3 Questions Professionals Consider Before an Auction Starts

Some people love auctions, others hate them. It's pretty rare to find someone who's indifferent to them. Emotional, confrontational, intense, high stakes - bidding at auction takes everyone out of their comfort zone. Perhaps that's why they're so entertaining. Seriously, I often attend auctions just to watch.

Good friends of mine were interested in a property that went to auction. They wanted me to bid for them.

Of course, no worries, always happy to help. To do so in good conscience though, I needed to first educate myself on current market value.

I attended a private inspection with them on the Wednesday prior, and spent 2 hours examining the place: on the roof, in the attic, under the sub-floor, I had a good look at drainage, electrical, levels, and windows... Built in the 1930s and lovingly maintained, it was a ripper property. Worth about $2.2m by my reckoning.

Apart from 'what's your budget', I posed 3 questions to them prior to auction that fundamentally shaped our bidding strategy.

The first question: Have you established a decent relationship with the selling agent? Let me explain why this is important...

Plan A for most auctions should be to see the property pass in with absolutely no bidding from purchasers. The reason is simple - the vendor is then forced to reassess their price expectations in light of zero confirmed interest. Having spent all this money on advertising, and all this time on keeping the place looking great over the course of 10+ opens, the vendor is faced with the very real prospect of not being able to sell and move on with their lives. They're in a vulnerable position, and in an emotional state - right where you want them.

In this scenario, a good agent will push their vendor to determine the lowest possible acceptable price. And, before revising the sale method online to 'Private Sale', the agent will ring interested parties to discuss this price + 5-10%..

It's at this point where the relationship between you and the selling agent becomes so important.

If you spent the campaign dismissing her as a pesky salesperson not worthy of your respect (this is more common than you'd think - I've seen agents abused in the most shocking of ways) then what are the odds that she'd call you first? Or second? Or third? Even if she knows you're a serious buyer, chances are she'd rather eat a bar of soap than speak to you.

Assuming you've made a bit of effort to establish a rapport with the agent, and you've made absolutely clear that you're seriously interested in purchasing the property (you'd tell her this immediately before the auction), then you could be the first person she calls.

In the case of my friend, the selling agent had previously sold one of their properties, and they knew him well. I've known him for years as well, so we were well placed to be the first person called if no bidding occurred.

The second question: Are you willing to risk losing the property if it passes in to another buyer? This is all about risk versus reward...

Perhaps the most important leverage that an auctioneer has is the prospect of a private 1-1 negotiation with the highest bidder, to the exclusion of all other buyers. If bidding doesn't reach the seller's reserve, then the highest bidder to that point gets the exclusive right to negotiate with the seller immediately after the auction. I've transacted on a few properties this way, and it's a good place to be as a buyer.

So, faced with this reality, why wouldn't you bid in order to ensure first right to negotiate? Two reasons:

1. These post-auction 1-1 negotiations don't always result in an immediate sale, meaning that the door often opens up for other buyers to get involved later in the day (see question 1 about ensuring you're the first called).
2. Multiple bidders equates to competition between BIDDERS, as opposed to competition between BUYER and SELLER, meaning that once the reserve price is hit, the successful bidder effectively pays more for the property than the vendor was willing to accept.

If you want to ensure you spend as little as possible on a property, you need it to pass in at a price lower than the vendor intended to sell at. The RISK is that you'll ultimately lose the property to the bidder who secured exclusive rights to negotiate, but the REWARD is that you may have the chance to pay significantly less than you would have under the hammer.

My friends had been looking for months. They loved the property, and rightly so. They wanted their family to grow up there. No, we couldn't give anybody else a sniff.

The third question: Are you confident of not getting carried away, and bidding more than you budgeted.This is what auctions are all about!

I'm a professional, but when purchasing a 'forever' home for me and the family a few years back, I asked a friend to bid on my behalf. Good auctioneers know how to turn the screws...

Another $5,000? What about another $1,000? Seriously, you'll pay more on petrol driving around to open for inspections in coming weeks! Ask your wife - surely she wants the property enough?!

I've known my mate for years, and while he lacks a bit of confidence sometimes, I'd absolutely trust him to perform in a tough situation. We talked in detail about the auction bidding strategy that I thought would work best, and he was adamant that they wouldn't spend a dollar over $2.07m for the property.

I knew that his wife (who was hiding in the car down the street!) would give him huge props for bidding, and I knew that he was more than capable of executing our strategy (particularly with me standing beside him and talking out the side of my mouth!). Two minutes before the auction started, I said "You've got this mate. You're bidding, not me". His look was priceless, but he straightened his spine, stuck out his chest, and took it on himself.

I talked him through the entire auction, and after conferences between agent and vendor, and up against a 20-year professional bidder across the street, he secured the property under the hammer for $2.05m. Cool as a cucumber.