If you've ever attended an auction, then you'll know it's essentially a theatrical performance. The Auctioneer enjoys being the centre of attention, using unusual speech patterns and sudden changes in volume to pump up the audience. There are cliffhanger pauses and a whole rollercoaster of emotions.
Which is great when you're just there to enjoy the show. But when you want to buy the property, it's very easy to get caught up in all the theatre and make some basic mistakes. I'm not a fan of buying at auction, and this is certainly one of the reasons why.
Let's take a look at the mistakes buyers make at auction, so you can avoid making them yourself.
Okay, so the first mistake? Sticking your hand up to bid! Just kidding, that's my dislike of auctions speaking again. Of course sometimes you have no choice if you want to buy the property.
But honestly? My strategy is to ALWAYS make an offer prior to the auction. Real estate agents and particularly auctioneers love auctions, because they buy into all the drama too.
Reality, though, is that a lot of vendors are stressed out by the auction process and are quite happy to sell prior if they get a good offer. Statistics suggest that happens around 30% of the time.
Auctions are also solely about price, but as a property developer, terms are often more important. If you offer the right price before an auction and can also get delayed settlement? Win-win for you and the vendor.
So to me this is the biggest mistake you can make - buying at the auction.
Assuming that you have no choice but to bid at an auction, let's take a look at some other mistakes property developers make.
Do Your Due Diligence
Let's be clear about auctions - you are buying the property on an unconditional contract. That means once you sign on the dotted line, you're locked in. No wriggling out through a finance clause or when you find out the site has an overlay that stops you developing it in a viable way. Maybe if you're desperate enough it's worth crashing the contract and losing your deposit, but that's very much a last resort.
So it's really important to thoroughly research the property before the auction. This includes not only the market value but also the property’s condition, any legal issues, and the neighbourhood. Auction properties are sold "as is" which means any hidden problems will become your responsibility. Get a building and pest inspection done as a bare minimum if you plan to keep the house, but also check for legal issues, overlays and anything else that might block your development plans.
"But Rob," I can hear you say "all of that costs money!" Yes. Yes it does. It sucks even more if you then don't win the auction, particularly if it happens multiple times. But let's get serious now - if you buy a property that turns out to be a dud, you're going to lose a lot more than the small amount it will cost to check it out before you buy. It's basically insurance, and is a cost of doing business.
Know Your Numbers
I'd like to think it goes without saying that before you bid on a property at auction, you've done your feasibility and the numbers stack up. As part of that you need to think about all the extra "stuff" you have to pay for as part of the purchase, from stamp duty to conveyancing costs.
The other number that is vital is your budget. I don't know how many times at auction someone will hit their limit, and then try to squeeze a few thousand more. This is often when auctions get completely bogged down with tiny bids. While this might be great for the auctioneer because it's clear there's more than one bidder who's emotionally attached to the outcome, it's a big mistake for the buyer.
You have your top number. If the auction passes that number, you're out. End of story. Bidding higher starts to put your feasibility in jeopardy. Don't stand in the crowd and start doing numbers in your head "well, if I can get the build cost down a bit I can afford to pay a bit more..." No. Stop bidding.
Again, make sure your budget for the auction includes not just the maximum amount you’re willing to pay for the property and other buy costs, but also any potentially significant repair or renovation expenses if you're keeping the house.
Keep Emotions Out Of It
I've already touched on this, but it's important to repeat it. If you're buying a development site at auction, emotions don't come into it. You know your numbers, you've done your due diligence. Approach the auction with logic and clarity.
And look, I get it. Finding good sites that stack up can be tough, and when you've already missed a few it's hard to resist the urge to tweak things a little and start chasing the deal. No. Stop bidding.
I want to be really clear about this. Emotional attachment can cloud your judgment and lead to overspending. It’s essential to remain objective and treat the auction as a business transaction. Establish a maximum bid based on your budget and stick to it, no matter how much you like the property.
