Information for House Buyers
Because I have written an ebook on buying a house at auction, I would be cutting off my nose to spite my face if I simply repeated all of the information and advice in the book here on this website. So what you will find in this section of the website are a basic overview of the auction process from a buyer’s point of view. In doing that I will provide bits of general information and advice about buying a house at auction.
The whole process in a nutshell
You have found a house you would like to buy. It is going to be sold at a public auction. What do you have to do?
In my book I suggest that the main things that you have to do are:
Work out what its likely market price is, then work out what it is worth to you, then work out what your auction limit should be.
Check that it doesn’t have any hidden problems (legal, structural, pest, boundary, location, practical).
Check that you haven’t overlooked any obvious problems with it (design, location, what it has or doesn’t have, what needs fixing).
Organise your finances.
Work out your auction strategy.
Attend and bid at the auction.
Unfortunately all of that is going to involve a fair bit of work. But then, if you are like most people, the house is going to be one of the biggest purchases that you ever make in your life, so any time that you devote to it is definitely going to be time well spent. That applies with bells on if you discover that the house has problems that mean that you will be better off not buying it.
And one of the great things about the house going to auction is that it means that all of the work that you will have to do has to be done by a set date: the date of the auction.
That raises another issue. Most buyers hate having to buy at auction, but in fact they shouldn’t. That’s because:
Auctions are good news!
Open auction (by which I mean the normal auction process where potential buyers come together and keep bidding until there is only one bidder left) is the best way to buy a house.
I go into the reasons for this in great detail in my book, but for present purposes it is perhaps sufficient if I draw your attention to the section of this website that I have written for house sellers. In that section, I very strongly urge house sellers to not sell their house by open auction because it does them no favours. Auctions are great for real estate agents, but can be very bad for house sellers. So, logic dictates, in a zero sum game (that is, between buyers and sellers, one’s gain is the other’s loss, and vice versa) that if something can be very bad for house sellers, it must be good for house buyers. (Don’t worry, my book gives a much more practical explanation.)
Essentially, open auctions are a means to determine what the highest price the SECOND highest bidder is prepared to pay. There are other methods of buying a house that are designed to determine the highest price that anyone is prepared to pay. These methods include sealed bid auctions, expressions of interest campaigns, various forms of private sale and Dutch auctions.
Sure open auctions might be a bit stressful, but isn’t it worth it if it means that you might have the chance to get a bargain ?
And in any event, in my opinion auctions can be character-building (in the best possible sense of that term) and fun. In fact, I have a Chapter in my book devoted solely to describing how that may be so.
How to reduce auction stress
Talking of stress, there are ways to reduce the stress of auctions, and, you guessed it, my book describes them in detail.
In a nutshell, there are 4 ways to reduce the stress of auctions:
Make sure you are at the right auction.
Have a bidding limit and strategies to stick to it.
Know beforehand how auctions work.
Have a strategy to counter dummy bidding if you think it might happen.
Make sure you are at the right auction
What this means is that you should only attend auctions to buy at if the likely market price of the house is a price that you can afford (unless, of course, you are happy to take your chances on getting a bargain). What that, in turn, means is that you need to work out the likely market price of the house for yourself. In the past too many people have turned up to auctions with the intention of buying relying solely on what the agent for the seller has told them is likely to be the price at which the house will sell.
Now, in the good old days agent’s estimates were often outrageously wrong (and, curiously, they were all wrong in the same direction, that is they were almost always significant underestimates of the price). These days they tend to be more accurate, but they are still not something you should accept without question, and you certainly shouldn’t base an entire buying campaign on such estimates.
So how do you work out the likely market price of a house for yourself ?
Unfortunately, my book contains no suggestion as to how you can magically come up with this figure. The only way to come up with the figure is to do research, in other words, to do hard work. At the very least it will involve going to a number of house inspections, and then following up to find out what those houses were sold for.
By the way, there are apps that do magically come up with a suggested figure, but they also have limitations that mean that you would be unwise to rely solely on them, assuming that they do give you a figure, which is not always the case.
