Don't show weakness

Mal JamesMay 31, 20110 min read

A key focus for many buyers at the moment is to not pay too much. Fair enough – it’s a healthy focus But if this is the only focus, then as a buyer of a good home or a good investment you might miss out on the main game – to buy well.

Take a golfer who is totally preoccupied with looking at the flag, until his partner points out the water hazard to the left. That’s good factual information and healthy to focus on if it makes you change your aim a little to the right. But it’s an unhealthy focus if it becomes so encompassing that you end up duck-hooking into the very hazard you are trying to avoid.

The hazard that all buyers, whether emotional home buyers or first-time investors, are trying to avoid is making bad decisions that don’t achieve their outcomes. Let’s say your desired outcome is to buy a good home for your family, but also to make a good investment purchase. In this market, is that best serviced by a focus on buying a good home at a fair price or by beating the agent and getting a discount? Of course both aims are worthy, but in my opinion the former is a more important focus.

Here’s a question: When are you more likely to be buying a good home: when the selling agent tells you a property is bargain, when you find yourself negotiating at 10% below the asking price, or when you find you are competing against multiple bidders in an “on the market” auction?

The fact is that when there are multiple bidders for a property, it’s a clear signal that the property is likely to be a good future investment. Multiple bidders signal consensus on price, and that is good for capital growth; multiple bidders also signal that there is a high chance this is a good home. An obsessive focus on not paying too much is actually not a buying strategy and could even be counter-productive in a competitive auction situation.

Take this recent auction at 7 McLaughlin Avenue in the Melbourne bayside suburb of Sandringham. This was a roughly 30-year-old house on more than 1000 square metres with an older-style façade. It is a bit dated but has a classy floor plan and internals. It is a good home, and I was interested to see how it would sell.

After an opening bid of $1.5 million, a second bid came in at $1.55 million and a third at $1.65 million. Another bid came in at $1.66 million, and then finally we were “on the market” at $1.71 million – but by this point people seemed to be running out of money.

Bidder number two was slow to bid, and bidder three responded more authoritatively, nearly buying the house for $1.71 million. A fourth bidder then came in at $1.72 million but didn’t look that strong, and this seemed to allow the third bidder back in with a bid of $1.751 million. The final result: $1.752 million.

Not bad, and the under-bidders probably thought they’d given it their best shot, but my thought was that at least two of them looked weak and that was what let the winning bidder back in each time. I can’t help thinking that there might have been a different result if the other bidders had gone in with a different mindset.

It’s human instinct for others to battle on when they think the other party is injured and almost out of the race. If you’re the weak one, you may end up paying more or even worse missing out on the property, when it is quite possible that the winning bidder would have stopped $10,000 below you if you had put in a stronger bid.

The fact that you showed you were gone was what energised him for one last final effort. So what are the real issues in this market?

1) Get your main goal clear in your mind.

2) Understand value before you start bidding. Why? Because uncertainty makes us all look weak.

3) Sure, don’t overpay – but don’t miss out either (as long as it’s worth it)

4) Don’t assume you will have no competition 5) Have multiple bidding strategies to deal with pass-ins, vendor bids, etc, but also have ones to deal with bullet bidding, strong competition, weak competition and so on.

Mal James

Mal James is principal of James Buyer Advocates, which advocates on behalf of buyers of property over $1 million.
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