Approaches to consider when negotiating without finance pre-approval

Sydney and Melbourne have faced some significant changes in their respective property markets over the past two years. Sydney’s correction commenced in mid-2017 and Melbourne’s followed some eight to nine months’ later. In response to the cumulative effects of APRA’s crackdown on lending (initially on investment lending and later on servicing across all loans), and our recent Banking Royal Commission, our property markets have experienced a sudden correction; some parts of the markets exhibiting more downturn than others.

In the wake of the stricter lending and reduced approval volumes, our auction markets have also taken a turn and the impact has been palpable. Auction clearance rates are down, and bidder numbers are also reduced. No longer are auction pass-ins a reflection of a compromised or low-scoring property, but they are a sign of the times. Good properties are passing in and buyers are relying more on finance clauses and private sale opportunities.

With this change in our previously more dominant method of buying property in inner and middle-ring suburbs of our two cities, buyers, sellers, and agents have had to adapt to significantly more negotiations in their day to day activities. Saturdays are no longer just reserved for auction efforts and sales under the hammer. Agents have accepted that their auction process steps now include more of the following:

• Remaining in close contact with prospective buyers throughout the campaign to gauge their intention (and ability) to bid,
• Preparing a vendor for a pass-in and subsequent negotiation
• Allowing adequate time in the auction process for a post-auction negotiation
• Facilitating ‘subject to finance’ offers and the steps that follow (ie. valuer access, follow up with solicitors, communication with vendors and back-up buyers, hosting open for inspections while the property is still under contract), and
• Being prepared to re-sell the property if the conditional sale does not proceed.

An agent’s work has become more process driven and caution, fear and disappointment are factoring into their buyer/vendor conversations much more often.

In response to this, as buyer agents, we too have had to accommodate a few extra processes to protect and prepare our clients for each journey.

We have to take into account the heightened chance of a valuation shortfall (i.e. a valuer determining that a property price tag is in excess of where they deem market value to be). In a correcting market, the risk is real, and the impact can be difficult for buyers who have no plan B to overcome the issue. When our clients have a higher Loan to Value Ratio (LVR) we will introduce a valuation clause that enables them to exit the contract should the unlikely issue prevail.

When finance conditions are present on a client’s preapproval, we will counteract the risk by introducing a finance clause on a short-range condition once we have an idea of credit assessment timelines from their bank or broker.

Bidding at auction without clarity on finance approval is a risky step but if a client’s approval has been delayed and the intel we have gleaned from the agent suggests that other buyers are also suffering the same fate, we still can pursue some options to buy. We can either offer a fair price supported by a finance clause the day before auction (with the agent’s endorsement), or we can chance our attendance at auction and carefully bid under reserve with the intent to go inside and negotiate afterwards. This approach generally requires full disclosure with the agent, as it becomes their job to broker an acceptable outcome between the purchaser and the vendor once the property has passed in. In the absence of other buyers, most agents will accept a genuine bid under reserve with the knowledge that any deal will have conditions struck in accordance with the client’s finance risk.

It is worthwhile for all buyers who find themselves facing an auction without preapproval to consider their chances of buying the property with a finance clause. In this difficult lending climate, crazier things can happen than an agent taking a conditional pre-auction offer. Buyers just have to plead their case and be prepared to demonstrate the strength of their case. A letter from a broker, an endorsement from an accountant, in fact anything that can give a vendor confidence that the finance has every chance to come through can make the impossible seem possible.