Have you ever been confused by price guides and reserves?
Plenty of buyers are! Let's talk a brief look at some of the things you need to know about buying property listed for auction.
What is a price guide?
A price guide is pretty much exactly what it sounds like.
Except that it doesn't always accurately reflect price expectations.
There has long been a problem with underquoting in Australia.
So, where a property is expected to sell for, say, $750,000, the price guide might be listed as $650,000 to $700,000.
We've even been to auctions that have sold under the hammer for well over half a million dollars over the indicated price guide!
Why would an agent do this?
Partly it's because until a property is sold nobody can say for certain what the market value is.
It's also because they don't want to scare off potentially interested parties buy quoting above the price range they are searching in.
And it also became a bit self-fulfilling.
If everyone else is doing it, we must do the same thing.
Agents have often copped a bad rap for this, but the criticism isn't always fair.
After all, from start to finish an auction campaign could run for well over a month.
And who can really say how much interest there will be in a property until the campaign is launched and buyer interest can be gauged?
Thus, the price guide might initially be launched at a conservative level, but it could later be increased to reflect feedback from buyers.
To combat widespread underquoting, rules have been introduced in some states in recent years to outlaw flagrant abuse of the practice.
Valuing a property is still an art as well as a science, though.
So, it's perfectly possible for properties to sell on auction day for considerably more than the price guide, even with the rules now in place.
Different agents and agencies will take different approaches to campaigns, so it can be helpful to be familiar with how previous campaigns have tracked against expectations.
If the agent does not provide a price guide, they may provide a statement of information (SOI), upon which there may be listed some comparable market sales.
These can act as a guideline for the vendor's expectations.
But you still need to be sure that these comparable sales are realistic and comparable examples, and don't simply reflect lofty expectations on behalf of the vendor.
The auction process can be somewhat fluid, and one campaign might differ significantly from the next.
So, there is no substitute for due diligence.
Auction bidding strategies
Much is written about auction bidding strategies.
The truth is that in a hot market there is a limit to how much you can do.
If you attend an auction where there a several dozen emotional bidders and some of them are prepared to pay over what you consider to be a fair market value, all the clever bidding strategies in the world aren't going to help you.
All you can do when the market is running hot is to try to buy the property prior to the auction date (or better still, find pre-market or off-market properties to buy!).
When the market is cooler, which will happen at the low point of the property cycle, you may be the only interested bidder.
In this instance the vendor or some agents may try all kinds of strategies to effectively hold an auction where you are bidding against yourself (mystery phone bidders might appear, vendor bids, and more mystery phone bids…).
You need to be wise to this and ascertain what is a genuine bid from a genuinely interested party.
How? Experience and intuition play a big part in this.
In some states the vendor might be able to make a bid at auction, known as a vendor bid, can help to kick things off.
Or it may help to bring the bidding activity up to a price that's more realistic from the vendor's perspective.
Knowing when to stop bidding
Stop! There comes a point in some auctions where you should stop bidding.
If you are a mortgaged buyer and you think that the price has gone beyond a point where the valuation could come in low, then you really must stop bidding.
Remember there's no cooling-off period when you buy at auction.
If you're the successful bidder when the hammer falls, then you will be expected to buy the property, regardless of what the valuer says.
Related to this point, if the price is bid above your budget then you need to stop bidding. Period.
Sometimes you will miss out on an auction. That's okay.
If the property passes in, then you might still be able to buy it after the auction.
If someone else buys the property, then perhaps it just wasn't meant to be. It's said that the deal of a lifetime comes around every few weeks.
Maybe you'll find an even better property soon.
Part of the reason that vendors sell at auction is to get buyers to become emotionally involved in the process. And it's your job to make sure that you don't bid too emotionally.
Related to this point, is to consider the scarcity of the property in question.
If there is genuinely no other property like it then that's one thing.
If, on the other hand, it's one apartment for which there are many other similar units in the locality then it doesn't make sense to bid too aggressively.
Yes, you've invested time and energy in this property, but don't over commit.
A final, more intangible reason for stopping bidding is if you don't believe you are in a genuine auction.
This is much less common than it used to be. But in years gone by I've seen agents taking offers from mystery phone bidders who have been nowhere to be seen through the sales campaign.
And then as soon as you stop bidding, they stop bidding!
How curious… It's hard to be sure whether other bidders are genuine – but be careful about effectively having a bidding war against yourself.
Where to go for more
For more on auction reserves and how best to prepare for a auction day, download our free e-book here.