I should also mention that working out what the likely market price of a house is only part of what you have to do if you are intending to buy a house at auction. Once you know the market price, you then have to work out how much you are prepared to pay for the house. That might be more, or less, than the likely market price.
Have a bidding limit and strategies to stick to it
For many people, the most stressful thing about going to an auction to buy is the fear that they will pay more for a house than they can afford. It is, therefore, not a very profound insight to suggest that the way to overcome this fear is to go the auction knowing what amount you can afford to pay for the house, and then having plans in place to make sure that you don’t go over that amount. In my book I call having a limit “the golden rule of auctions – part 1”, and I call sticking to your limit “the golden rule of auctions – part 2”.
With respect to this latter, even instructing your spouse to hit you over the head with an umbrella if it looks like your finger is twitching after you have passed your limit will do the trick (actually, I haven’t specifically mentioned that strategy in my book, but it fits in with one of my more general suggestions – there are also more sophisticated suggestions that don’t involve possible charges of assault).
By the way, knowing how much you can afford to pay for a house is not as simple as working out how much money you will have available. In setting an auction limit you also have to take account of buying costs such as land transfer fees, stamp duty and conveyancing costs. Those are additional costs that you will have to pay within about 3 months of the auction at the latest, and the amount you will have to pay for stamp duty, in particular, is quite significant. You should also take into account what I call “incidental” costs – things like the costs of moving, insurance and fixing up things that might need fixing up before, or just after, you move in.
Know beforehand how auctions work
According to surveys, the second biggest fear people have about bidding at auctions is the fear of not knowing what to do, or doing the wrong thing. Again, it is not a profound insight to suggest that to prevent this fear from causing you stress, it would be a good idea for you to get some idea of how auctions run before you go to an auction to bid so there will be no surprises on the day. And it would be a good idea to have worked out before you go exactly what you will do at the auction. (There is more information about that below.)
As I mention in the book, once you know the drill, auctions can be pretty humdrum – they are definitely not rocket science, or else I couldn’t possibly have written a book about them.
But you still need to do some homework. The best way is to go to several auctions beforehand to see how auctions run (or don’t, as the case may be – lots of auctions turn out to be what I call “dead” auctions, that is auctions where no bids other than vendor bids are made). Of course, the absolute best preparation is to buy my book, read it (I’m afraid that’s a fairly vital step if you head down this path, as simple buying it won’t help you that much), follow the advice in it, and, in the light of the information and advice in the book, go to auctions to see how they run. But, then, I would say that, wouldn’t I ? (Did I mention the money-back guarantee, so if you find that you don’t like my advice, it won’t have cost you anything ?)
One significant anti-stress thing that you can do in relation to an auction is to work out beforehand when you will start bidding, and how you will bid. The biggest chunk of my book is all about that. The actual list of things that you need to do is very short, and can, in fact, be very simply expressed, but the thinking behind them takes a few pages to explain. (If you have read this far you will have realised by now that pithiness is not one of my strong points.) It is also useful, from an anti-stress point of view, to have some idea of what sort of tactics auctioneers and other bidders might try to use against you. That takes quite a few pages to explain.
Have a strategy to counter dummy bidding if you think it might happen
Does dummy bidding still happen? I think that there are still circumstances in which it might happen (even though it has been specifically against the law for quite some time). In particular, if there is a reasonable chance that the auctioneer might know how much you can pay for a house (and that can happen in a number of quite innocent ways), there is an increased risk of dummy bidding. To avoid stress associated with that risk it is a good idea to have worked out a strategy to counter possible dummy bidding. (Unfortunately, the best strategy to counter dummy bidding is only available to Victorians because of quirks in the law in other States.)
Other auction preparation
I started this section by listing all of the things that you need to do to prepare for an auction. That list was:
Work out what its likely market price is, then work out what it is worth to you, then work out what your auction limit should be.
Check that it doesn’t have any hidden problems (legal, structural, pest, boundary, location, practical.)
Check that you haven’t overlooked any obvious problems with it (design, location, what it has or doesn’t have, what needs fixing.)
Organise your finances.
Work out your auction strategy.
Attend and bid at the auction.
