have made a lot of money in the property market because they’ve held onto their property for a long time, and therefore, when they’re at auction, you’re on for a stiff competition against them. And then there’s the investor’s, as well. | |
| So check everyone out. Take your time, sit down somewhere so you can watch everyone register, and just people watch. I think that, for me, is one of my biggest tactics when it comes to auction, and really has helped me succeed, and scare of some buyers, and hold off when I had to, just looking and checking out the people. | |
| Marcus Roberts: | Yeah. Fascinating. And certainly watching everyone register, we’re not suggesting for a second to stalk them in the weeks afterwards, in case they happen to be there at the next auction that you’re there. But just getting an idea of who are the people that are there as nosy neighbors that live on the street and just want to see what happens to the house next door, verse those that are actually registering, there for a serious purpose, and there that are your competition. |
| Michelle May: | Yeah. |
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