Ep 46. Making an Offer Prior to Auction
In this episode, Michelle explores making an offer prior to auction and ensuring it is the right choice for you.
Here’s what you’ll learn from today’s episode:
Michelle explores the reasons why buyers may want to buy prior to auction.
Why being scared of going to an auction isn’t a reason to want to make an offer prior to auction.
Understanding when it’s not a good idea to make an offer prior to auction.
The importance of being confident in your offer when making an offer prior to auction.
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Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
Transcript
Michelle
Hello and welcome to another episode of the Buy Your Side Podcast, the property podcast, to help you make smarter profit buying decisions. My name is Michelle May, and I am the principal of Michelle May Buyers Agents. Thank you for joining me today. I want to talk to you about making an offer prior to the auction.
A lot of properties here around Sydney, the vast majority of time get sold through the auction process and quite a few people have contacted me over the past number of years and then also more recently about wanting to make an offer prior and if I could help them with that. So I think it's really important to not go in this with feet-first.
I want to talk you through the best way forward with making an offer prior to auction and the things you need to consider before making the decision to do so. I think the first thing that people really don't think about enough is actually why do you think you want to make an offer prior to auction. And when I ask that question, people are mostly surprised because they haven't really thought about it that much. They just know that they want to but haven't really considered the reasons why and I think that is very important to start first and foremost with what is your motivation? What are you trying to get out of it other than obviously securing the property? Quite often I get the answer that they're scared to go to auction, and that's quite understandable because you know auctions are intimidating situations to be in.
Even though I am going to auction as a professional, my heart rate still goes up. You know there's a lot of pressure on me to obviously secure the property for people but I can feel the tension in the air, and it's not unusual in a hot market for there to be a throng of people. Having 10 or more registered bids at an auction is not an uncommon occurrence in a hot market, and when a property is very popular, add to that potentially having your friends or your family, your mum and dad there.
Tensions are rising creating nervous energy. Having neighbours come and have a look, so usually there's a crowd of people that gets done in a public place. So I understand the sweaty palms a hundred percent, but is that the right reason to make an offer prior to auction just to avoid that situation? Because what you need to consider is that sure it's a nerve-wracking situation, but if it's the best way to get the result that you want ie to buy the property then it may be the situation that you need to be in. So if it is just the situation of I don't want to be at auction, I've never done it, I don't want to be pushed around by the agents, coming around to me saying hey how about a little bit more a little bit more then consider farming out the actual bidding to auction to someone like myself. Make sure that you have a real strategy in place and understand your limit. Do not sway from your limit! All those things that I've talked about before.
Another reason why people want to avoid auctions is to avoid that competition and somehow get a better deal. In theory that could be possible because a lot of people when it's an auction campaign will wait until the last two weeks or even the week prior to the auction date to get their affairs in order. Maybe they haven't even got pre approval yet, so it'll take until the very last minute to get that in place. So yes, by making an offer prior you could potentially cut out a portion of the competition and that may result in a better price, but it's not necessarily the case because of the way that offers are dealt with prior to auction with the agents, and I'll go through that in just a second so you understand. Your motivation for me is a very important part of why it is or is not a good idea to make an offer prior to auction.
Stage 2 is I really think it's important to understand that in real estate it comes down to a lot of its strategy and playing chess with the people involved, the different parties involved, understanding who is involved, and so really considering all the options, all the way forwards and the possible outcomes, is the best way to get a positive result or the best possible outcome. Sometimes even though we play the game to the best of our abilities and having considered all the different outcomes, we still sometimes don't have a successful outcome for our clients. But at least we've looked at all the options and gone ok, this is the way to go forward.
If someone ends up paying more then so be it, but at least you've considered it by going in. Not walking in blind effectively. Your chances of success are much smaller so going to stage 2 this is where you understand everyone else involved in the process. Understanding the vendor situation and their motivations is crucial in understanding and let me put it out there that unless I have an 80% or more conviction that I will get the deal across the line for my clients by making an offer prior to auction instead of going to auction I do not make an offer.
Ok, so you've got to be really confident in your position before you make the offer so going back understanding the vendor situation and motivation is incredibly important because ultimately yes they have the property for sale. We're assuming that they want to sell it, but that's not always the case. Sometimes it's people who are targets and they don't sell unless they get their dream price which in some markets works.
