The risks and rewards of buying before auction, private treaty negotiations and auction day

Mal JamesNovember 9, 20110 min read

Negotiating on a property is all about balancing the risks with the rewards. In your quest for the reward of buying your dream home, you might run the risk of paying more than you needed to. But focusing purely on the reward of paying a lower price for a home might raise the risk that another buyer trumps you and you miss out on the house you love.

Let’s look at a couple of scenarios, and the risks and rewards they might raise:

Buying before auction

Let’s say you decide to make an offer before auction. Making an offer early gets rid of the competition that hasn’t yet made itself known to the selling agent. It can also work because selling agents are unlikely to recommend against an offer that has some grunt about it. At auction day they don’t want egg on their face.

If your offer is accepted, the reward is that you get the main prize, your new home. The risk is you may have paid more than you needed to had you waited till auction. Of course if you are successful you will never know – you can congratulate yourself and nobody can argue the toss with you.

But there is also a risk that your pre-auction offer may not be accepted, but instead be used (correctly and ethically) by the selling agent as a price floor when it comes to auction day – not only for you but for other buyers too.

Overall going early is a strategy we favour only when you have done your due diligence and you believe that the genuine expected price (not the agent quote) is at market value and close to your budget limit. Going early involves a bit of smoke and mirrors, and we feel relatively comfortable in that domain. If you don’t then waiting till the auction may be your best bet.

Private sale negotiations

When the asking price of a quality home drops from $2 million to $1.8 million due to some tough negotiation most buyers think they are now in a better risk v. reward position to buy the home. But if you offer, say, $1.7 million at this point you can put yourself at the risk of missing out on the home. That’s because other buyers may now appear who consider $1.8 million a good price and may be prepared to pay $1.85 million.

Alternatively not trying to lower the price on an overpriced home is also a risk – especially if the home is a B grader. When there is little proof of market competition – in a private sale or vendor bid pass-in – you may end up overpaying. In time that will affect your resale, adding risk to the long-term financial benefits of the deal.

On the other hand in a flat and falling market it may be quite a low risk to walk away from an asking price or a pass-in figure that seems very, very high – even if you love the home – as there is little chance of another buyer.

But in other scenarios there is a risk walking away from a home you love, just because you’re reluctant to pay a few thousand dollars extra. Say a property you love has been passed in to you as the highest of three bidders at an auction – why would you refuse to budge on your last bid, even though it was only $1,000 above the other bidder? Sticking to your guns may only mean the underbidder gets a chance to buy and you miss out on a home you really wanted.

Another additional risk buyers often take for no reward is walking away from the auction on Saturday, only to pay the reserve on Monday anyway. The most common time for a deal to be done after a pass-in is that same weekend. So if you are happy to pay the price why not just buy it on the Saturday rather than run the risk of someone else buying it that weekend if buying the home is your main goal?

At the end of the day, any home buyer has to take risks to get rewards – unless you have a policy of only going after homes that nobody else bids on. And buying a home that nobody else wants is not a great strategy for good long-term emotional and financial outcomes.

Mal James is principal of James Buyer Advocates, which advocates on behalf of buyers of property over $1 million. Mal writes weekly auction reports, advice and in-depth market analysis on James' website.

 

 

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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