Lord Tennyson famously wrote “In the spring a young man’s fancy lightly turns to thoughts of love…!” When it comes to real estate, that could be rewritten as something more like "In the spring, real estate agents start to drool at the thought of all those lovely auctions!"
Once only the darling of Sydney and Melbourne’s inner suburbs, during the pandemic the love of auctions has spread far and wide, despite the fact that many have been conducted online.
In some ways this is understandable - many agents have been unable to conduct home inspections during lockdowns, or have been severely restricted in how inspections can be conducted. The old days of giving the vendor a ring and popping over 30 minutes later with a prospective buyer vanished.
So auctions made sense. A couple of carefully controlled open for inspections if allowed, a short campaign, an auction, done. Given the scarcity of listings on the market, it worked gangbusters.
But then an interesting statistic started to emerge - the number of properties that sell prior to auction is remarkably high. How high, I hear you ask? Why? And how can I turn that to my advantage?
I'm glad you asked!
How Many Properties Are Selling Prior to Auction?
The statistics on pre-auction sales fluctuate a LOT, from lows of 2-3% prior to the pandemic, right up to highs around 87% in the early months. While there's still substantial changes from week to week, the average has settled down to somewhere in the 30-40% range.
And when you think about it, that's HUGE! It also means that if you're interested in buying a development property, waiting for the auction to happen means you may end up with no property to buy at all..
WHY??
Potentially there may be many reasons why vendors will accept a pre-auction offer for their property, but the biggest one is CERTAINTY.
Real Estate Agents might enjoy the short lead up times and drama around auctions, because they know it gets them their commission more quickly. But vendors? The whole process generally scares the bejeezus out of them.
On TV makeover shows they love to show the happy vendors celebrating with delight when their property sells, but pay careful attention to the scenes earlier in the auction. Most vendors look like the proverbial deer in the headlights as they try to manage their fear and panic.
For many vendors, they'd rather have the certainty of a sale at a fair and reasonable price than the uncertainty of an auction. Maybe they've already put an offer on their next property. Maybe they need a certain amount of money to do whatever they plan to do next. The list is endless.
But if you dig deep enough, underlying almost all decisions to accept a pre-auction offer is the reassurance of certainty. That's what most vendors want.
How Can I Turn This To My Advantage?
Now that you know how many times a pre-auction offer can potentially be successful, ALWAYS make an early offer! I've done this successfully on many occasions, and here's my strategy - make two offers.
I'm not simply talking about making your first offer and then raising the price if the vendor says no. I'm saying make two completely different offers. Let me explain.
Offer 1 - This is basically my auction offer. It's the price I'm willing to pay for the property under auction conditions, because I know there is not much scope for varying the terms and conditions in a way that is financially beneficial to me.
Offer 2 - This is my offer based on terms that suit me and, if I've done some research, also meet the vendor's needs. In my offer, for example, I might offer to pay $100k as a deposit (so they can pay the deposit on their retirement home) but delay settlement for 12 months (so I have time to organise the Development Approval and that's when they have to pay the balance on their retirement home). Because I've saved money not having to pay for the property outright, I can pass those savings on to the vendor, and pay more for the property.
In a nutshell:
Put yourself in the vendor's shoes for a minute. You need $100k for a deposit, but you don't need to pay the balance on the retirement home for 12 months. Right now you have an offer in front of you that meets your needs AND gives you a higher price than you were expecting. Or you can wait for the auction in two weeks and see what happens. What would you do?
Well, I think you're going to say "Yes, please!" and sign.
On the flip side of this, if you're selling a development site, I'd recommend you push back against Real Estate Agents who are pushing you to go to auction. Most property developers don't have a large chunk of cash sitting in a bank account, or find obtaining development finance slow and complicated when they have multiple deals on the go - so why make it harder for them by forcing them into auctions? Chances are a lot of them won't even bother.
I remember hearing a statement many years ago which was "if you want to make your property easy to sell, then make it easy to buy". So I recommend that as a Property Developer you flip this statement on its head when it comes to properties listed for auction. Make properties easy to buy by making it easy for the vendors to sell - because you've given them what they need.