Here is an example that was a problem In 2021. Prices were going up and up and everything was selling for crazy amounts and there were a lot of people there that were taking a chance. They'll go, I'll put it on the market and if I get 2 point 3 for a house that was worth no more than two point one for example, to see how motivated the vendors are.
How many vendors are there actually? Is it a couple and why are they moving? Why are they selling it? because they've outgrown their current house or their current apartment and they're trying to buy a house because they've got children? Are they moving to a different state? Different job? have they already bought elsewhere? if people have already bought then they're going to be highly motivated to sell and potentially more motivated to sell it prior to auction to lock it in. But if it's a couple and they're about to get divorced, I can tell you there is a much more likely chance of them accepting an offer prior because people get divorced for a reason and they're not always amicable. Therefore there may be disagreement in accepting an offer and also the agent has to deal with people not potentially being on the same page, at the same table even. I've had incidents where the agent had the man, the husband and wife, they wouldn't even be in the room together so he was like the mediator in the whole process. It was like well this is such a bad relationship. This is, clearly the best thing for them is to sell the house but also clearly the best thing for you as a buyer, is to wait for auction day because when the Hammer falls, they have to sell because they want to get on with their lives.
Whatever stands on the day is the result that they will accept most likely there's always variations to the rule but by and large that is what I would recommend if they're divorcing, probably best waiting until auction.
Another example, is a situation when it's a deceased state so mum or dad or both passed away or they move into a retirement village and there are family members involved. So the person may still be alive. Whatever the case maybe, they may not be the only primary decision maker, now in my experience when it comes to deceased states or when the family member is about to go into a retirement village, they need funds for that, but also when it's more than 1 sibling or cousin or Auntie or whoever the family member maybe or executor of the estate with people who they're responsible to, it is very highly likely that the property has to go to auction because it is incredibly difficult to get siblings on one page. In particular when there's quite possibly a fair bit of money involved. You know?
Money can do strange things to people. Even if it's just 2 beneficiaries. There's a 50% chance that one will agree and the other one won't which leaves you with an offer not being accepted and I'll talk about what the consequences of that will be, so understand very clearly from the agent who are your vendors, who are you dealing with and what is their motivation to actually get a deal across the line. Ok, then you're dealing with the agent him or herself, how on board are they with you making an offer prior and why are they or why are they not and it is a fact that some agents have actually the vast majority of agents have a repetitive way of doing business. I deal with hundreds of different agents in the areas that I work in the Inner West and Eastern Suburbs and Bayside of Sydney. I know that some agents literally can't do a deal to save themselves, they're like ‘Michelle no no no I'm not accepting any offers, I just don't want the hassle, I don't want anybody to be mad at me’. Which are variably depending on how they handle over priced which I'll talk about in a second may well be the case.
Traditionally real estate agents, did you know, they are not as much of a trusted profession so that there's a lot of distrust with agents and there's a reason why you should go in with a healthy dose of cynicism. However agents are by and large just trying to do their job as well. Some agents just choose never to if they've got an auction campaign. That's what they're doing come hell or high water. No matter what the situation is, they're selling it on auction day and that's it.
Other agents love doing deals like their volume agents. They love to just go go go. They're not really searching for that top ten percent to get the best outcome possible deal for their vendors because in real terms, it's not going to make much difference to their commission so they don't really fight for it. So it’s a no brainer if it comes nicely packaged like we like to do as buyers agents. We make it as easy as possible for the agent to accept it and therefore almost or want to say convince the vendor to accept it then that's great for us, but it's really for you as a buyer. It's really important to understand that if an agent is telling you it's a deceased estate. It's got to go to auction, listen to them. You know? because they're just trying to guide you, because if you do make an offer then that's actually going to be a huge disadvantage for you.
It's then really important to also understand the quality of the property. The quality of the property goes kind of hand-to-hand with the other buyer interest and in the market. So these are sort of, intrinsically linked together, because what you've got to do is just take a step back. Take a step back from your brief and how well this property matches your needs, like how much do you really want it? Take a step back and actually look at how good this property is in the cold light a day like is it? Or do you just love it because it's the only thing you can afford or you've been looking for six or twelve months and you're just over it and that's why you're buying it and really at the open for inspection. Has there been nobody or has it been the type of property where you've been queuing every time you've come to have a look at it because there's been so many people? It's a really cute property. It photographs really well and so when you come in. It's actually even better. How good is this property really? Because that will give you an understanding also on how to play this moving forward because you can imagine if the agents are in an okay position and that it's not a deceased sale for example of which by the way I haven't seen that many other than an investor owned property. So again, understanding who the owners are is very important.
