AUCTION TRICKS OF THE TRADE??

I found this article on the net on propertyguide.com.au… Some may find it of some interest… [biggrin] Del…

PURCHASE BY AUCTION

There has been much hype surrounding auctions since several television programs popularised them as an exciting way of watching vendors hope for big profits and buyers pursue their dream homes. However there are many aspects of the auction sale that present financial risks to both vendors and bidders that are not so readily promoted. Fortunately, new laws in some states now require the vendor to provide inspection and building reports as part of the contract for sale (see our guide to the new real estate act if you are buying in the ACT) . This means that bidders will no longer have to pay out for these services and lose their money if they should be unsuccessful. Albeit, anyone intending to purchase a property by bidding at auction still needs to be well prepared and familiarised with the auction process in order to avoid the traps that can outsmart the unsuspecting bidder.

Preparing for the auction

Make your inspection of the property well in advance of the auction date. Compare the property with others you have seen and consider what you would be willing to pay for it. If you are in doubt of its worth, consider getting a valuation (see advice under buyer tactics and strategies below). Once you have set a maximum, determine not to exceed it or you may regret it later.
Obtain a copy of the contract (which will include reports relating to the condition of the property) and read it thoroughly, taking particular note of any conditional clauses. Arrange for your solicitor look through it as well so they can explain any expressions or conditions you may not be sure about.
Finalise mortgage arrangements with your chosen lender and ensure you have access to funds for a deposit as this must be paid on the day if you are the successful bidder.
Familiarise yourself with the auction process by attending several auctions and observing what happens. How many contracts are issued? Does this equate with the number of bidders participating? What methods does the auctioneer use try and encourage more bids? Does he try to create excitement and drama by changing the pace and intensity of the bidding or by appearing to complete the sale, i.e. ‘going once… going twice’ thereby extracting a higher offer from a perhaps inexperienced bidder? Do bidders go along with the given increments or do they call out their own amounts? Is the property sold or passed in and if so, does the underbidder (the person who made the highest bid) eventually negotiate the sale? If it helps, make notes of how the auction was run and why or why not it was successful.
If you are not sure you can handle the tension of an auction or cannot trust yourself to keep within your highest price, consider hiring a buyer’s agent to do the bidding for you.

The auction process
The auction will be held either on site of the property for sale or in a public gathering place such as a hotel seminar room (in-room auctions are more common to NSW). Wherever the auction is taking place, they will operate in a similar way. The auctioneer will begin by describing the property and give a brief explanation of the sale contract and conditions of the auction. If it is being held in an auction room, slides of the property will usually be shown. An opening bid is then requested from the present bidders. Once the first bid has been made, the auctioneer will call for higher bids, usually in large increments so as to try and reach the reserve set by the vendor. Bidders can also call out an amount they would like to bid. (Prior to new legislation in the ACT and some other states disallowing non-genuine bids, agents and vendors were able to place artificial bids until the reserve price was reached giving the false impression of fierce competition for the property, thus bumping up the bids.) If the auctioneer is close to reaching the reserve but no more bids can be sought, he may try to entice you to enter the bidding or raise your highest bid with the incentive of making the sale. The auctioneer’s job is to maintain interest and create an atmosphere of competition amongst bidders to encourage them to continue raising their bids. He may do this by attempting to intensify the pace of the bidding or by observing their character and playing to their humour and imagination in order to keep the bids coming.

When the reserve is not reached
When no further bids can be found by the auctioneer and the reserve price has not been reached, instructions will be sought from the vendor as to whether they will lower the reserve. If not, the property is ‘passed in’. It has become protocol for the ‘underbidder’ to have the first right to negotiate a purchase price with the vendor following the auction, however there is no rule disallowing any other bidders to make an offer – after all, the vendor wants the highest price they can get. If an agreement on price is reached within a certain time following the auction, the sale is still deemed to be by auction.

