Do I Have to go to Auction?

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Sydney is an auction-centric city where the majority of properties listed for sale will be advertised with an auction campaign. The auction method creates momentum and draws large crowds with mass advertising, open homes and of course, a transparent method of public sale. It also sets a deadline and imposes a timeframe. However, we are often asked, does a property have to go to auction? And under what conditions could it be a good idea for a buyer to proceed to auction as opposed to placing a pre-auction offer?

To determine if a property needs to go to auction, buyers need to understand the circumstances of the sale. These include understanding the vendors’ situation, the market conditions and the agent’s personal preference for auction. The reasons why a property may be required to be sold at auction can include:

Deceased estate

This scenario can involve a number of beneficiaries in the decision making. An auction facilitates a transparent negotiation with each buyer publicly bidding for the property. In this situation an agent may disclose that the property is a deceased estate and that they have been instructed not to consider offers prior to auction. In this instance there may be little the buyer can do but prepare for auction and bid on the day.

Mortgagee in possession

When a lender takes legal possession of a property, they may instruct the sales agent to sell the property at auction and decline any pre-auction offers. The mortgagee in possession does not want to face any criticism from the mortgagor that they may have sold the property below market value and therefore an open auction process is seen as the clearest way to determine fair market value.  Buyers in this scenario may have no choice but to prepare for auction. Buyers should ensure however, that they remain in contact with the sales agent in case the circumstances of the sale change.

The vendors’ or the sales agent’s preference

When there is little stock or the market is running hot, or the property will be popular, or the agent is eager to gain market exposure, sales agents tend to prefer to take properties to public auction. When it is obvious that demand is outstripping supply and there is a line-up of buyers ready to purchase, it may be in the vendor’s best interest to take the property to auction. This also avoids the agent fielding multiple offers and conducting lengthy negotiations with multiple buyers.

If there is an opportunity for a buyer to place an offer before the auction, the next step is to assess whether the best course of action is to proceed to auction or to submit a pre-auction offer. This decision will depend on a number of factors including:

The market conditions

Buyers should consider if they are trying to purchase in a competitive market with increasing property prices or if they are in the midst of a declining market with reduced buyer activity. If the market is hot and buyers can see there are significant numbers of interested parties asking for contracts, placing offers and bidding at auction, then the competition is likely to increase by proceeding to auction. If the market is running hot, placing a strategic pre-auction offer early on in the sales campaign could be your best chance of securing the property. At Buyer’s Domain we have a very strong track record of doing this.

How far along is the auction campaign?

The earlier a buyer sees the property the better. This gives the buyer more chance of convincing the owner and agent to sell before the competition heats up on the property. However, be mindful of inflating the owner’s expectations during the auction campaign. To avoid this, enquire with the agent as to the owner’s appetite to sell prior to auction. Buyers should try to find out as much information as possible to ensure if there is a high chance of the vendor’s acceptance of an early offer

The level of competition on the property

If there is strong competition on the property, the agent and vendor will be more inclined to run the property to auction. That is, unless someone offers a price above the general market feedback at the time. To understand if there is strong competition on a property, ask the agent how many contracts have been issued, how many contract changes have been made and if any pre-auction offers have been submitted. Keep in mind, buyers may feign interest or turn up last minute and decide to bid at auction so you may not know how much competition there truly is until the time of the auction.

There are many variables at play with an auction campaign and buyers may need to work with a moving target. It’s important to know the questions to ask and more importantly, what to do with the information you receive. This will determine if, when and how you submit a pre-auction offer with the best chance of success. Nothing is guaranteed until contracts are exchanged so buyers need to have a healthy dose of skepticism and do their independent research.

If weighing up all these factors sounds out of your depth or you just don’t have the time to keep on top of it all, we would be more than happy to help you. Contact Nick Viner on 0405 134 645.

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