Avoiding a bidding war

If I had a dollar for every buyer who had said to me, “Cate, I don’t want to enter into a bidding war”, I’d have a lot of full piggybanks. It’s an understandable avoidance, particularly for those who have had their hearts set on a property, only to be outbid by someone else’s higher offer.

In a recovering market, we often find that buyers experience a much harder period of adjustment to competitive bidding scenarios. During the time of price downturns or static buying conditions, buyers essentially have it good when it comes to competition. Days on market are longer, auction bidding numbers are lighter, auction clearance rates are lower, and private negotiations are easier.

Our Australian property markets eventually recover, though, as history has shown us time and time again. The coalface feels different and while the data doesn’t immediately reflect the change in mood, agents and buyers alike can sense it. Auctions are a bit more competitive, some sale prices are surprisingly strong, private sales are moving at a quicker pace, and more buyers are attending open for inspections.

Telling a buyer who has experienced the market trough buying conditions to prepare for competition is hard. The mere idea of someone else coming along with a stronger offer is enough to put many buyers off bidding or participating in the negotiation.

“Cate, I’m not interested in a bidding war”, they say.

But once a market is strengthening, avoiding bidding wars can cost a buyer a good property in a moving market.

A bidding war can certainly take the edge of what would have been a bargain buy. Sometimes a bidding war will result in a buyer paying more than they had assessed the market value of the property to be. If we cast our mind back to the heat of the 2021 market, where many cities experienced price growth above 2% per month, the reality was that a $1,000,000 property was growing in value by over $600 per day at this time. Buyers had to be prepared to set the new record with each sale in such a moving market.

The potential cost of avoiding a bidding war is three-fold.

Firstly, if the property is particularly special and well-suited to the buyer, the sense of regret once it has sold to someone else could be quite heartbreaking. We often find that in situations where buyers avoid a high-scoring owner-occupier property out of an unwillingness to compete for it, they later look back and feel a strong sense of sadness. The ongoing implication of this occurs when they fantasise over the property they missed out on, building it up in their mind, and they then compare every future opportunity to the on they let get away. This kind of behaviour can thwart a search going forward.

Secondly, if the market transition has been quick and price growth is gripping, (akin to the COVID boom), the pace of growth could outstrip the buyer’s budget and leave them focusing on lesser-quality, or smaller properties as a result of budget constraint.

It’s the the third cost that is the most expensive long term, however.

When buyers actively avoid competition, it often means that they are selecting properties with limited appeal. After all, it makes sense that if a market is heating up and some properties have limited, (or nil) buyer interest, there could be some obvious flaws to the property. Maybe the dwelling is on a main road? Or perhaps it has a difficult encumbrance or title? Or it could have some serious maintenance issues or expensive levies that the new purchaser will have to remedy. Another possibility is that it’s overpriced to start with, and no buyers are interested in that particular asset at the vendor’s asking price.

Not always, but often a property languishes on the market due to these reasons.

One of the most dangerous things a buyer can do in an effort to avoid competition is to go on a quest for an off-market purchase, particularly if they aren’t prepared to do the due diligence and pricing analysis. Currently, we are experiencing considerably more ‘off-market’ pitches from agents, whether it be a text, an email or a phone call. The reason why there are so many more off-market opportunities is because agents know that there is a cohort of buyers who will jump onto these ‘off-market’ deals for the sake of telling themselves that they bought an off-market property.

Sadly, only a tiny proportion of the off-markets that agents are pedalling are actually good.

The vast majority are either compromised, over-priced, or both. If you are currently in the market and receiving agent emails and texts about off-markets, test this theory and have a look at the location and price of each offering. So many are on main roads or awkward locations. Others have terrible floor plans or poor quality workmanship. And so many of them are absolutely overpriced.

People have forgotten what constitutes a good reason for an off-market. Vendors who want top dollar and don’t want to pay for any online advertising are not great off-market vendors. A good off-market is a fairly priced, quality asset with a motivated vendor. And why would such a vendor sell for a fair (or discounted) price, when stock levels are so low and buyer appetite is increasing? A truly motivated off-market vendor is usually selling due to a genuine financial need for a swift sale. It may be because they bought an upgrade/downsizer property and they need to sell their current home in order to manage the settlement. Or they may be off-loading an investment property that has a lease in place for financial reasons. Sometimes an off-market vendor is tackling a tricky situation (or they require a set of terms that are not mainstream). Whatever the reasons, these aren’t opportunistic ones. An opportunistic vendor’s off-market is one to avoid.

And a pre-market, wrapped up in disguise as an ‘off-market’ is downright dangerous. They can lure buyers in, attract honest offers, only to be launched for an auction campaign a few weeks later. Vendors and agents then have a firm idea of genuine buyer interest, including the price that interested buyers would be prepared to pay. During this period, buyers are focusing their energy on properties that were never truly off-market to begin with, and likely missing out on exploring other possible options.

Targeting off-market sales just to avoid competing buyers is a terrible solution.

The best way to minimise competition is to be decisive and move swiftly when the right property comes along. Sometimes agents will run an auction campaign all the way to auction day, meaning that the chance of competition (and heartache) is higher, but in quite a few situations, buyers can make a firm and fair offer and trigger a sale on an auction property before auction day. When considering private sales, stealth is the key. Once the due diligence and pricing analysis is complete, a thorough contract review can be quickly organised and the negotiation can commence quickly. The earlier the offer process is managed, the shorter the period of time will be for new buyers to be attracted to the sales campaign.

Auctions have been around since as early as 500BC during the Roman Empire. The word ‘auction’ in latin means “I increase”. While it’s human behaviour to avoid price increases, (whether auctions or multiple buyer private sales), competitive bidding is often key to attaining the prize.

Avoiding it means avoiding the prize itself.