Should you make an offer before the auction?
15 Nov 2016
Listing volumes have been remarkably shallow this spring; we’re at levels one might expect in a depressed market in which little is selling, so everyone is sitting on the sidelines. But the circumstances are at the other end of the scale in Sydney and Melbourne: auction clearance rates are regularly posting over 80 per cent, sometimes half-a-dozen bidders are fighting hard for a modest single-fronted cottage in a less fashionable suburb and the winner is paying $100,000 more than the recorded price of comparable properties sold just 12 months before.
I’m not sure conditions could be better for a prospective vendor. Nevertheless, it seems four years of a rising market have exhausted the pool, and we may have to wait until autumn 2017 before numbers are replenished.
On the flip side, buyers in these markets are having a tough time. It’s bad enough that they have to pay more to secure an asset, but it is perhaps even more dispiriting – and concerning – to have so little choice in the first instance. I say “concerning” because it increases the risk of buyers acquiring unsuitable properties and then suffering buyer’s remorse.
Understandably, buyers are exploring creative ways to improve their odds of success. Anecdotally, there has been a noticeable increase in property selling before auction or estate agents receiving unsolicited pre-auction offers.
In these cases, the buyer’s rationale is that an offer early in the campaign might tempt vendors to sell at a reasonable price (or even for a bargain) before enough competition has built to reveal where value lies. This has been known to succeed, but the confluence of the right circumstances is rare.
The ploy may work if the estate agent is inexperienced, selling out of their region or downright incompetent. But in a vibrant market, practised, local estate agents have the knowledge, wit and professionalism to knock back early offers in a campaign and to then work hard at rustling up other parties from their database of buyers to build competitive tension.
The auction either takes place as usual or matters are quickly brought to a head with a boardroom auction or a request for best and highest offers. It’s rare to see the prospective buyer who initiates this come out on top.
On the odd occasion when a vendor accepts an early offer, it is usually because it is way above the vendor’s (and the agent’s) expectation. Agents accept offers late in the campaign because there are no other likely bidders on auction day. Either way, the buyer has probably paid too much and the “early bird” strategy has failed.
Setting a sales price in this manner may cause another problem – don’t be surprised if, when seeking a loan to help finance the purchase, the bank questions the valuation when there is no tangible evidence of other buyers willing to spend a similar amount purchasing the property.
But don’t think a pre-emptive offer is risk-free if you’re one of the 90 per cent of buyers who are knocked back by agents. Most importantly, by the early showing of your hand, you’ve lost any control you had in the negotiation process, and handed it to the estate agent.
You’ve also made the agent’s next call to the vendor a pleasant one, providing them with a fabulous selling tool. An estate agent who garners the confidence of their client early in the sales campaign through demonstrable progress is well-placed in terms of having their advice followed at the pointy end of matters. And being able to tell other inquirers that an offer has already been knocked back, marks this property as a serious proposition.
So buyers should resist making pre-auction offers. It’s far better to indicate to an agent that you have some interest in a property and that they keep you informed of any developments, such as offers from other parties. Stay in touch, be ready to respond if necessary to other offers, but don’t initiate a pre-auction negotiation.