Let's say the vendors are ok, they're just selling because they're taking the next step in their life and buyer demand like buyers at the inspections have been. You've been elbow to elbow basically, this is going to be a hot property. Understand that if this is a good agent they're not going to want to take offers prior to auction. They would want to have that action at the auction because they know that people are going to get emotionally involved potentially depending on the type of property. Maybe the bank of mum and dad will get involved which is great for them. They'll get their colleague agents to stand in the crowd and go to some buyer who whispers in your ears like are you sure? Are you going to let it go for a thousand bucks blah blah blah. This is the type of frenzies auctions that agents want because also don't forget a lot of them get done in a very public domain like in the front garden or in the street. Even neighbours will show up just people who are interested in the market. It's a marketing tool for them as well right by taking an offer prior.
And missing out on that piece of action for potentially getting next listings too. Now you know that I always make this joke but it's pretty stressful really if the domain coffee cart shows up at the auction, you know you're in trouble because the domain you know is real estate. A website domain.com if they show up with their free coffee card or the agent has alerted for a coffee van to show up. You know you're in trouble because that means that they're expecting a hot auction. If you see a photographer you'll know it's probably going to be at a hot auction.
So understanding the level of interest in the property. The quality of the property and understanding the market. What time of year is it? Lots of people out bid because there is little stock. How long have you been looking? Is this the first time that this is matched to briefly and highly likely that there's other people like exactly in your situation who are thinking exactly the same so you've got to be honest with yourself here and listen to the answers to your own questions, listen to what the agent's telling you and ask the questions. So you've asked all this. You've been honest with yourself and you're thinking I'm still convinced that I'm going to get a good deal. I'm going to have a higher chance of success if I make an offer prior to auction than running it to auction. Ok, fair enough then it doesn't end there because then you need to understand the agent's process of what happens after you've put an offer in to them and how they want to receive it.
First of all, you've had the conversation and by the way you do not talk about money or what you're going to offer. You can talk about money with the agent. Go hey so what's the closest comparable that you're sort of judging this property by and they might say oh well, you know this other apartment across the hallway sold for 800K and that had a better kitchen.
But this one has a northern aspect so you know and it sold like a month ago so that's probably where we're pitching it. I think that's probably fair so you got to understand what the agent is thinking. You know what? don't talk about where you're prepared to pay just let them do the talking about it, then you could potentially throw in what would be the vendor's dream price because you'd be surprised sometimes it's under what you're prepared to pay and then you can say has anyone else made an offer?. You would be open to offers if the answers are all positive then you need to understand the agent's process moving forward. So you say to them literally if I were to make an offer prior, What are you going to do next? Tell me what you need from me and what are you going to do with the other buyers so traditionally agents should contact all contract holders not just everybody willingly being through the opens because that could be everybody and their grandmother. And the hairdresser from up the road. They only talk to the ones that have requested a contract; those are potentially the more viable competitors in your process. I mean less so than in the olden days now, It's probably more the people who,
requested a building and passed or have gone through the effort of paying for the strata or downloading the strata report. That's probably more the viable, true interested parties or people who've made contract change requests.
Typically they would contact all contract holders to do the right thing but you need to understand what are they going to say to them, will they actually disclose the amount that has been offered, will they do a ring around. Until basically this last man standing and will they disclose the amount every single time so that's what they call a Dutch auction or otherwise known as the auction before the auction so that is as transparent as it'll be. Then have to trust that process to a certain degree because you know how much of that is the agent whipping up imaginary other offers or not. Don't forget that if an agent were to do that which is obviously illegal, but if they were to do that, It's a very risky business because if they say oh well I've now got an offer you say you made an offer of 800 I've now got an offer of 810 and you go oh well sorry, that's it if that 810K was made up then they've got nothing.
