I'm just going to come right out and say it - I'm not a fan of Auctions.
I know a lot of agents love them, spruiking the idea that it gets the vendor the best possible price. And to be fair, if you have two or more emotionally invested buyers bidding against each other, crazy prices can happen.
But in reality...
To win an auction you only need to pay a little bit more than the second-highest bidder. Which is more than likely less than you might have been willing to pay.
The main thing it achieves is to force an unconditional sale. No hanging about for a few weeks while the Buyer scrambles to sort out their finance and inspections. No annoying Lawyers arguing about anything. The Vendor has certainty that the property is sold - and the Agent has certainty that they'll get their commission (ooh, had my cynical hat on there for a second!).
But if you have a site that's going to be of interest to Developers, auctions are even worse - for both the Vendor and the Developer.
For starters, let's take a closer look at why Vendors love auctions.
From the Vendor's perspective, it takes all the uncertainty out of the sale. So I get it, I really do! Waiting weeks for a Buyer to get their ducks lined up in a row can be nerve-wracking, so of course the Vendor wants to skip that step.
But now let's look at auctions from a Property Developer's point of view. Professional Developers rarely have huge lumps of cash sitting in a bank account waiting to buy their next site, unless they've just cashed out of a previous development deal.
Which means they're probably going to need to do some fancy dancing with banks or investors to pull the funding together to buy a site.
Due diligence for most property developments involves spending time and money to really be certain that the deal has legs. For bigger deals, that can really add up.
Looking back at the list of positives for Vendors, it's obvious that it almost exactly replicates the list of negatives for Developers. Which is why selling a development site via auction is a really bad idea for everyone - including the Vendor. Auctions immediately shrink the pool of potential Buyers faster than a hot summer's day in the Outback.
But wait! There's good news. A third of properties listed for auction actually sell prior to the auction taking place. So as a Developer, I'd definitely recommend you take that road. It gives you a much better chance of finding out what the Vendor needs and putting together an offer that makes both of you happy. Win-win!
If you have no choice other than bidding at the auction though, here's some tips to help your chances of success.
Before the Auction
Be prepared! Wherever possible, do the same due diligence you would have done while the contract was still conditional. This may include:
But, will all of this leave a hole burning in your wallet, let alone your calendar?
Absolutely.
Personally, I call these "regret" costs, or think of them like an insurance policy. I'd rather spend that time and money now to walk away from a deal that turns out to be a dud, than end up with a major headache down the road that costs a lot more to rectify, if it even can be. How often do you see development sites on the market where the numbers don't stack up? It's amazing how often they were last sold only a year or two before. Pay the "regret" costs now. You'll be glad you did.
Auction Day
Two main things to keep in mind on auction day...
Firstly, know your maximum price and stick to it. If you don't think you can, then get someone else to bid on your behalf. Secondly, always remember you can negotiate prior to the auction commencing, both in terms of making an offer or negotiating terms in the auction contract. Also check to see if anyone else has negotiated changes to the contract right up until the auction starts.
Bidding Tips
Very important - have a bidding strategy. Stand where you know the auctioneer can see you, and preferably where you can see other bidders so you can read their body language. When you make a bid, hold up your paddle or hand and call your price out in a loud and confident voice. You can make bids either by calling out the actual price (e.g. $505,000) or the increment ($10,000).
Bidding Strategies
When it comes to strategy, I always have my A game ready, with plan B in my back pocket, just in case. After all, someone else may use your preferred strategy, so it doesn't work if you try and use the same one!
Auctioneers love to get a rhythm going in an auction. It helps the bids flow smoothly and lulls the bidders into going along for the ride. So your job is to hit that rhythm with a sledgehammer.
There are a couple of techniques you can use in the early stages of an auction. One is to jump straight in with a big, confident opening bid. This can make weaker souls recoil in fear, even to the point that they won't bid at all because they're afraid that if you're starting that high, you can go a lot higher.
