Why I don’t buy investment properties at auction

The house next door to the apartment block I live in, in Sydney’s inner west, went under the hammer last Saturday. The four bedroom house, on a small 450 square metre block, was very old and required a lot of work. It was passed in at $995,000, though will likely settle for over $1 million via a private offer.

Channel 9 News was there, reporting the coverage of what has been a very strong auction summer season in Sydney. Most market commentators agree that Sydney is currently in the boom – or peak as it is also known – phase of its property cycle. This has resulted in auction clearance rates remaining fiercely strong; amidst some of the most competitive interest rates on offer in many years.

So I thought I’d look at purchasing investment properties at auction, versus private sale. But first, let’s take a step back and identify why some properties go for auction, whilst other properties are advertised at a set price, for private sale.

Top reasons why properties go to auction:

• Property type. If the property is unique or a rarity for its area, the true value may not be clear. Owners may hedge their bets that an auction might drive a better sales price. Properties needn’t be hugely different or unique either, to set them apart. 

• In smaller markets or postcodes where there have not been many comparable recent sales, owners may benefit from may also be a better environment for auction instead of private sales

• Sometimes auction can be the preference to hasten a sale. Listed-price properties on the other hand, can risk spending too much time on the market if priced incorrectly. Then, in this digital property age we’re living in, the property appears month after month with the same list price, and buyers avoid those online listings like the plague. They do this for three reasons; firstly they assume the property has been purchased already and the listing hasn’t been updated. Secondly, property buyers think there is something seriously wrong with the property, and last of all, the market knows the property is incorrectly priced. Auctions avoid this from happening.

• Owners who understand the likely true value of their property in relation to others may prefer to set a fixed sales price. Even if this is negotiated slightly during the sales process, fixed asking prices help property owners who need the security of a more precise sales price early on

• In areas where an owner is selling a very common property type. For instance, say if over 80% of housing stock in your suburb are two bedroom, one bathroom, no parking apartments and your apartment is this exact same specification, the maximum likely sales price is likely very evident based on so many similar recent sales.

• The jury is still out on this one, but some property sellers argue that fixed list price properties sell faster than auction properties. This is because if the seller has unrealistic expectations at auction and is not willing to sell for anything less; there may be several ‘passed in’ auction results over numerous months before a sale is identified.

• Non-auctioned properties tend to attract more genuine seekers. It is said that some 70% plus of attendees at an auction are either nosy neighbours – much like myself today – or property buyers just doing their research and not seriously entertaining the idea of bidding on it.

Bringing this in to an investor context, in my experience I’ve generally avoided properties going to auction. Here’s why:

I don’t typically consider ‘rare’ or ‘unique’ properties for investment

Regardless of the property type I am purchasing – be it house, semi, townhouse, apartment – I rarely would look for properties that are unique or substantially different from the status quo of that suburb.

This is because, as investors, it is not in our interest to do so. We’d rather hedge our bets on a property type that is high demand, so that we know it’ll always be desired by renters. This helps avoid the risk of vacancy (which can crush an investors’ bottom line if months and months of vacancy occur)

During due diligence phases, I find non-auction properties that deliver more ticks on my shopping list

This extends back to property investment 101: Do your due diligence on your chosen suburb to make sure the property type you are buying, is the type that renters are wanting the most.

Financially, auction properties just do not stack up for me

As investors we are driven ultimately by the bottom line. Financially, there is added risk to buying investments at auction.

Another investor 101 tip is this: You should never go looking for investment properties before you’ve calculated how much you can spend. You’d be surprised at the number of beginner investors who ignore this cardinal rule!

Not only should you know your budget, but you should have your deposit amount calculated and your pre-approval set already (so you can move quickly when you need to).

Deceptive agents can set investors up for disappointment

The other reason I avoid auction is timeliness and, well, real estate agent lies! Agents frequently low-ball the expected sales price, in the weeks leading to auction in order to get more foot-traffic on the day.

Let’s say you’ve done your research as mentioned about, and you’ve calculated you can buy a property to a maximum buy-rate of $320,000. You speak to an agent about an auction property where they agent feels it’ll end up at the $300,000 mark. You think to yourself: "Great, I can confidently go, maybe even bid a little higher than $300,000 and still be in-budget, and possibly win this property." Alas you get to the auction and the auctioneer calls for an opening bid of $340,000!

Already it is beyond your budget, and it only adds insult to injury when the romance-enthused home buyers (who you are also competing with at auction), bid with their heart about this and the property goes for $370,000.

Worse still, you’ve wasted weeks of research and due diligence, and you are now back to square one. It’ll be weeks before you’re ready to bid on another property at auction

Property investment is not about the romance people develop with their ‘dream home’. As investors we do not live in these houses, nor are we likely to. Auctions tend to attract head strong and heart strong buyers who have fallen in love with a property. This wildcard addition to the sales process usually only ends up benefitting home buyers, whilst hurting investors.

I am aware there may be other views on buying investment properties at auction, but in my experience, steering clear of auction properties in the best step investors can take to minimise risk and expedite property purchases.

Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.