I have pretty much covered the first of these in discussing how to reduce auction stress. What follows is a quick look at the rest of these points.
Check for hidden problems
Unlike books giving auction advice, no house is perfect. (Just kidding with respect to the books, well, my book, anyway.) Every house has a problem of one sort or another. The trick with buying a house is to know what the problems with it are BEFORE you buy, so you can factor them into your decision as to how much you are willing to pay for the house.
It is unrealistic to expect that you will be able to discover all of the problems with a house before you buy it, but it is realistic to hope to be able to discover most of the deal-breaking problems, provided there is enough time. That’s the rub. Time. Actually, it‘s only one of the rubs. There’s also the rub of expense. And with expense, there’s the further problem that you might be spending money on a house that you won’t be successful in getting. So when you find a house you want that is about to be auctioned, you will have a whole lot of decisions to make in relation to checking the house out:
are there any legal problems with the house ?
is the house structurally sound ?
does the house have any pest problems ?
are there any problems with the boundaries of the land ?
how easy will it be to get to and from work, and to shops, and to schools ?
are there problems with nearby noise, smells or neighbours ?
Some of this stuff you can pay people to check out for you, some of it you can check out for yourself. With respect to getting paid reports, as to whether you do or not often comes down to an assessment of likely risks versus the likely expense. With respect to the other stuff, it’s more a matter of realising what you need to check, and how best to go about it.
Check that obvious problems haven’t been overlooked
Some houses have all the right sort of rooms, but when you think about how the rooms relate to each other, you quickly realise that the house has not been well designed, and that that poor design might create problems for you if you lived in the house. That sort of thing is easy to overlook the first time you see a house, because there is so much to look at.
Or on a second look you might realise that the house is on a street that is so narrow that you might have trouble getting to or from the house by car at times when there is a fair bit of traffic on the street. Or that trees on a neighbour’s property, or on the nature strip out the front, might prevent the house from getting sunlight at certain times of the year. Or that reversing out of the garage will require considerable driving skill and a car with a reversing camera if you don’t want to risk a neck strain. Or that the garden will be pretty high maintenance, and no one in the family has a green thumb. Or that certain things will be needed, or need to be replaced or repaired or painted before you can comfortably move in
I think you get the idea.… At the very least you should have a second look at any house you are interested in well before the auction. And that look should be without the rose-coloured glasses
Organise your finances
You should never bid at an auction unless you know that you will have available to you 10% of the amount you bid pretty much immediately, and then the rest of that amount by the settlement date. You are flirting with disaster if you ignore this advice, particularly with the way the finance industry operates at the moment.
Work out your auction strategy
On this issue I will start with a cliché that I did not include in the book: if you fail to plan for what you will do at an auction, you are planning to fail at the auction. And as I have already mentioned above, having an auction plan is a great way of reducing the stress of attending an auction.
So, it is my very strong recommendation that before you participate in an auction, you should have a very good idea of what you will do at the auction.
In that regard I note that a sensible auction strategy needs to provide for 2 scenarios: live auctions and dead auctions.
As I have described elsewhere, a dead auction is an auction where no one makes a bid other than the auctioneer on behalf of the seller. A ‘live’ auction is any other sort of auction, although in the book I also refer to ‘mostly dead’ auctions, which are live auctions where only one real bid is made. Lots of auctions turn out to be dead auctions, and dead auctions can provide you with a great chance to get the house at a bargain price if, but only if, you prepare properly for them. Hence the need to have a strategy in relation to them. I will talk a bit more about that below.
Live Auction Strategy
The 2 essential elements of a live auction strategy are the 2 parts of what I describe as the golden rule of auctions: have a limit, and stick to it.
You then need to work out:
where you will stand
whether you will ask questions (see below for more information on this)
when you will start bidding
how you will bid (the actual way you will bid, that is whether orally or by hand movement; and if orally, by increments or by calling out the whole bid; quickly or slowly; the size of the increments; whether you will bid unusual increments)
how you will make sure that you stop bidding once your limit is reached
how you will respond to the tactics that other bidders might try to use.