If you find yourself getting too attached, it might be wise to step back and reassess your priorities. Remember, there will always be other auctions and opportunities. Or, if you still know from your research that the deal stacks up, get someone else to attend the auction on your behalf.
Auction Terms & Conditions
Each auction has specific terms and conditions that dictate how the process will work, including the timeline for payment and settlement. The auctioneer will announce these as part of the auction process. Ignoring these details can result in unexpected costs or losing the property. Always read the auction's terms and conditions carefully, and if anything is unclear, seek clarification from the auction house or a legal advisor.
Sounds rock solid, right? Did you know that you have the right to negotiate your own terms prior to the auction? For example, you might want 90 days for settlement, but the auction conditions say 60 days. You can negotiate the longer settlement in the lead up to the auction, and if you win the auction, that condition becomes part of the contract.
This is a hidden gem, because almost nobody knows you can do it. So if you need special conditions to make the deal work, ask for them! Don't let the agent intimidate you into thinking you have to accept the conditions they've laid out. Learning that was definitely worth the effort of reading this far!
Lack of Finance Preparedness
Bidding at an auction when you don't have finance approval or cash in the bank is definitely a recipe for disaster, so you should have that in place before you bid.
The other thing to think about is that you will be expected to pay a deposit on the day. You're welcome to carry a briefcase full of cash with you to the auction, but nowadays most people pay electronically.
Which means you need to have the money sitting in an account that you can access then and there, and be able to transfer the full amount you need straight away. The last thing you want is to have $65k in your account ready to pay the deposit, only to discover you have a maximum daily transfer limit. Solve those issues before the auction!
Side note: agents will always ask for 10% deposit, but this is a condition you can negotiate prior as per my earlier comments.
Buying property at auction can be a rewarding endeavour, but it requires careful planning, thorough research, and disciplined execution. By avoiding these common mistakes, you can enhance your chances of success and make the most of your auction experience. Remember, preparation and knowledge are your best allies in the fast-paced world of property auctions. Happy bidding! Or not, if you took my advice and made a prior offer and it was accepted.
Which is great when you're just there to enjoy the show. But when you want to buy the property, it's very easy to get caught up in all the theatre and make some basic mistakes. I'm not a fan of buying at auction, and this is certainly one of the reasons why.
Let's take a look at the mistakes buyers make at auction, so you can avoid making them yourself.
Okay, so the first mistake? Sticking your hand up to bid! Just kidding, that's my dislike of auctions speaking again. Of course sometimes you have no choice if you want to buy the property.But honestly? My strategy is to ALWAYS make an offer prior to the auction. Real estate agents and particularly auctioneers love auctions, because they buy into all the drama too.
Reality, though, is that a lot of vendors are stressed out by the auction process and are quite happy to sell prior if they get a good offer. Statistics suggest that happens around 30% of the time.
Auctions are also solely about price, but as a property developer, terms are often more important. If you offer the right price before an auction and can also get delayed settlement? Win-win for you and the vendor.
So to me this is the biggest mistake you can make - buying at the auction.
Assuming that you have no choice but to bid at an auction, let's take a look at some other mistakes property developers make.
Do Your Due Diligence
Let's be clear about auctions - you are buying the property on an unconditional contract. That means once you sign on the dotted line, you're locked in. No wriggling out through a finance clause or when you find out the site has an overlay that stops you developing it in a viable way. Maybe if you're desperate enough it's worth crashing the contract and losing your deposit, but that's very much a last resort.
So it's really important to thoroughly research the property before the auction. This includes not only the market value but also the property’s condition, any legal issues, and the neighbourhood. Auction properties are sold "as is" which means any hidden problems will become your responsibility. Get a building and pest inspection done as a bare minimum if you plan to keep the house, but also check for legal issues, overlays and anything else that might block your development plans.
