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Have you ever attended an auction? It can be a scary experience for first-time homebuyers and investors alike, and it’s not a process we recommend to our clients.
Imagine, as you’re waiting for the process to start, everyone is checking out the competition – wondering who will walk away with the property that day.
All eyes turn to the auctioneer as he or she steps up and begins. As prices and bids fly through the air at a frenzied pace, the air is alive with emotions as each potential buyer strives to have the winning bid.
For those potential homebuyers or new investors who weren’t prepared, the process can quickly shift from excitement to despair as they see their plans fly away at the drop of a hammer.
Reasons to Avoid Auctions
- The property is generally purchased unconditionally
- Terms don’t typically give enough room to escape should the deal not be viable
- It’s easy to become emotional – in fact, auctioneers depend on emotion to achieve their goals
Before Auction Day
You can purchase a property before the auction even begins; in fact, sometimes properties destined for auction hold the potential for a discount as the vendors need to sell their property.
Begin your pre-auction purchase in the same manner as you would do any other property investment; research. Study and understand the market drivers, and if possible, attend a few auctions to get a feel for the market.
Obviously, you don’t want to pay more for the property than it’s worth, so it’s really important to understand the market. Pay close attention to sales in the area, noticing not only the sales prices, but also, the trend.
Is the market at the bottom? Both prices and market sentiment are at their lowest at this point in the cycle, which means you have a good chance at buying at a discount. Remember – buy when everyone is selling and sell when everyone is buying!
Do your due diligence and decide the maximum you will pay for the property before attending the auction.
How did the agent come up with the quoted price? It’s very common for this figure to represent the lowest possible price that the agent could legally advertise. It’s also very doubtful you will get the property for anything near this price. A commonly heard refrain in the industry is “quote it low, watch it go – quote it high, watch it die”.
Don’t go above your bottom line at all and be willing to walk away if negotiations reach an impasse. This will be easy as you won’t have gotten emotionally involved… right?
Have a valuation prepared so that you can get your financing in order and be able to give the vendor an unconditional offer right from the start. Make it hard for the vendor to say no, but don’t overreach, either. You’re in this to make a profit, after all! This is where your due diligence will pay off in spades.
Write it Down
Give the agent a call. Ask him if the vendor is willing to take pre-auction offers. If he is, then quote an offer that is close to your “walk-away” figure – now is not the time for ridiculously low offers.
Submit your offer in writing and attach a deposit cheque. There’s just something about cash that will get a vendor thinking…
One helpful tactic (especially after making other offers) – quote an odd number, such as $452,500 rather than $455,000 or $450,000. This suggests that you’re financially unable to go any higher – a good motivation for the vendor to consider your offer rather than risk losing out.
Remember that it’s not always about price. If the vendor has already purchased another property or is in a distressed situation, a quick settlement may appeal to him more than a higher offer.
Decide on what you will offer but make it a good one. Remember that at this point you’re in competition with other purchasers, not negotiating with the vendor.
Don’t let your offer die on the vine. You want the vendor to consider your offer seriously and unless it’s a solid offer you’re just noise. The vendor will let it go to auction without a glance at your proposal.
The whole idea of an auction is to create an aura of desire and to let competition drive the price upward. If your offer hits the sweet spot – or comes anywhere close to it – the vendor just might be willing to accept it.
Avoid a “Dutch Auction”
This happens when multiple individuals put in their pre-auction offers and are advised a higher bid has been received.
As potential buyers bid blindly against each other, emotions come into play as each try to secure the winning bid, subsequently driving the property price to an unrealistic level.
Avoid this trap by keeping emotions out of your purchase and walking away when the limit you’ve set has been reached.
When a market is booming it’s not the time to target auctions, however auctions do act as great barometer of a market’s health and they can deliver a great return for your private sale.
For example, let’s say you’re under contract for a property with a valuation (and purchase price) of $300,000. Obviously you’ve not secured a discount.
If this purchase were in the right market you could gain instant equity (on paper) after similar properties sell at auction for $320,000 to $350,000 dollars! Makes up for the lack of a discount, wouldn’t you say? If the value doesn’t move, however, you may still rescind the contract within its terms and look elsewhere.