To Auction or Pre-auction? That is the Question.
But first, you might have another one. What actually is a pre-auction?
Quite simply, it is what it sounds like, you make an offer before the day of the auction. You put in writing what you are prepared to pay for the property, then submit the offer a week or two before the auction day.
You need to make it appealing to the vendor, so they may reconsider holding the auction altogether.
There are a few key advantages to a pre-auction offer.
Firstly, you could assertively knock out your competition. Auctions can often raise emotions and you could very well get stuck in a heated bid-off and end up paying an inflated price. Sometimes up to 20% more than the property value.
By avoiding a public auction, you know exactly what price you are truly willing to pay for the property. Sticking to your budget is important to avoid pain and baked beans on toast down the track.
If a vendor is willing to take a pre-auction offer, it could be a sign that the auction hasn’t attracted as much interest as hoped. The market could be saturated with properties and have minimal buyers. You can use this to your advantage.
It also means you can buy without further waiting. Once we’ve found our dream home, we just want to get into it right? Now, what colour should we paint that wall?
Of course, there are some disadvantages.
If your price is too high and the vendor is determined to go to auction it could push the reserve price up as the vendor has already received an offer.
On the flip side, if a vendor is willing to take a pre-auction offer, it may be a sign the market is red-hot competitive (more buyer demand than supply) and you may end up paying a premium price for your purchase.
Another disadvantage of placing a pre-auction offer is that you usually only have one shot, one opportunity, something about Mom’s spaghetti, to make an offer. At an auction, you can bid back and forth until you win or get outbid.
The important thing with a pre-auction offer is to know your stuff. Make sure you put in a competitive offer after you’ve done your research – use real estate websites to see the sale price of nearby auctioned properties and quiz the agent on why the property is being sold. And as always, be prepared to walk away if they aren’t happy with your offer – there’ll be other homes.
Auctions on the other hand are a little different.
You could be a glass case of emotions and bid far too high or you may just be cool as a cucumber and nab the bargain of a lifetime. It’s like anything in life really, make sure you know your limits. Write you max price on your hand if necessary.
There are a few key advantages to buying at an auction, generally speaking. First of all, there’s less ambiguity. On auction day, all your competition will be there, they’ll all be given a fair opportunity to buy and negotiations are out in the open.
You also know that you could walk away with a new home! If you’ve reached the reserve price, when that hammer falls, the decision is final – your bid will be successful and there will be no further negotiations. There’s also a flip side to this, as you’ll read below.
So, what about the watch-outs?
The auction day will be your last opportunity to ask any questions before bidding starts. Make sure you give the home one final inspection too.
The majority of auctions have a set reserve price (the lowest price the vendor is willing to sell at). Once this is reached, the auctioneer will announce that the property is officially ‘on the market’, so be aware if you bid after this, the property could be yours. If you are successful, you will need to pay a deposit – generally 10%.
You should also be aware there is no cooling off period for an auction – you’re all in! So, don’t bid unless you are absolutely sure you want to call this property home. If you’re the winning bidder you are legally bound to proceed with the purchase.
For every bargain story, there’s a horror story and everything in between. If you’re ready to take on an auction, know your stuff, your limits and importantly, when to keep your bidding paddle down.
So, what’s a guy or gal to do? More and more homes are being sold at pre-auction. Around 28% of Sydney sellers and 14.5% Melbourne sellers sold their home before auction in August 2019. Is this a case of home buying FOMO? Or are people concerned they might lose their cool on the day? There’s no straight answer for it really. People are still going to auction though with success. Of course, that success around the country is ever changing. You can stay up to date with the latest stats here https://www.realestate.com.au/auction-results/.