Disclaimer – this article is for educational and entertainment purposes only. Please don’t take it as personal advice. I help buyers, but I work for my vendors.
You’ve inspected 14 houses over the last four months and you couldn’t see yourself living in any of them. Too small. Too dark. Too expensive. Wrong location. Flats overlooking. No parking.
You’re getting over the search already.
Then you find the one. You’ve always liked this street. The floor plan suits your family to a tee. It doesn’t have a garage, but it has a carport. And it even has hydronic heating!
This is it. This is your next home… Now what?
You attended the first and second open inspections and spotted that annoying downsizer couple in matching puffer vests who seem keen and probably have a bigger budget than you. Dammit.
Do you make an offer now and try to quash some of the competition, or wait for the auction?
The psychology of buying a house is intriguing.
Some buyers fear missing out more than overpaying. Others fear overpaying more than missing out.
So let’s break it down.
This is all about risk management. Overpaying versus missing out. Opportunity cost and time.
If you’re going to miss out, why not just find out as soon as possible rather than agonising for another two and a half weeks until the auction?
Unfortunately, many of the factors that will determine whether you’re successful in a pre-auction offer are outside of your control:
– How motivated the vendors are and their price expectations (which don’t always align with the estimated selling range)
– How much interest there has been in the property
– How motivated the other buyers are and how their budget for this home compares to yours
– How the agent will handle the process
So here are the things to consider – which are in your control:
1. Are you ready?
Have you inspected twice, had the contract reviewed by a conveyancer, and had a building inspection done if that’s important to you?
Can you make an unconditional offer (not subject to finance, a building inspection, or any other condition that may prevent the vendor from accepting your offer)?
2. Is the vendor going to be receptive to a pre-auction offer?
This is where you need a little trust in the selling agent. Eek.
No matter what the agent says, pretty much all properties can be bought before auction if the vendors agree.
There are some very rare cases – like a mortgagee in possession, a court-ordered sale, or a deceased estate with multiple beneficiaries who don’t talk to each other or can’t agree on a price – where the property genuinely needs to go to auction.
Mostly though, if an agent says the vendors want to go to auction, it’s either because:
– There’s a lot of interest and they feel a competitive auction is the best way to maximise price, or
– The vendors “need to have their day in the sun”
Translation: the vendors are stubborn, have unrealistic expectations, or otherwise need to run the process through to auction to feel like they got the best possible outcome – and not lie awake at night wondering if they could have got more.
In both instances, the vendors will still happily sell before auction if the offer is good enough.
No vendor is going to reject $3 million on a $1 million home – to take an extreme example.
You might not be aware of this, but it generally takes far more effort, time, and skill for an agent to sell a property before auction (via private negotiation) than at auction – particularly if there are multiple interested parties or “challengers”.
When there’s a lack of transparency and multiple interested parties, it’s nearly impossible not to upset the buyers who miss out – or not to have the successful buyer feel like they overpaid.
This is why at Jellis Craig our best practice is to hold a boardroom or Zoom auction when we’re selling before auction with competition.
Okay. So the agent says the vendor is open to pre-auction offers. Your first thought should be: why?
Is it because the vendors are reasonable, risk-averse, or just really dread the auction process and prefer the ‘bird in the hand’?
Or… do they have limited interest and think they can get a better price by treating with you in isolation before auction – rather than you turning up on the day to find three neighbours and three agents and you’re clearly the only buyer?
Then you have all the bargaining chips.
Unfortunately, there’s no real way of knowing – unless you’ve got a DeLorean handy, complete with 1.21 gigawatts and a flux capacitor.
If the quoted range seems too good to be true, the opens have been busier than airport security on Boxing Day, and the agent is reluctant to get an offer from you, you’re probably going to have some competition.
Either way, these two things are always true:
1. If you’re ready to make a (good, clean) offer and the vendors are open to it, your offer has to be compelling enough for them to accept it and not proceed to auction, and
2. Ideally, it’s also compelling enough to deter other buyers from challenging.
I do believe there can be a first-mover advantage to offering early – and it’s more powerful the sooner you can act.
If you offer before the first open, you’ve probably cut out 90% of the competition.
If you offer the day before the auction, 90% of the competition has probably already inspected and done their due diligence.
To further complicate things, vendors and agents will generally want to see at least two weekends on the market to gauge interest before considering offers – so the earlier the offer comes in, the more compelling it may need to be.
And the later the offer comes in, the more likely they are to just proceed to auction because it’s easier. (Unless you’re their only buyer.)
So you need to pick the sweet spot: enough time for the vendors to be in the headspace to accept, but still early enough to cut out some of the competition.
We see it all the time – an acceptable offer comes in mid-campaign and there are other interested buyers at the “trigger offer”, but when push comes to shove, they don’t compete because they:
– Feel rushed
– Haven’t had time to get their mum, dad, or trusted advisor through
– Haven’t reviewed the contract
– Haven’t done a building inspection
Even if they are ready to offer, they sometimes don’t challenge because they assume that if they do, the original buyer (and possibly others) will come back with higher offers and drive up the price.
So… they don’t.
That’s the first-mover advantage.
Final (not) advice…
If you’re going to make an offer, make sure the agent clearly explains the process.
Ask:
– Will they disclose your offer to other buyers?
– How long will it take for the vendor to accept, reject, or counter your offer?
– How long will other buyers have to challenge?
– If others do challenge, what’s the process?
– Is it best and final offers? (Not good – they lack transparency and create confusion.)
– Do you get the last right of refusal? (Potentially good for you if the agent is being transparent – but not great for the other buyers, or even the vendor.)
– Will they do a boardroom / Zoom auction? (Daunting for you, but the only way to have full transparency.)
If this is all a bit much, maybe just wait for the auction.
There’s always an element of luck involved – whether you’re buying before, at, or after auction.
Unfortunately, there are plenty of agents who, through incompetence or deception, mishandle a pre-auction offers process – burning buyers or leaving money on the table for their vendors.
Hopefully, you never have to deal with that – and if the process is run well, buying before auction can be a great outcome for everyone involved.
David Sciola 