I bought a property at auction for a client the other weekend with a simple but effective strategy…
Quietly study the competition until bidding hits the reserve, wait for things to slow down a bit, then bid hard.
Every property, campaign, and auction is different, so this isn’t a one-size fits all approach (i.e. I use different strategies depending on circumstances). But, I reckon the following advice is useful to non-professionals…
Auctions are designed to benefit sellers. Firstly, it’s the vendor who is calling the shots. Going into an auction, nobody knows what price the vendor wants – even the selling agent sometimes! This unknown keeps everyone interested and on edge.
Secondly, most auctions are conducted in public, in front of a large crowd. The vast majority of people attending aren’t there to bid; they’re simply looking to enjoy a show. But, serious buyers see everyone as potential opposition, and their competitive instincts go up.
Without going into 5 more reasons why auctions favor sellers, it’s all about emotion. Buyers don’t want to miss out!
So they compete with other buyers, and many bid much higher than they originally intended. What’s another thousand dollars? Five thousand? Ten thousand?! The motive can often evolve into beating the other guy instead of securing the property.
The key thing to recognize as a buyer – if the bidding doesn’t reach the reserve price, then the vendor will be forced to negotiate in a more rational environment, and that involves putting their cards on the table and ultimately saying ‘We want $X for the property’. Their proverbial pants get pulled down, ideally without a single bid being placed.
Auctioneers make a big deal of affording the highest bidder the first opportunity to negotiate with the vendor if the property passes in. Yes, this is a risk for those who don’t bid. But, a good way to alleviate this risk is to tell the agent prior to auction that you are seriously interested in purchasing the property. If it passes in, and negotiations with the highest under-bidder commence, the agent will advise the vendor that they know of another interested party who may be willing to pay more.
How things played out
In this particular situation, I knew the selling agent pretty well, and was open with him immediately prior to auction, telling him that my buyer wanted to purchase the property, but I wanted it to pass in. He replied that I better be the highest bidder so that I could be the one to negotiate. But I planted the seed in his mind.
The auction started with a vendor bid of $0.900m, and after a big song and dance, someone finally put in a bid of $0.920. It went back and forth slowly between 3 bidders, up to $1.116m, and then it faltered. The auctioneer pointed to me, saying ‘Andrew, you’re awfully quiet mate?! I’m sure you’re interested’. To which I replied ‘Is it on the market yet?’
That little interplay helped me enormously, because it told the vendor that I was a serious 4th bidder, interested in getting involved – but only on my own terms.
If the vendor wanted the auction to continue, he had to put it on the market.
If he didn’t put it on the market now, then it would most likely pass in, and the leverage would swing towards me and the other buyers during post-auction negotiations.
After another song and dance, Jack conferred with his vendor inside, and came out excitedly exclaiming that the property was on the market at $1.116m (clearly a bit lower than the vendor wanted, but it was in his interest to take advantage of the emotional environment and keep the auction going). I went straight in at $1.120m. Bidder #2 went $1.121m to which I bid straight back at $1.125m. Knocked him out of the bidding.
Going once, going twice… then bidder #3 came in at $1.126m. Me at $1.130m. Him at $1.131m. Me at $1.135m. Him at $1.136m. Me at a winning $1.140m – we secured the property under the hammer for $10k below budget.
A key part of this strategy involves bidding with authority, quickly, and without reducing your increments.
I’ve seen an auction go up over $100,000 on $1,000 bids alone. An emotional, non-professional bidder can get consumed with the thought of not losing out on a property for a measly $1,000. Never mind that the $90,000 over budget he’s already gone! And, by keeping larger increments, you give the impression that you’re capable of bidding much higher.
So, that’s a simple but effective strategy for auction bidding… 1) Tell the agent you’re seriously interested immediately prior to auction. 2) Don’t bid until it goes on the market. 3) Bid strongly without reducing increments.
If it passes in to the highest bidder, you do run the risk of missing out, but if the agent recognizes you as a genuine buyer, then he will tell his vendor about you, and will most likely come back to you later in the afternoon or early Monday.