There are strategies you can adopt to mitigate risks when bidding at auction. Depending on the quality of information you are able to obtain, it is possible that an auction can work in your favour. Most of the time, however, you are in a weak position to purchase a property at an auction. Let’s consider some things to keep in mind when planning to attend an auction.
The three types of auctions
In-room auction – An in-room auction is usually held at an auction house. There can be multiple auctions back-to-back in one evening. If the auction you are interested in is first on the ‘order of sale’, the room will be far busier than if you are interested in the last auction of the night. Everyone who registers for an auction on the evening will be given a bidder’s number – a card with a number on it that is raised to make bids. Agents like in-room auctions because there may be many people with bidders’ cards, but you will have no idea if they intend to bid for the property you are interested in. The number of people in the room can give the illusion of stronger competition than the actual competition. It is often useful to casually mingle around the area where people are registering to bid and listen to conversation to ascertain the level of interest in the property for which you intend to bid.
On-site auction – It is much easier to determine the level of competition at an on-site auction. Anyone holding a bidder’s card will be bidding on the property. These auctions can be busy, but most people there are likely to be neighbours and agents keeping track of the market.
Online Auctions – It is impossible to tell how many bidders are at an online auction until it starts. When people place their bids online, you will see them as a number and be able to determine how many people are bidding on the property. An in-room auction can also have a hybrid of people sitting in the room as well as bidding online.
Set a firm budget
Bidding at auction is playing right into the hands of the seller. It is the peak of a high-pressure situation where everything is specifically engineered to put the bidders under as much stress and emotional pressure as possible. Setting a firm budget can help prevent you from making irrational decisions in the heat of the moment. If you are on the auction floor, a good sales agent will approach you and pressure you to make a bid. For this reason, when bidding on behalf of clients, I will suggest that they not be in the room or at the action. If my client is on the phone, I can act as a buffer and talk logically to them by reminding them of our ‘pre auction plan’ and reduce the risk of them being carried away with the emotion of the moment.
Gather information
Sometimes it is difficult to know if information is factual or whether it has been tweaked to attract you to the auction. It is easier for a buyer’s agent to gather good quality information because of their long-standing relationships with other agents and even the auctioneers. Some good questions to ask in advance of an auction are: How many contracts have you issued? How many people have completed a building and pest inspection and/or a Strata report? How many bidders will be registered? What is the reserve price? It is good to ask these types of questions from a place of “can you help me; I am new to this”. An agent will most likely not tell you the reserve price or how many people are registered for the auction, but if you appear to be inexperienced and in need of help, you might be able to extract more information than if you appear to be a hardnosed ‘know-it-all’. Vulnerability is a powerful tool.
What to take with you
When bidding at Auction you will need to take to the auction your I.D. and a cheque book, or the capacity to make a bank deposit. Prior to the auction, you will need to make sure that any requests for changes to the contract have been agreed and it is wise to take a printed copy of related email correspondence between the solicitors. You will need to cross-reference the contract of sale before signing it, to make sure any agreed changes have been incorporated. Remember, there is no cooling-off period when purchasing under auction conditions.
Bidding strategy
You may hear about many different strategies for bidding at auction, but the truth is that once you hit the floor, whoever has the most money and wants the property the most will buy it. When opening bids are sought, it can take quite some time for people to make a first bid. So, I like to open the bidding low and just sit back and see what competition arises. Once the initial back and forth of bids begins to slow down, you should have a general idea of who is actually interested in the property. You can then decide whether or not you wish to be a serious contender or if the price is beyond your limits. It is good to choose a consistent amount to raise each successive bid. For example, you might choose to go up in bids of $5k. If you decide on this number, stay consistent. The moment you place a bid lower than the $5k, it is a sign that your financial reserves are getting low. You can also watch for this sign amongst other bidders.
When is it good to go to auction?
‘Auction’ is a word that strikes fear into the heart of many buyers. However, the auction experience can be just as daunting for the seller. If you are confident that you can obtain good quality information from the agent selling the property and know that there is little interest in the property’s auction, you are in an extremely strong position to push for the auction to proceed rather than place a prior offer. If a seller sees their property go to auction and all they get in return are crickets on the auction floor or your one low bid, their auction fails and you have taken away all of their power. You have taken away their deadline, their leverage and you are in a very strong position to negotiate. But be warned: if you are given poor information – the type of information to simply attract you to the auction because the agent knows it will be a good auction – you will be ambushed. You must be confident that you have sound information.
Do not be frightened to walk away
If the auction goes crazy and bids become excessive, walk away. There are plenty more fish in the sea.