As previously mentioned, if you suspect that the auctioneer might know how much you can afford to pay, you might also include in your strategy what you will do to try to prevent becoming the victim of dummy bidding.
With respect to all of the matters listed above, you can work out everything for yourself, but you might find it faster and easier to create your auction strategy by using the information and advice in my book, which covers all of these things and more.
For instance, with respect to the tactics that other bidders might try to use, my invariable advice is that you should let yourself be briefly entertained by them, but that in all other respects you should ignore them, not be distracted by them, and continue to proceed with your auction plan. (Of course, this is in keeping with my general view that auctions are not rocket science.)
Dead Auction Strategy
As already mentioned, lots of auctions turn out to be dead auctions, even in good times, so it is a very good idea to be prepared if an auction you are planning to bid at looks like it will be a dead auction.
Overall, my advice is to make sure that you have put yourself in the position where you have first negotiation rights with the seller. To do that involves going against the accepted wisdom of dead auction bidding behaviour, so it takes a bit of explaining, which, of course, you will find in the book. (It is also the reason I needed to create the concept of ‘mostly dead’ auctions (although a recent look again at The Princess Bride may also have been a factor).) It is worth mentioning that although the dead auction situation can provide a great opportunity for a bargain, if it is not handled carefully it can also provide a fairly nightmarish scenario of having to effectively put in bids without being able to see or hear any of the other bidders – in this situation you will be relying entirely on what the auctioneer tells you the other bidders have said or are doing (or as to whether they exist at all).
Attend and bid at the auction
Obviously you need to attend an auction if you want to have any chance of being successful at it. In fact, not so. It is possible to send someone to bid for you, or else to attend to carry out instructions that you give them over the phone. Also, a number of auctions are live-streamed these days, so it is possible in some cases to bid over the Internet, or by phone call to the agent conducting the auction. Nevertheless my general advice is that you should attend the auction (remember, bidding at auction is character-building in the best possible sense).
With respect to bidding itself, there are 3 basic overall styles:
The from-go-to-whoa approach
The come-in-once-it’s-on-the-market approach
The come-in-at-the-end approach.
For non-professional bidders I am a strong advocate for the first of these approaches. In my book I mention 5 reasons in support of my views on this, and then I follow this with a fairly lengthy analysis of the pros and cons of each of the bidding approaches that further supports my views on why the first approach is the best one to adopt.
There are also various bidding tactics that bidders at auctions use. My general advice on this is that you shouldn’t worry about trying to adopt any of these tactics. First, it is questionable as to whether of them are in any way helpful, and second, you will have enough to concentrate on without having to worry about anything else.
Should you ask any questions at the auction ?
My general advice is that you should not ask questions at the auction. However, if you have particular knowledge that might reduce what bidders are prepared to pay for a house, and you think other potential bidders may not have that knowledge, you should seriously consider asking a relevant question. Better yet, rather than asking the question yourself, you should consider ensuring that somehow the question is raised.
And just for the record...
Oh, and there are other things that you also need to consider in the auction situation:
Should you use a buyer’s advocate to bid for you ?
My general advice is that you do not need to use a buyer’s advocate to bid for you. However there are circumstances where buyer’s advocates can be very useful.
Should you put in a pre-auction offer?
My general advice is that you should not put in a pre-auction offer. However, if you have found a house that you really want, there is a significant risk, particularly if you live in Sydney, that you might miss out on the house if you do not either make a pre-auction offer, or advise the agent that you are prepared to make such an offer. A surprisingly large number of pre-auction offers are accepted in Sydney, and a significant number are accepted in Melbourne. Also, a significant number of houses are withdrawn from auction in Sydney, so indicating an interest in a house may reduce the chances of that happening (although there is nothing from stopping you from approaching the owner of a property that has been withdrawn, so it may not necessarily be a bad thing if a house is withdrawn from auction).
Do you need an alternative settlement date?
The standard settlement period for auctions is 60 days. Many buyers need longer than that, and some would prefer a 30 day settlement. It is usually straightforward to arrange a different settlement period, but it is something that you need to organise before the auction. It can be quite a difficult, and expensive, thing to do after the auction.