Six tips for making a pre-auction offer

In Sydney around 30% of advertised auctions were sold before the auctioneer did any work. In a strong market many buyers fear the auction process because competition drives prices out of their reach. Auction clearance rates are high so there is no doubt we will continue to see a large number of buyers try and avoid the auction.

So what happens when you’ve been through a property a few times and you love it? You’re partway through arranging finance, and you’re getting psyched up to bid at the auction in a week or so. Then the agent calls. “The vendor has received an acceptable offer. The property will be sold unless we receive a higher offer by five o’clock tomorrow.”

Your heart sinks. The buyer has probably put in the offer because they don’t want the stress of competing at an auction and they’re worried about being bid out of contention. But if the property doesn’t go to auction, how are you supposed to know who you’re bidding against, and how much they’re prepared to pay?

When you’re competing with another buyer in this way, you’re forced to make an offer that reflects your spending limit, without the opportunity of testing the market and perhaps buying the property for less.

It may be frustrating, but inviting buyers to exceed a pre-auction offer is perfectly legitimate. Pre-auction offers are unconditional, so it’s important to approach the situation from a position of strength. If you get the dreaded phone call, here’s how to play your cards:

  1. Fast track your preparation. Tell your lender about the situation and see if they can rush your pre-approval. Organise the building inspection if relevant, and ask a solicitor or conveyancer to inspect the contract and vendor statement. Many purchasers neglect these steps, only to find after they purchase that the property is structurally unsound, the body corporate has struck a levy for major repair works they didn’t know about — or worse still, that they couldn’t afford to buy the property in the first place.
  1. Determine your spending limit, based on your pre-approved amount. Bear in mind that your spending limit may be different from the property’s market value, which is determined by the level of demand relative to supply. If the market value is more than you can afford, and you can’t find an additional source of finance, you may have to bow out.
  1. Call the agent. Ask for an indication of the other buyer’s offer. The agent can’t disclose the exact amount but may be able to give an idea of the bar you have to clear, e.g. “more      than $350,000”. Ask the agent how many other offers are coming in, so you know how much competition there is. The more competition, the higher the likely selling price.
  1. Price isn’t everything. Ask the agent what settlement terms the vendor wants. If they’ve already purchased another property, they may want a quicker settlement than the standard number of days. If you can meet their preferred settlement terms, and your offer is close or identical to the highest offer, the vendor may accept yours instead.
  1. Submit your offer to the agent. Do this in writing by the required deadline; preferably earlier. Don’t try to be clever by submitting a bid lower than you know the vendor will accept. At this stage in the game, you’re not negotiating with the vendor; you’re simply competing with other purchasers, so you won’t get another chance. Make an offer that you believe is genuinely competitive.
  1. Sit back, bite your nails and wait! It may be nerve wracking, but once the deadline has passed, it won’t be long until you have your answer. If you miss out, at least you’ll know the property’s market value. The more knowledge you have, the stronger your position next time around.

Source: Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.

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