API Blog :: Have your say!

We’re coming to the end of a year many real estate agents will be pleased to bid farewell.

BY CATHERINE CASHMORE

Turnover has been down in most states and prices ordinary at best. Last month should have been one of the busiest of the yearly real estate cycle, but it turned out to be one of the quietest, which has placed a strain on many of the smaller real estate agencies that need to bank enough commission to last through the quieter Christmas months.

Therefore the majority are celebrating the official drop in interest rates and it was widely spruiked during the weekend auction preambles as being the stimulus needed to reignite the market. A 25 basis point drop, however, will have no noticeable effect on prices – certainly not in the short term. But it will mark the beginning of a change in sentiment.

The market is a mixed bag. There are plenty of buyers ‘looking’, but most are reluctant to step into the arena unless necessary. Those who need to buy are often struggling to find suitable choices – quality has been meagre across the board all year. In some respects it’s similar to 2008 – investors who need to sell will shed their poorer assets first, owner-occupiers will only sell if personal circumstance demands and discretionary vendors will only sell if they can get their ‘wish price’. In such circumstances overpriced property will often linger on the market for months at a time, equating to large volumes of sub-par stock. Some investors have been brave enough to act against the tide and purchase, but most are adopting a ‘wait and see’ approach. If we have a second interest rate drop it may push prices, but it would be premature to make such suggestions.

Auction clearance rates in Victoria have been stuck around 50 per cent for a number of months but many vendors are still opting for the auction system over private treaty. In bullish markets it can be a remarkably successful way to escalate the price to levels buyers wouldn’t have otherwise stretched to, however in a flat market the effect is reversed. If a buyer sees no one else bidding, they’ll naturally lose confidence and tighten the wallet strings – in such cases it will take a well-skilled negotiator to fulfil vendor expectation.

Auctions are advertised as a fair transparent way to sell real estate and on the face of it, it sounds very simple. Everyone lines up outside the property and providing the bids reach the reserve, the person still holding their hand up when the agent shouts “sold” is the winner! Right? Well, not exactly.

The real estate agent shouting “sold” loudly in your direction doesn’t complete the sale of real estate. At this stage the buyer has offered nothing but a verbal promise, which doesn’t count as a successful sale. Until the purchaser and vendor have signed the contract the property isn’t sold. There’s good reason why sales agents rush the winning bidders inside to sign the contracts after the auction, avoiding excessive chatter or distractions.

If truth be known, the auction process works in the best interests of the sales agency, which gets its ‘day in the sun’ performing to the local vendors. With flags on display and a street full of spectators, it provides a fantastic chance to source other prospective buyers and sellers.

Auction rules vary across states, however in Victoria every agent is obligated to state that the auction will be conducted in accordance with the Real Estate Institute of Victoria bidding conditions, on display prior to the event. Following this will be an explanation that no late bids will be conveyed to the vendor and at the fall of the hammer the property will be effectively sold to the ‘winner’. However this information can be misleading to the inexperienced and it’s important for prospective purchasers to understand exactly what’s legally required to complete the purchase.

Firstly there’s nothing that requires the winning bidder to sign the contract. In other words, they’re allowed to change their mind if they suddenly notice something they don’t like about the property before pen hits paper! The verbal agreement to purchase only takes effect once in writing. Secondly, the vendor can also change their mind or sell to a higher bidder. For example if they over hear someone shout out after the hammer has fallen that they’ll pay $20,000 more there’s nothing to stop them instructing the auctioneer to ‘re-open’ the auction. They can also decide they don’t want to sell if they don’t like the look of the potential purchaser.

In other words, the show that has just taken place outside the property essentially offers nothing but good street theatre.

What about dummy bidding? Illegal right? Technically yes, but in practice no! The dummy bid has simply been re-termed ‘vendor bid’. It serves no purpose except to enable the agent to shout out a bigger number to get the bidder to increase their offer.

So considering all this, what is the real goal of an auction? It’s certainly not to get the highest price – after all, the successful bidder is only going to offer one bid over what the under bidder is willing to pay. It can however be very successful when two buyers have a similar amount to spend – although there’s no easy way to assess this prior to the event. In fact a skilled negotiator will stand a better chance of getting a purchaser’s highest price through a private negotiation process than he will at auction. Get two potential bidders in separate rooms and you’d be surprised what good negotiation can achieve!

What experiences have you had with auctions? Do you think they’re a good way to sell property?

Catherine Cashmore is a buyer advocate in Victoria