"But Rob," I can hear you say "all of that costs money!" Yes. Yes it does. It sucks even more if you then don't win the auction, particularly if it happens multiple times. But let's get serious now - if you buy a property that turns out to be a dud, you're going to lose a lot more than the small amount it will cost to check it out before you buy. It's basically insurance, and is a cost of doing business.
Know Your NumbersI'd like to think it goes without saying that before you bid on a property at auction, you've done your feasibility and the numbers stack up. As part of that you need to think about all the extra "stuff" you have to pay for as part of the purchase, from stamp duty to conveyancing costs.
The other number that is vital is your budget. I don't know how many times at auction someone will hit their limit, and then try to squeeze a few thousand more. This is often when auctions get completely bogged down with tiny bids. While this might be great for the auctioneer because it's clear there's more than one bidder who's emotionally attached to the outcome, it's a big mistake for the buyer.
You have your top number. If the auction passes that number, you're out. End of story. Bidding higher starts to put your feasibility in jeopardy. Don't stand in the crowd and start doing numbers in your head "well, if I can get the build cost down a bit I can afford to pay a bit more..." No. Stop bidding.
Again, make sure your budget for the auction includes not just the maximum amount you’re willing to pay for the property and other buy costs, but also any potentially significant repair or renovation expenses if you're keeping the house.
Keep Emotions Out Of It
I've already touched on this, but it's important to repeat it. If you're buying a development site at auction, emotions don't come into it. You know your numbers, you've done your due diligence. Approach the auction with logic and clarity.
And look, I get it. Finding good sites that stack up can be tough, and when you've already missed a few it's hard to resist the urge to tweak things a little and start chasing the deal. No. Stop bidding.
I want to be really clear about this. Emotional attachment can cloud your judgment and lead to overspending. It’s essential to remain objective and treat the auction as a business transaction. Establish a maximum bid based on your budget and stick to it, no matter how much you like the property.
If you find yourself getting too attached, it might be wise to step back and reassess your priorities. Remember, there will always be other auctions and opportunities. Or, if you still know from your research that the deal stacks up, get someone else to attend the auction on your behalf.
Auction Terms & Conditions
Each auction has specific terms and conditions that dictate how the process will work, including the timeline for payment and settlement. The auctioneer will announce these as part of the auction process. Ignoring these details can result in unexpected costs or losing the property. Always read the auction's terms and conditions carefully, and if anything is unclear, seek clarification from the auction house or a legal advisor.
Sounds rock solid, right? Did you know that you have the right to negotiate your own terms prior to the auction? For example, you might want 90 days for settlement, but the auction conditions say 60 days. You can negotiate the longer settlement in the lead up to the auction, and if you win the auction, that condition becomes part of the contract.
This is a hidden gem, because almost nobody knows you can do it. So if you need special conditions to make the deal work, ask for them! Don't let the agent intimidate you into thinking you have to accept the conditions they've laid out. Learning that was definitely worth the effort of reading this far!
Lack of Finance Preparedness
Bidding at an auction when you don't have finance approval or cash in the bank is definitely a recipe for disaster, so you should have that in place before you bid.
The other thing to think about is that you will be expected to pay a deposit on the day. You're welcome to carry a briefcase full of cash with you to the auction, but nowadays most people pay electronically.
Which means you need to have the money sitting in an account that you can access then and there, and be able to transfer the full amount you need straight away. The last thing you want is to have $65k in your account ready to pay the deposit, only to discover you have a maximum daily transfer limit. Solve those issues before the auction!
Side note: agents will always ask for 10% deposit, but this is a condition you can negotiate prior as per my earlier comments.
Buying property at auction can be a rewarding endeavour, but it requires careful planning, thorough research, and disciplined execution. By avoiding these common mistakes, you can enhance your chances of success and make the most of your auction experience. Remember, preparation and knowledge are your best allies in the fast-paced world of property auctions. Happy bidding! Or not, if you took my advice and made a prior offer and it was accepted.