Once only the darling of Sydney and Melbourne’s inner suburbs, during the pandemic the love of auctions has spread far and wide, despite the fact that many have been conducted online.
In some ways this is understandable - many agents have been unable to conduct home inspections during lockdowns, or have been severely restricted in how inspections can be conducted. The old days of giving the vendor a ring and popping over 30 minutes later with a prospective buyer vanished.
So auctions made sense. A couple of carefully controlled open for inspections if allowed, a short campaign, an auction, done. Given the scarcity of listings on the market, it worked gangbusters.
But then an interesting statistic started to emerge - the number of properties that sell prior to auction is remarkably high. How high, I hear you ask? Why? And how can I turn that to my advantage?
I'm glad you asked!
How Many Properties Are Selling Prior to Auction?
The statistics on pre-auction sales fluctuate a LOT, from lows of 2-3% prior to the pandemic, right up to highs around 87% in the early months. While there's still substantial changes from week to week, the average has settled down to somewhere in the 30-40% range.
And when you think about it, that's HUGE! It also means that if you're interested in buying a development property, waiting for the auction to happen means you may end up with no property to buy at all..
WHY??
Potentially there may be many reasons why vendors will accept a pre-auction offer for their property, but the biggest one is CERTAINTY.
Real Estate Agents might enjoy the short lead up times and drama around auctions, because they know it gets them their commission more quickly. But vendors? The whole process generally scares the bejeezus out of them.
On TV makeover shows they love to show the happy vendors celebrating with delight when their property sells, but pay careful attention to the scenes earlier in the auction. Most vendors look like the proverbial deer in the headlights as they try to manage their fear and panic.
For many vendors, they'd rather have the certainty of a sale at a fair and reasonable price than the uncertainty of an auction. Maybe they've already put an offer on their next property. Maybe they need a certain amount of money to do whatever they plan to do next. The list is endless.
But if you dig deep enough, underlying almost all decisions to accept a pre-auction offer is the reassurance of certainty. That's what most vendors want.
How Can I Turn This To My Advantage?
Now that you know how many times a pre-auction offer can potentially be successful, ALWAYS make an early offer! I've done this successfully on many occasions, and here's my strategy - make two offers.
I'm not simply talking about making your first offer and then raising the price if the vendor says no. I'm saying make two completely different offers. Let me explain.
Offer 1 - This is basically my auction offer. It's the price I'm willing to pay for the property under auction conditions, because I know there is not much scope for varying the terms and conditions in a way that is financially beneficial to me.
Offer 2 - This is my offer based on terms that suit me and, if I've done some research, also meet the vendor's needs. In my offer, for example, I might offer to pay $100k as a deposit (so they can pay the deposit on their retirement home) but delay settlement for 12 months (so I have time to organise the Development Approval and that's when they have to pay the balance on their retirement home). Because I've saved money not having to pay for the property outright, I can pass those savings on to the vendor, and pay more for the property.
In a nutshell:- Offer 1 is their terms, my price
- Offer 2 is a better price, my terms
Put yourself in the vendor's shoes for a minute. You need $100k for a deposit, but you don't need to pay the balance on the retirement home for 12 months. Right now you have an offer in front of you that meets your needs AND gives you a higher price than you were expecting. Or you can wait for the auction in two weeks and see what happens. What would you do?
Well, I think you're going to say "Yes, please!" and sign.
On the flip side of this, if you're selling a development site, I'd recommend you push back against Real Estate Agents who are pushing you to go to auction. Most property developers don't have a large chunk of cash sitting in a bank account, or find obtaining development finance slow and complicated when they have multiple deals on the go - so why make it harder for them by forcing them into auctions? Chances are a lot of them won't even bother.
I remember hearing a statement many years ago which was "if you want to make your property easy to sell, then make it easy to buy". So I recommend that as a Property Developer you flip this statement on its head when it comes to properties listed for auction. Make properties easy to buy by making it easy for the vendors to sell - because you've given them what they need.
