What Happens When A Property Passes In?

While Melbourne and Sydney may be the auction capitals, auctions are becoming commonplace in many cities. But what happens when a property is passed in, and how can you negotiate the best deal in this situation?

What Happens When A Property Passes In?
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While Melbourne and Sydney may be the auction capitals, auctions are becoming commonplace in many cities and each state has their own legislation.

One thing that auctions have in common is a reserve price. Ebay offers it, stock and station agents who sell cattle have reserve prices, art and jewellery auctions exhibit reserves and cars are sold with bottom-line reserves. Reserve prices can vary and vendors ultimately set them. Problems and confusion arise when buyers aren’t aware of the rules, are ill-prepared for the auction conditions, lack a plan of execution or aren’t familiar with the right price to pay for the property. Every now and then a vendor will create an issue for themselves when it comes to setting a reserve price too. Being greedy, ignoring market feedback and campaign metrics, or being misaligned with other stakeholders can not only create more stress on the day but can result in a less-than-favourable sales result.

So what is the reserve? It is the price at which the vendor is prepared to sell to a live and unconditional bidder.

Vendors generally sit in one of three camps;

  1. They have a clear reserve and are content to allow the agent to ‘call’ the market on the property if bidding hits that particular figure.
  2.  They have a desired reserve but have requested the agent ‘refer’ the bidding when a particular level is not met. At this point, pending how the bids are originating they may decide to place the property on the market or may wish to continue calling for bids until either a reserve is met or the property is passed in.
  3. The vendors are not aligned on their reserve price throughout the campaign, and the declared reserve either prior to the auction or during the ‘referral’ stage is a surprise to the agent.

When the auction is in full flight and the onlookers and live bidders are outside in the street, vendors in the second and third category have a few minutes to make an informed decision as to whether to place their property on the market or not. For those who decide to chance their property passing in, they face some interesting prospects, and depending on their agent’s experience and ability to guide them well, their end result could be optimal if the agent makes the right call and they heed their agent’s advice.

One thing that buyers often mistake is reserve versus post-auction asking price.

The price that the vendor was prepared to place their property ‘on the market’ at isn’t necessarily the price that a skilled negotiator agent cites the highest bidder when they stroll through the front door and set up camp temporarily in the lounge.

The auction is often just the first challenge. The pass-in negotiation requires patience, preparation and respect.

Buyers need to note that they only get the opportunity to negotiate exclusively with the vendor if they are the highest bidder in the crowd. If the auctioneer’s vendor bid is above their bid, a pass-in will not ensure them this opportunity.

A prepared buyer will be well aware of the recent and comparable sales in the area, as will the agent and likely their vendors. A patient buyer won’t be alarmed when the cited ‘reserve’ is considerably higher than the figure they’d prepared themselves for as bidders. And a respectful buyer won’t offend the vendors or alienate the agent to the degree that the negotiation is shut down and the doors are re-opened to the general public.

A skilled negotiator will patiently liaise back and forth with the agent, gleaning appropriate opportunities and methods to continue the negotiation without drawing the pass-in process to a regretful and unproductive purchase attempt.

Understanding the vendor’s needs and preferences for settlement dates, defending property comparisons and appraisal figures assertively and respectfully, and remembering that some post-auction negotiations take over an hour is an important list of actions for any pass-in negotiator.

The worst two things that can strike if buyers aren’t prepared for the negotiations are;

  1. They will pay more than the property is worth because they fell prey to a strong agent’s post-auction asking price without challenging it.
  2. They will miss the property for a price that was completely fair and reasonable and lose out to another buyer because they neglected to recognise the value and/or annoyed the agents and vendors and shut the exclusive negotiation process before the deal could be struck.

Remembering that a real person is at the other end of the negotiation is essential. A fair fight in the negotiating ring is OK, but leaving a trail of destruction and a bad taste in a vendor’s mouth can be costly if hold-ups or issues occur leading up to settlement.

An upset vendor is far less likely to waive penalty interest charges or show compassion when a difficult buyer asks a favour.

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