Because then they've got to go back to you and say, they didn't come good and then they're going to try and whip you up to 810 so you've got to decide whether this is the way you want to play it the other option typically is sealed bids. This is your best and final scenario now, this is where the agent will set a deadline at which point you know you typically would come in with a sealed envelope with your offer on in the olden days on the sign contract, or in an email or whatever the case may just understand what it is that they're dictating this to me is far less desirable than actually going to auction where you're eyeballing everyone. You're not being taken for a ride and you're not over paying significantly and what do I mean by that with the sealed bid situation. You really are flying blind. You're given no guidance. You have no idea how many other people are there. Putting in an offer. You don't know what the nearest offer is to yours so you could literally be overpaying by a hundred grand or more. I was reading an article the other day where an agent was gloating about the fact that they had done the sealed bids and the difference between the under bidder and the bidder the one who won it was one hundred and twenty thousand dollars on a $2000000 property. So do you want to be that guy because I'd rather go to auction no matter how nerve raking they are or pay someone to go to auction for me, best and final. I have to say that I have also won sealed bids by £50 in the UK.
It was because I was clever. I put something clever on the contract but that's a very risky move and I wouldn't recommend it if you haven't done it before. And that also requires a very good relationship with an agent and you know then potentially guiding you as to what to put on a contract so this is where you get upset with other buyers when they miss out.
And also I imagine you would be very upset if that were to happen to you so it's a very risky very risky process. You could miss it. You could miss it by literally a thousand dollars or you could win it by 50 or you could actually overpay by a significant amount of money and the the valuation come in at the price that you've actually been prepared to pay and put in writing because that's also the thing quite often when someone goes when a property goes to auction and you buy it at auction.
The valuation is the auction result I should say is taken as Gospel by the valuers so they'll go that was the price on the day that's market Condition. So therefore we sign off on that and obviously depending on your LVR but in a Private Treaty situation because that's what it then becomes prior to auction, unless you add a 66W to your contract which most agents would request, we now require from you because they're cutting short an auction campaign. It's still not the same as selling at auction. There is a higher risk there when it comes to the valuation particularly in my opinion when you don't really know where you're going with your bid. So however, if you still have an appetite to put in an offer prior and you understand fully what the agent is doing you then need to get to a point where you need to start talking money right? and how quickly that process will be as well. So only at that point after you've had all these conversations can you go listen, now I always pretend that I haven't had this conversation with my agency with my clients yet or with my partner yet or it's like if I were to put this on a contract what if I were to put this offer on the table. What do you think? Your vendors would say you know where you think the other buyers would be at in terms of money have you? You know what they have missed out on before, how far how high they would go before you can ask these questions. The agent may not know, they may not answer your question but still, it's worth asking and then see how they react to that. I would really proceed with caution and really take it one step at a time. Ask those questions to understand everyone's motivation, understand your own motivation and then go from there.
Again, if you are not supremely confident that you are actually going to close the deal, there is a very big reason not to make an offer prior to auction and that is if your offer in writing gets rejected. That means that you have pretty much alerted all the other buyers out there. How much you were prepared to go to and that is how much the agent will have to change the price guide, because the office of trading here in New South Wales stipulates that if an offer gets rejected that is now the new price guide. Ok, so you would have seen that online all of a sudden. The price guide is updated.
I have to say that sometimes that doesn't get done and it's just the agent will go, well, it's just a verbal offer and that's why it doesn't get updated. They want it in writing and official writing but anyway they should be updating the buyers that an offer has been made and It was rejected now in the situation where there's a bit of under quoting going on and you have just made a decent offer that alerts a lot of buyers it was under quoted but that's close to where I was and you know what? it doesn't leave you with a lot of firing power on the day. You've just alerted everyone I know what it's worth or close to what it's worth and so everyone else will know too.
I don't think that's the best way forward. I think you're much better off holding your cards close to your chest and making a really strong opening offer on auction day, and then you've been prepared to do so.
I hope this gives you a bit of an insight into what goes into our process before we make an offer prior. It's not just forcing an agent or a vendor to accept the offer or you know taking advantage and I hear all these words from people when they contact me. Saying this is what I want but without truly understanding what the other side wants. You're not going to get a fruitful outcome so tread carefully.
These would be helpful pointers for you to at least get started and if you then find that you're better off going to auction then listen to some of my episodes about going to auction, how to prepare for that because it's not just about who's got the deepest pockets. There's a strategy involved there as well and if you're feeling you're just scared to go which is totally understandable, reach out to someone like me. This is what we do for a living and I know that I've scared off quite a few other buyers by going to auction so there is, definitely strategy involved there as well.
Anyway I hope that has been helpful. If you want to make an offer prior to auction, think about these things to do first? and if you've got any questions by all means get in touch hello@buyyouside.com.au and I'm also on Tiktok and Instagram, thank you for listening and until next time.