I noticed an interesting trend developing over the few months before the current Covid Cocoon locked down our property markets.
In those booming days, there were more buyers purchasing their property before auction than ever before.
Driven by FOMO (fear of missing out) and record-high property prices across the country, the number of pre-auction sales has surged over the past few years.
And it seemed like it was not only related to Covid-19 restrictions and lockdowns.
Sure, the economic situation we’re in has fast-tracked the trend, but what’s clear is that it is a trend that was already on the rise before the global pandemic hit.
A recent CoreLogic report shows that, for Sydney, the proportion of properties sold prior to auction increased from 23.1% over the past 5 years, to 28.0% during stage 2 restrictions, and 35.2% for the two weeks ending 4th of July.
Across Melbourne, the portion of properties sold prior to auction was also rising and then increased further with each lockdown.
“Agents may have adapted to getting deals done prior to planned auctions, which may have become easier as property market conditions began to recover from October 2020,” the report said.
More properties were also sold after the auction event during lockdown than the historic average, which again could be a function of the recovery in the market from October 2020, where auctions were more likely to eventually sell than pass in, Corelogic said.
The pandemic certainly skews the numbers.
All this was happening when clearance rates and property prices were at an all-time high.
Australia’s national median house price has climbed exceptionally close to the million-dollar mark at $955,927 – which is a huge 18.8% increase over the year, or 5.8% over the June quarter, according to Domain’s latest quarterly House Price Report.
And clearance rates in July were as high as 86.8% in Canberra, 72.6% in Adelaide, 70.5% in Sydney, and 69.3% and 61.8% in Melbourne and Brisbane respectively.
So this begs the question - is it really better to buy before the auction?
Let’s look at the pros and cons.
The PROS of a pre-auction sale
There are a number of reasons why buying before the auction date ticks around might be beneficial for both the buyer and seller.
Here are the main ones:
If you’re a buyer:
- It helps you stick to a budget: When you’re buying at an auction it's easier for buyers to get swept away with the process and let FOMO rear its ugly head and suddenly you’re paying more than you’d planned.
Making a pre-auction offer takes away that stress and lets you put in an offer that is ruled by your head, not your heart.
- You can prepare: Buying before auction gives buyers more time to prepare the documentation side of things, such as a pre-approval and property valuation which might not be done in the lead up to an auction.
- You can get into the property sooner: This is a huge bonus if you’re in a rush.
You can bring forward a settlement date if time isn’t on your side by writing it into your pre-auction offer.
- You might pay less: In the first 6 months of 2021, sellers who wait until auction managed to get up to 14% more for their property in some major cities.
So for a buyer the data implies buying pre-auction might open up opportunities for a better deal.
If you’re a seller:
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- It avoids the risk of the property being passed in: Sometimes properties are passed in on auction day which could be a setback to any seller's plans.
It also risks putting potential serious buyers off if you still want to sell.
- Saving on cost: Marketing and advertising costs for an auction can be costly.
By selling before the auction a seller can avoid these unexpected fees.
- Speed: Divorced? Separated? Want to offload an investment property off quickly before prices drop?
Want to sell up and move to the dream home you’ve already found.
Whatever the reason, if you’re looking to sell quickly, selling prior to auction can speed up the process.
- Avoiding Auctions: There’s no denying auctions are enormously stressful, and many vendors will accept pre-auction offers simply to avoid this.
The CONS of a pre-auction sale
While buying before the auction is becoming increasingly popular, there are still a number of pros and cons driving auctions and clearance rates across each capital city.
If you’re a buyer:
- You might pay more: It is possible to lose out when buying prior to the auction.
You usually have to pay a premium price to snare the property before auction day.
And if the property is passed in at auction, you could find yourself in an excellent position to negotiate a discounted sales price with the seller and might score the property for thousands less than you had been prepared to offer pre-auction.
- It could make auction harder: The seller knows how much you’re prepared to pay and may use your offer as the new reserve price on auction day.
This can make the bidding war harder for you.
- No cooling-off period: There won’t be any cooling-off period if you made your successful pre-auction offer within three days of the auction, and you can’t change nor withdraw your offer.
If you’re a seller:
- You could get less money: Recent data by Ray White Victoria shows that vendors can make a significant premium if they can hold out for auction day.
In the first 6 months of 2021, those who sold their property under the hammer fetched 12-14% more than their best pre-auction offer in the Melbourne market alone.
5 top tips for negotiating your way into a pre-auction purchase
1. Do your homework
It might be considered “flying blind” to make a competitive offer when trying to secure a property prior to the auction, but that shouldn’t mean you have no idea about the price you’re prepared to pay.
The best weapon when it comes to negotiation in real estate is knowledge.
Know the market and know the value of the property in question.
Armed with that power, if it’s the right property – and especially if you’re looking at buying your home – don’t be scared to put your best offer first and walk away if the price is too high.
2. Be prepared to lose
While no one likes to consider themselves the “loser” in any sort of negotiation, it’s far better to walk away and live to fight another day than over-commit to a property you’ve become emotionally blinded by.
3. Don’t be forced into a “Dutch Auction”
A “Dutch Auction” is essentially where two or more potential purchasers end up making “blind bids” prior to the property going to auction.
Having no idea how much the other party is offering, the selling agent may tell you that they’ve put in a higher amount and ask if you’re prepared to increase your offer and this ultimately pushes the price for the property higher and higher.
Again, the key is to walk away when you reach the limit you’ve set yourself.
4. Time is your greatest weapon
Use the time to your advantage by making your offer at the last possible minute.
Never be too hasty or impatient as this will work against you and could be the reason you lose out to another purchaser.
5. Play your cards close to your chest
Real estate agents are very skilled at prying information out of potential buyers, including the price they’re prepared to pay for a property.
Sometimes you can end up revealing things to them that you never intended to and that might be detrimental to your negotiating power - so keep your cards close to your chest.
A number of mini auctions are creating runaway prices as FOMO drives desperate buyers to bid well above their intended limits.
It’s no wonder then that the trend for pre-auction sales is rapidly increasing.
If you’re a buyer it would make sense to snag a property before the auction if you can… but don’t expect to find a bargain.