Hammering misconceptions: Auction success a mix of style and substance

You gotta know when to hold-em, know when to fold-em; going into an auction fully prepared and with a strategy in place is fundamental to completing a successful purchase in such a dynamic setting.

Hand holding auction gavel and crowd in background
Auctions can be an overwhelming experience for some but with the right preparation can be an investor's best friend. (Image source: Shutterstock.com)

Auctions are not for the faint hearted. From unconditional purchasing to intimidation tactics, many buyers loathe the mere prospect of taking part in one.

However, even for those who feel they can muster the courage to put up their hand and bid, there are some critical mistakes bidders make that have either caused significant stress or cost them the purchase altogether.

Auction rules vary between states and territories, and knowing the auction rules can make the difference between landing the keys and missing out.

What’s more, some people miss out to another buyer for a price below their own bidding limit, and this can be devastating.

Finance pre-approval and due diligence

The first misconception is that due diligence and finance approval can be conducted after the purchase as a condition of sale.

Auctions generally require unconditional bids, and those who have not had the contract perused by a legal representative, finance pre-approved by a lender, or planning enquiries conducted prior, may get a rude shock if surprises arise.

For example, a zone other than residential may preclude the property from a residential loan product, which will no doubt cause a fluster if it can’t be financed by the purchaser.

A budding developer whose purchase can’t be subdivided due to easements or restrictive covenants will no doubt be troubled if the discovery is post-purchase.

Having a deposit ready at auction

The second misconception relates to settlement terms and deposit payments. Auctioneers call for a ten per cent deposit and either a firm settlement date or a date range. Without prior arrangement (before auction day), auctioneers can decline variations to the terms in which they are calling for.

Aside from deposit size, the payment of the deposit can be tricky for some buyers to navigate.

Gone are the days of chequebooks being commonplace. These days, buyers carry their smart phones inside after an auction has concluded and they log into their internet banking to arrange an EFT transfer.

Those who haven’t provisioned for increases on their daily transfer limits can also cause themselves a bit of grief. Many agencies and vendors are relaxed, but mortgagee court-ordered sales aren’t so relaxed. Ten per cent is ten per cent. Arrangements for suitable transfers must be made.

Style and strategy part of auction process

People often assume that the buyer with the deepest pockets wins the keys. Plenty of buyers believe that bidding style has zero impact on their chances of success.

What they misunderstand is two-fold.

Firstly, they are assuming that every other potential bidder is resistant to any sense of fear, intimidation, awkwardness or embarrassment.

When this is combined with a feeling of intimidation from other, more assertive and confident buyers, the chances of success for the bidder who is already feeling uncomfortable will diminish.

The impact of a confident bidder staring another bidder down cannot be underestimated.

Despite any amount of planning, they could find it difficult to think strategically under pressure. They could also struggle to communicate effectively with their partner with any budget re-assessment discussions - and we all know how much of a pressure-cooker impact an auctioneer can have during the final stages of an auction call while a hundred other people may be watching on.

Not every bidder has a firm plan

I estimate that around 50 per cent of active bidders have a vague plan, 30 per cent have a firm, but flexible plan, 15 per cent have a firm and non-adjustable plan, and 5 per cent have no plan, (some of whom didn’t leave the house that day expecting to buy a property).

Of the vague plan people, they may have a general idea of where they believe value sits for the property, but they won’t have a firm upper limit or a designated ‘walk away’ price. Their assessment of value will most likely be a round number and they will probably be quite prepared to have some flex. They will also likely chat to their partner and make bid-increase decisions during the auction.

These buyers are more likely to be susceptible to intimidation tactics or a change of heart when bidding gets tough.

The 30 per cent who have a firm and adjustable plan will likely bid stronger and will be less impacted by others until they are in their ‘non-adjustable’ price territory once the property is on the market and competitive bids are still coming.

The 15 per cent who have a firm and non-adjustable final figure may be nervous, but they have a mandate and they’ll likely apply it and bid to their plan. Those who hire professional bidders will likely fit into this category too (provided they don’t have a bidder who will call them or tempt them to increase their budget during the auction).

These 15 per cent of buyers are not as likely to be rattled by another bidder, despite how nervous they could feel.

And the final category, the 5 per cent who have no plan and are very unpredictable.

After all, someone who buys a house without a plan, a budget, or (for a lesser number), without any intention of buying a property that day – are on a different wavelength altogether. They may be impervious to any clever, intimidating bidder tactics because they aren’t applying much rationale to what should be a very careful decision in the first place.

Auctioneers call the shots

Auctioneers can determine the bidding increments, and this can surprise the most confident of buyers.

I recall an auction I bid at two years ago. The auctioneer was calling for ten thousand dollar increments and my opponent bidder’s stance and style was provocative. He was determined to place a five-thousand-dollar bid, and I held the highest bid. The auctioneer refused his bid and reminded him that he was only accepting ten-thousand-dollar increments.

The property had not quite reached the reserve price, but I knew we were closely approaching it. My defiant opponent bidder continued to insist on his five-thousand-dollar bid.

The auctioneer, seemingly annoyed with the antics of the other buyer stopped the auction and said clearly, “Sir, I am only accepting ten-thousand-dollar bids. Either you place this bid, or I will pass the property in to the woman on the right.”

My overconfident opponent reiterated his five-thousand-dollar bid. The auctioneer promptly passed the property in to me and our devastated bidder’s jaw dropped as I picked up my bag and walked inside.

He knocked on the door, argued his point and begged for a chance to rekindle the opportunity, but his moment was lost. He had a significantly higher budget, yet missed his chance to buy his future home.

In the same vein, auctioneers can reject a bidder’s bid altogether. Offensive behaviour, doubts about their willingness to proceed with the sale, and disruptions to the auction are all perfect methodologies to be precluded from auction participation.

The auction rules do exist, and whether we like them, loathe them or disagree with them, it pays to understand them.

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