Are there negotiation rules that agents are bound to?

I am often asked by prospective purchasers, “Can an agent do that?” when they have had a disappointing outcome in a pre-auction or negotiation situation. The reality may surprise some. Agents are bound by auction rules, but negotiation and pre-auction scenarios are quite different.

When imbalance in our market conditions strike, campaigns are more likely to have twists and turns. Whether a market is a competitive, seller’s market, or a quiet and challenging buyer’s market, agents will pivot accordingly.

Agents can dictate their own rules.

Post COVID lockdowns, we found ourselves in a tough buying climate. This is technically referred to as a Seller’s Market and characterised by demand outpacing supply, and defined by the auction clearance rate figures being above 65%. Auction success for most buyers is threatened by heated bidding, crazy budgets, and desperate buyers. 

It is little wonder that buyers were making early offers before auction day.

In a seller’s market climate, many agents and their Vendors  simply reject the offers, adjust the campaign quote and run the property to auction. But when a particularly strong offer is received, the agent may encourage their Vendors to ‘place the property on the market’ . it is at  this moment that the agent’s rules become really important to understand.

One of the biggest mistakes a buyer can make is assuming that all agents handle competing buyers the same.

We’ve had many distressed phone calls over the years with buyers asking us how to navigate a negotiation which they, themselves have instigated. 

Buyers who assume that they can buy a property exclusively and without competition when they know that the property has been advertised with a public auction date are naive. The Vendor has paid for an auction campaign and all of the media advertising which goes with it. Buyers who have seen the house or any of its advertising material are expecting it to sell publicly on the advertised date.  If an offer is received in the Vendor’s acceptable selling range are received prior to auction, the agent owes it to their vendor to inform every other buyer who has expressed interest in the property that the rules are changing. The auction is no longer going ahead and the property will sell prior. 

This is where things get interesting.

Once a sale is no longer occurring on, (or within three business days’ before or after) the advertised auction date (*in the state of Victoria), auction conduct rules no longer apply.

This means that the agent can apply their own process for how they wish to handle competing buyers. There is no legislation which defines how agents must host a competitive sales campaign, other than the fact that they are bound by the Act to be honest and present all offers to the Vendor. How they go about facilitating the sale process is something which every buyer considering making a pre-auction offer should determine before they make any offers.

Some agencies have a published process. Others determine the process based on the number of competing buyers. Some let the Vendors decide. Others have their own individual preferences for handling competition.

It is essential as Buyers Advocates for us to know exactly what the process is before we pounce in with pre-auction offers.

Processes include, but aren’t limited to:

• A boardroom auction the following day, (the interested buyers meet at the agency and bid against each other in a boardroom where the auction is ‘simulated’ and usually hosted by an auctioneer.) While it feels like an auction, auction rules do not apply. Cooling off periods are still available if the auction is more than three business days’ away. Conditional offers are generally not acceptable but the agents can define whether this is the case.
• Round-robin style competing; usually via phone. The agent commits to going around to each buyer, fully disclosing each incremental offer until the last man stands. 
• “Best and highest”; a much-loathed secret-ballot style negotiation where buyers are given one deadline to submit their ‘best and highest’ offer. It should be a process where no offers are disclosed but it isn’t always the case. As Buyers Advocates we avoid this method of negotiation at all costs, unless the property is likely outside of our client’s budget. In these situations, a buyer can sometimes get lucky and buy at their best and highest price when they would most likely been outbid at auction, but in most cases it is a method where remorse or disappointment strikes. Buyers don’t like flying blind or ‘guessing’ prices.

On the flip-side, when buyer’s market conditions strike, campaigns can also be challenging to negotiate. Agents will be more likely to facilitate sales quickly, (and sometimes with limited or little notice to other buyers). Agents will track their vendor’s campaigns carefully, and if they feel that they only have one likely or obvious buyer, they may encourage that buyer to make an offer prior to auction day.

After all, the power will shift significantly for the buyer if they are the only bidder on auction day.

If an agent feels that the optimal outcome for their vendor’s sale is to name a fair price and sell swiftly to one buyer prior to auction, they will do so. The risk of their only buyer spotting another property in the lead up to the auction could be concerning them.

It is a tough gamble for some buyers. Do they secure the property now, without competition, for a price that seems fair? Or do they resist the opportunity and head to auction? If the scales tip in their favour, the property will pass in to them and they will likely be able to negotiate a sharper deal. But if another buyer comes along in the days or weeks leading up to auction, they will have competition.

If a buyer needs to incorporate a condition into their contract that would typically be refused at auction, a careful pre-auction offer may be the only option for them.

We have had many years of interesting negotiation experiences, and two particular actions hold us in good stead. Asking the right questions gives us a better appreciation of the conditions that the agent and the vendor are facing.

Establishing the agent’s rules is essential because these rules can determine whether it’s a good idea to buy prior to auction, or a terrible idea. Not all competing-buyer processes suit all buyers, and making the decision which is right for you is vital.