Making an offer prior to auction

by Chris Lang on June 29, 2010

Property Auction I’ve had an experience lately of making an offer on a house prior to auction. In Melbourne, where vendors seem to just love selling their houses on auctions, people like me, who favour private sales, are clearly a minority :).

I used to think that when a certain house goes on auction there was no way around it, except for turning up on the auction day and bidding with the rest of the pack. So if you are thinking the same, I’ve got news for you – there is a way out, and it’s called making an offer prior to auction.

Making an offer prior to auction is a science on its own right. Mainly because you need to work out what price and settlement period would tempt the vendor into giving the auction up, without being a mind reader. You need to time your offer so that it gets accepted, before another buyer comes along and makes a better offer. The reason for this is that once one offer has been made, it will be disclosed by the agents to other potential buyers to try and get them to go higher, transforming the whole process into just another auction. This would be the opposite of what you’ve meant to achieve.

As always, agents are in advantage in any case – if the house sells prior to auction, the buyer has made their job simpler, and if not – they can adjust the vendor bid accordingly so that it’s equal or higher than highest received offer. In fact, at open houses they will encourage people to make offers, to ‘feel the market’ and to have leads to come back to, should the house pass in.

A trick that you can expect them to pull on you is to demand an unconditional offer. Just to be clear, there is no law that says “all offers on houses advertised for auctions must be unconditional”. In many cases agents will have you believe that going unconditional is the only way to get your offer passed on to the vendor – which is not true. They must pass any and every offer, conditional or not, unless the vendor has instructed them to not take anything less than X (and your offer is below), or if the vendor is not open to selling prior to auction at all.

It is true that as it gets closer to the auction, when a vendor compares two offers where one is conditional and the other one is not, the unconditional might win, even if they offer a bit less – just because it’s less risky. But if you are submitting an offer well before the advertised auction (4 weeks for example) and it is conditional on building and pest inspections done within a short period of time (a week), the risk for vendor is not all that big because there’s plenty of time left.

In my opinion, because timing is rather important, it makes sense to offer your best price and terms when making the first or the second offer. If there is a lot of interest, a buyer that is mucking around with the price and offering small increments risks losing to another person who offers a far better price at one go. Also, make it clear to the agent that you won’t be bidding at the auction and set an expiry date on your offer to put the pressure on the vendor. Make your offer expire before they have another open house, to reduce chances that they encourage another buyer to compete against you.

That’s it from me, and now it’s your turn – what are your best tips for making an offer prior to auction?

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