Anticipating, (and prepping for) a pass-in

An interesting observation to share relates to the increased rate of auction properties passing in. We have come out of a very heated period of growth and currently, Melbourne’s capital growth rate is quite static.

This is unsurprising, given the global unrest, looming federal election and interest rate rise speculation. Each, in their own right are considerable elements to cool buyer sentiment. Our demand is still eclipsing our supply; auction clearance rates still point to a seller’s market, but our seller’s market conditions come nowhere near rivalling last years’.

Having seen multiple market cycles now, (and specifically the impact of elections, uncertainty in relation to interest rate rises, and global shocks), I’ve noted the correlation between cautious buyer conditions and the increased rate of auction pass-ins.

Cautious buyers are less predictable and fewer in number when it comes to auctions.

Fast-forward a few months, and while buyers are more considered, more cautious and fewer in number, vendors are still holding firm to the ideal that their property is growing in value week by week, and buyer hunger is at 2021 levels.

In short, many vendor’s expectations are not matching reality.

This is always a challenging period for agents and vendors when a market transitions from red hot, to one of caution. Whether the current cautious conditions fade and buyer sentiment regains quickly, (or more gradually) is unknown at this stage, but what is evident in quite a few scenarios is the disparity between vendor expectations and market willingness to meet the reserve.

A buyer’s approach to an auction should always take into account the five possible outcomes;

• the property campaign runs all the way to auction and they are the successful bidder,
• the property campaign runs all the way to auction and they are not the successful bidder,
• the vendor withdraws the property from sale, (the probability of this occurring is higher in a transitioning market such as the current one. A vendor who was less motivated, and clutching to lofty expectations is the type of vendor who would withdraw a listing from sale),
• the vendor sells prior to auction, (usually with the guidance and recommendation from their agent who can sense that the likely buyer numbers are sub-optimal for a successful auction outcome, and
• the property campaign runs all the way to auction and passes in.

It is these final two outcomes that are critical for buyers to be prepared for in our current climate, and each present their own challenges.

The willingness of a vendor to sell prior to auction is usually based on a combination of three things; guidance from their agent, a clear motivation on their part to sell, and confidence that at least one buyer is prepared to make them a fair offer. In a really hot market, it is much harder to tempt a vendor to sell prior to auction and it’s often the result of a particularly strong offer that tempts them to cut their auction campaign short. In today’s market though, this is a little less likely.

When an agent invites a buyer to make an offer prior to auction, it can create all kinds of turmoil for the buyer. They ask themselves questions such as;

“Am I paying too much?”,

“What if we just go to auction, could we buy it cheaper?”

“How will my offer be treated? Could I miss out altogether if the agent asks for best and highest?”

“Why has the vendor suddenly decided to sell prior, after telling the agent that they wanted their auction day?”,

… and so on.

The most important thing for a buyer to find out is why the agent is encouraging a prior offer, how many other buyers are likely to be involved if a negotiation commences, how the agent will deal with the offers, and whether the auction will go ahead or not in the absence of an early offer.

The most important thing for a buyer to know is value. If they have done their comparable sales research, they will have a firm idea of the property’s value. This is the critical element, because without it, a buyer could be nudged into paying a premium for a property that they could have picked up cheaper on auction day.

Likewise, if the vendor’s reserve is fair and reasonable, declining the opportunity and persisting with the auction could prove a mistake also. Experience has taught me that many things can change in the final days leading up to an auction, whether it be late entrants who secure finance at the last minute, (not surprising; banks often run escalation files to an auction deadline and grant pre-approval late on a Friday afternoon), or newcomers who spot the property and inspect for the first time on the Thursday before auction.

Anything is possible, and the opportunity for a buyer to secure a property prior should never be taken lightly.

If, however the campaign proceeds to auction, buyers need to prepare themselves for a pass-in. Too many buyers don’t understand the auction rules and the methods of negotiating that are required in such a situation.

First and foremost, the auctioneer controls the bidding increments. If the reserve hasn’t yet been met, the auctioneer can refuse a bid if the bid increment is less than what is being called for. Yesterday’s auction in Newport is a case in point. My last bid was less than another bidder’s bid, but her bid was not accepted and the property was passed in to me. The agent was calling for $25,000 increments and her bid increase was less than this amount.

I went inside the property and had the first right to negotiate at the vendor’s reserve.

Another important aspect for buyers to note is the importance of ensuring the property passes in on their bid, not the auctioneer’s vendor bid. if an auctioneer passes the property in on a vendor bid, nobody has the exclusive right to negotiate at the vendor’s reserve. The campaign immediately switches to a private sale, where any buyer can make an offer on the property.

Too many auctions of late have exhibited this, and ridiculously, have sold within minutes while buyers who held back during the auction then enter into a post-auction bidding war, likely having to pay a lot more than they could have done had they just put their hand up and bid.

Understanding the auction rules is critical when it comes to walking inside to negotiate. An auction pass-in negotiation can span from minutes to over an hour, but if the negotiations break down and a stalemate results, the agents will declare the property no longer an exclusive negotiation pass-in, and the buyer will be advised that other buyers will have the chance immediately after to negotiate also.

This is a tough tactic, but a genuine one.

The best way to navigate this is to have open dialogue about the perceived value of the property and the terms on offer. A buyer who is armed with comparable sales information will have a far better outcome when negotiating than an unprepared buyer.

An important note for buyers who experience a pass-in auction outcome is to consider how this will likely make them feel, prior to arriving at the auction. For many, the lack of social proof can be a bit of a shock, and many fall prey to wondering why others didn’t bid, and if something is wrong with the property.

Trusting your own pre-auction analysis and due diligence is critical.

Once negotiations commence, if a genuine price limit is in place, a vendor and their agent can’t argue with that. However, if a buyer misses the chance to buy at a fair price that they could have afforded, the feeling of regret will be tough to shake.

Allowing enough time for a negotiation, understanding the vendor’s price expectation, (and their basis for this amount), and remaining clear and focused during the negotiation is critical.

Most of all, a buyer has to anticipate that when sitting inside and conducting the negotiations, they will be surrounded by multiple experienced negotiators.

It can be intimidating for the uninitiated, and knowledge is power.

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