It’s also a good strategy to stand next to the auctioneer and face the crowd of bidders - that's even more intimidating! Repeatedly asking if the property is on the market yet (which means it's reached the reserve price, being the minimum the Vendor will accept), helps to break up the flow of the auction.
As the auction proceeds, use rapid counterbids to intimidate other bidders. As soon as they call out their bid, your paddle needs to be up ready for you to respond with your own bid. This gives the impression that you still have a long way to go to reach your maximum price. Also change the bidding numbers. Auctioneers like to keep the bids going in matching amounts, so $10k, $10k, $10k. Bid $30k. It immediately results in a pause while the auctioneer recalibrates and works out the new total.
Finally, try not bidding at all until the auction shows signs of slowing down. If you can see there's only a couple of bidders left, and they're taking longer and longer to make each bid, then jump in with your first bid. Even better if it's substantially above the current bid level. This is often enough to take out the stragglers and win you the property. It may mean you pay a little more than necessary, given the other bidders were already hesitating, but if it fits your budget, go for it.
One thing to keep in mind - NONE of these strategies are going to make you popular with the auctioneer. So don't play around with strategies like this unless you're absolutely dead set certain you want to buy the property.
After the Auction
Hopefully it's a case of congratulations! Time to get developing. But another worthwhile strategy can be to wait to see if the property is handed in (didn't meet the Vendor's minimum price) and then negotiate an offer. One thing to keep in mind is that auction conditions generally still apply for a couple of days after the auction (check your state's regulations), so if interest was low, it's definitely better to let that time pass if you can. The advantage you have is that you should have a much better idea of price, having watched your competition bidding, which will help strengthen your negotiating position.
So there you have it - lots of great auction tips for Property Developers. Now you can use a site being up for auction as an opportunity to get a foot in the developing door, given how many other Developers will find it all too hard and walk away.
And if you're interested in learning lots of different ways to buy property, our Property Development Formula course is a great way to learn.
I know a lot of agents love them, spruiking the idea that it gets the vendor the best possible price. And to be fair, if you have two or more emotionally invested buyers bidding against each other, crazy prices can happen.
But in reality...
To win an auction you only need to pay a little bit more than the second-highest bidder. Which is more than likely less than you might have been willing to pay.
The main thing it achieves is to force an unconditional sale. No hanging about for a few weeks while the Buyer scrambles to sort out their finance and inspections. No annoying Lawyers arguing about anything. The Vendor has certainty that the property is sold - and the Agent has certainty that they'll get their commission (ooh, had my cynical hat on there for a second!).
But if you have a site that's going to be of interest to Developers, auctions are even worse - for both the Vendor and the Developer.
For starters, let's take a closer look at why Vendors love auctions.
- unconditional purchase
- no cooling off period
- no finance clause
- no building and pest clause
- no due diligence period
From the Vendor's perspective, it takes all the uncertainty out of the sale. So I get it, I really do! Waiting weeks for a Buyer to get their ducks lined up in a row can be nerve-wracking, so of course the Vendor wants to skip that step.
But now let's look at auctions from a Property Developer's point of view. Professional Developers rarely have huge lumps of cash sitting in a bank account waiting to buy their next site, unless they've just cashed out of a previous development deal.Which means they're probably going to need to do some fancy dancing with banks or investors to pull the funding together to buy a site.
Due diligence for most property developments involves spending time and money to really be certain that the deal has legs. For bigger deals, that can really add up.
Looking back at the list of positives for Vendors, it's obvious that it almost exactly replicates the list of negatives for Developers. Which is why selling a development site via auction is a really bad idea for everyone - including the Vendor. Auctions immediately shrink the pool of potential Buyers faster than a hot summer's day in the Outback.
But wait! There's good news. A third of properties listed for auction actually sell prior to the auction taking place. So as a Developer, I'd definitely recommend you take that road. It gives you a much better chance of finding out what the Vendor needs and putting together an offer that makes both of you happy. Win-win!
If you have no choice other than bidding at the auction though, here's some tips to help your chances of success.