Going once, going twice, sold!
Once the reserve price has been reached, the auctioneer will declare the property ‘will be sold today’ or ‘is on the market’. This is when the serious bidding begins and anyone wishing to purchase the property will need to make a bid to be in the running. When no more bids are offered, the auctioneer, after trying to extract any last bids, will close the auction and declare the property sold to the highest bidder. The highest bidder is then required to sign the contract of sale as soon as practicable and pay a deposit (usually 10 percent of the purchase price) immediately. The conveyancing process will then begin and the balance of the purchase price should be paid upon settlement.

Auction rules & practices
New rules for the auctioning of properties in the ACT have changed the auction process significantly. Many of the rules protect bidders from being mislead by previously common practices such as dummy bidding. As of 1st July 2004:
Any person wishing to bid is now required to register their details prior to the start of the auction.
Anyone bidding on behalf of another person or party must themselves register and also provide the details of the person or party they will bid for to the agent.
Upon registration you will be given a bidder’s number which you must display (e.g. on a paddle) when you bid.
If you are the successful bidder you must sign the sale contract and pay the deposit (usually 10 percent) on the spot.
Auction conditions set down by the law will be on display for at least 30 minutes before the auction starts.
It is now illegal for any person including the seller, a bidder or an agent to make a dummy bid at auction.
The seller is entitled to have one seller bid made on their behalf by the auctioneer (where auction conditions specify this is allowed).
An auctioneer who accepts a bid from an unregistered bidder is liable to hefty fines, as is any person participating in dummy bidding.
If the last bid at auction before the property is passed in is a seller bid, the agent later advertising the property’s last bid must declare that the last bid was a seller bid. See our guide to the new real estate Act for a more comprehensive write up of all the details.

Buyer tactics & strategies
Obtaining a valuation: It can be difficult to gauge the value of a house being sold by auction. A price range is rarely advertised and agents are likely to emphasise the lower end of the range to any enquiries in the hope of attracting more bidders thinking there is a bargain to be had. One way around this is to obtain an independent valuation. In spite of the cost, if you are serious about the property this type of knowledge will give you confidence at auction and could save you from overbidding.

Show little interest: Agents are trained to read people and use their observations to entice or counteract any concerns of would-be buyers by talking up the features of the property. Therefore do not give away your interest in the property before the auction so that the vendor may be rethink and lower the reserve price.

Don’t bid before it’s on the market: Hold your bids until the reserve price has been reached. Unless auction conditions state that you must be the underbidder to enter post-auction negotiations, your lack of interest may subdue the competition and you will have more chance of getting a bargain if the property is passed in.

Consider bidding tactics: An early jump bid away from the regular increments of the auction can intimidate and confuse other bidders from coming back with a higher offer. This can be advantageous particularly if you are very confident of the house’s value. On the other hand, some bidders prefer to try and slow up the auction by offering bids of reduced increments (although an experienced auctioneer will rarely allow lower bids until later in the auction). As a general rule, bidding should be confident, unemotional and without hesitation as if adhering to a preplanned strategy.

Have a game plan: Run though all the possible scenarios you may face in the auction well in advance of the event and decide on your game plan, not forgetting to include a back-up strategy if you need to make an on the spot decision.

Making an offer: In a flat market where competition for the property is likely to be low, it may be advantageous to make an offer prior to auction in the hope that the vendor will accept in order not to risk an unsuccessful auction. This technique can backfire however, as the vendor may take your interest as reason to go ahead with the auction and use your offer to establish a reserve price, reasoning that you will at least pay that much. In this case, your interest could possibly force the price up, so keep any offers low. In a rising market, where buyers are numerous and properties limited, the vendor, aspiring to obtain a price above the market value through competition amongst bidders, is unlikely to consider any less than impressive offers.

Word of Advice: Getting carried away at auction can have disastrous consequences. Exceeding your financial limits could make your repayments unmanageable, or worse, if you are unable to come up with the money in the first place you could be liable to repay the vendor’s marketing, legal and conveyancing costs, plus any damages to market perception of the property resulting from the failed auction.