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What happens when a property passes in at auction? - featured image
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What happens when a property passes in at auction?

As Australia’s property market continues to cool across the nation, more and more properties are not meeting the vendor’s reserve price, so the property is then “passed in.”

Auction clearance rates have fallen from the 80% range achieved during last year’s boom to hover closer to 50% or even lower, leaving some homes taking longer to find a buyer.

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Why is this happening?

As property prices fall, some buyers hesitate to bid at an auction in the hope of picking up a bargain later, but this tactic doesn’t always work as they risk being outbid afterwards by an unexpected rival.

Another reason for properties passing in can be mismatched price expectations – at the moment buyers are cautious, while many vendors are unrealistic about the price expectation hoping to achieve the sky-high prices fetched at auctions over the past two years.

The property has passed in — what happens now?

When a property passes in, the highest bidder is generally given the first right to negotiate with the vendor’s agent.

This is why it's always worth bidding at auction because when property passes the highest bidder is in the best position to negotiate the purchase.

So the first thing to do is to put yourself in the position of being able to negotiate with the vendor and this means you should be the highest bidder.

It’s not always easy to manipulate the order of the bidding, but it’s important to put yourself in that position.

What happens next is the selling agent or auctioneer usually invites you to step inside the property and commence negotiations, while other agents approach the under-bidders to explore their level of interest and keep them “hot” in case the negotiations with you fall through.

When the parties go inside and negotiate, the process often occurs quickly as both the agent and the vendor hope for a sale on the day.

And that’s what we are currently seeing happening in today’s market – more properties being passed in at negotiated quickly after the auction.

Of course, if you're not an experienced negotiator, this is when you really need a buyer's agent on your side to level the playing field.

Here’s what I do as a professional auction bidder

Unless it is pouring rain, I don’t follow the agent inside.

Why?

Because this puts you on their turf and isolates you from what's going on outside and agents will use the perceived pressure of having competition outside as a powerful negotiation tool.

Instead, I prefer to stand outside where I can assess whether there is any real competition or just friends who are pretending to be buyers hanging around.

I've found the tactic of displaying strong body language, and standing on my own turf (even though I still might have butterflies in my stomach) surprises the agents and returns the negotiating power to me.

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Remember, the agent isn’t on your side

Remember, the agent is acting on behalf of the vendor and it’s their job to get the best price for them and many of them do it very, very well.

You can bet your deposit they are highly skilled at emotion-based selling and will employ tactics to make you believe they are going to help you.

But, however convincing they appear, it's important to remember that the agent appears they're not on your side.

Find out the lowest price

When a property has passed in at auction and you’re invited to negotiate, the first thing you need to do is determine the vendor's lowest price.

Remember... the reserve price and the lowest price the vendor would accept are not the same.

So ask the agent for the reserve price then balk at their response, seem surprised at how high it is, and ask:

"I understand that's the price the vendor was hoping for before the auction, but NOW what is the lowest price they will sell for?”

Your next steps will depend on what the vendor wants and what you believe the property is worth based on your pre-auction research.

If you're like me, you'll have an estimate of what the property is worth under low competition (what you'd really like to buy it for) and then the maximum you would be prepared to pay under intense competition (such as if the auction had continued on).

Of course, just because the property has been passed in doesn't mean that this is the market price, it is simply a starting point for further negotiation.

The real market value is what you, and hopefully the vendor, have assessed it to be based on comparable sales evidence.

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Negotiate

What happens next depends at which end of your price range the property is passed in for.

If it is at the lower end you have more flexibility and obviously, if there are no other buyers waiting in the wings you can minimise the amount you’re willing to counter-offer.

But I would start with this: “I've already offered you the upper end of what I think the property is worth” even if it's not the case.

When it comes to negotiating a price, don’t fall into the trap of making the same counter increments as the vendor.

Often the agent will say something like “would you meet the vendor halfway” - but obviously you're not obliged to do so.

A final word

When it comes to bidding on a property at auction, it’s vital that you do your homework to determine what the property is worth in the current market.

Armed with this information, if a property you’re bidding on doesn’t meet reserve and passes in, you’re in a great position to negotiate a sale price.

Also, why not level the playing field and have a professional buyers agent at your side representing you who can help you get the best price possible.

About Bryce is a property development specialist, having successfully sourced, project managed and completed hundreds of development projects for Metropole’s clients, helping them create substantial wealth.
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