Before the Auction
Be prepared! Wherever possible, do the same due diligence you would have done while the contract was still conditional. This may include:
- Inspection
- Searches
- Building and pest inspections
- Rates
- Body corporate research
- Surveys
- Price research
- Comparables
- Independent valuation
- Development potential - town planner etc
- Pre-lodgement meeting with Council
- Finance
- Copy of contract - read it and get legal advice
But, will all of this leave a hole burning in your wallet, let alone your calendar?
Absolutely.
Personally, I call these "regret" costs, or think of them like an insurance policy. I'd rather spend that time and money now to walk away from a deal that turns out to be a dud, than end up with a major headache down the road that costs a lot more to rectify, if it even can be. How often do you see development sites on the market where the numbers don't stack up? It's amazing how often they were last sold only a year or two before. Pay the "regret" costs now. You'll be glad you did.
Auction Day
Two main things to keep in mind on auction day...
Firstly, know your maximum price and stick to it. If you don't think you can, then get someone else to bid on your behalf. Secondly, always remember you can negotiate prior to the auction commencing, both in terms of making an offer or negotiating terms in the auction contract. Also check to see if anyone else has negotiated changes to the contract right up until the auction starts.
Bidding Tips
Very important - have a bidding strategy. Stand where you know the auctioneer can see you, and preferably where you can see other bidders so you can read their body language. When you make a bid, hold up your paddle or hand and call your price out in a loud and confident voice. You can make bids either by calling out the actual price (e.g. $505,000) or the increment ($10,000).
Bidding Strategies
When it comes to strategy, I always have my A game ready, with plan B in my back pocket, just in case. After all, someone else may use your preferred strategy, so it doesn't work if you try and use the same one!
Auctioneers love to get a rhythm going in an auction. It helps the bids flow smoothly and lulls the bidders into going along for the ride. So your job is to hit that rhythm with a sledgehammer.
There are a couple of techniques you can use in the early stages of an auction. One is to jump straight in with a big, confident opening bid. This can make weaker souls recoil in fear, even to the point that they won't bid at all because they're afraid that if you're starting that high, you can go a lot higher.
It’s also a good strategy to stand next to the auctioneer and face the crowd of bidders - that's even more intimidating! Repeatedly asking if the property is on the market yet (which means it's reached the reserve price, being the minimum the Vendor will accept), helps to break up the flow of the auction.
As the auction proceeds, use rapid counterbids to intimidate other bidders. As soon as they call out their bid, your paddle needs to be up ready for you to respond with your own bid. This gives the impression that you still have a long way to go to reach your maximum price. Also change the bidding numbers. Auctioneers like to keep the bids going in matching amounts, so $10k, $10k, $10k. Bid $30k. It immediately results in a pause while the auctioneer recalibrates and works out the new total.
Finally, try not bidding at all until the auction shows signs of slowing down. If you can see there's only a couple of bidders left, and they're taking longer and longer to make each bid, then jump in with your first bid. Even better if it's substantially above the current bid level. This is often enough to take out the stragglers and win you the property. It may mean you pay a little more than necessary, given the other bidders were already hesitating, but if it fits your budget, go for it.
One thing to keep in mind - NONE of these strategies are going to make you popular with the auctioneer. So don't play around with strategies like this unless you're absolutely dead set certain you want to buy the property.
After the Auction
Hopefully it's a case of congratulations! Time to get developing. But another worthwhile strategy can be to wait to see if the property is handed in (didn't meet the Vendor's minimum price) and then negotiate an offer. One thing to keep in mind is that auction conditions generally still apply for a couple of days after the auction (check your state's regulations), so if interest was low, it's definitely better to let that time pass if you can. The advantage you have is that you should have a much better idea of price, having watched your competition bidding, which will help strengthen your negotiating position.
So there you have it - lots of great auction tips for Property Developers. Now you can use a site being up for auction as an opportunity to get a foot in the developing door, given how many other Developers will find it all too hard and walk away.
And if you're interested in learning lots of different ways to buy property, our Property Development Formula course is a great way to learn.
