1 June 2008

How to win at property auctions - 1 June 2008

By Pam Walkley,
Money Magazine, June 2008

How do you stop yourself from paying over the odds when you are trying to buy your dream home at auction, asks Money reader Miranda.

"I recently came into an inheritance and want to use the money as a deposit to set myself up in a home I love, but everything I like goes to auction and I know nothing about auctions," Miranda writes.

Well Miranda, it’s time to educate yourself about the auction system. And the best way to do that is to actually attend as many auctions as possible to familiarise yourself with the process.

There is also some useful information available on the web. Do a google search for "buying a home at auction" in Australia and your screen will light up. Neil Jenman’s seven rules for buying at auction (see www.jenman.com.au) is well worth reading.

One of the biggest hurdles you will need to overcome is underquoting on auction properties by real estate agents. Jenman says agents routinely underquote by about 20 percent to get people to the auction. If you fall for this ploy you could find yourself spending a lot of money on building and pest reports for properties you cannot realistically afford.

Buyers agent Patrick Bright, whose latest book is a guide to saving thousands at auction*, says he hates seeing buyers wasting money and emotional energy preparing to buy a property they have been duped into thinking is within their price range.

Auctions are all about competition and "everyone wants to be a winner", says Bright. "Bidding frenzies occur when buyers let their hearts — or egos — rule their heads."

And horror stories of people who later regret getting carried away at auction abound.

To play the auction game successfully you need to remember agents are likely to be underquoting by up to 20 percent. This means if they say $500,000 and you cannot afford $600,000, walk away.

Next you need to devote the time and energy to know thoroughly the market you are buying into. Bright says you really need to inspect about 100 comparable properties and carry out detailed analysis of recent sales in the immediate vicinity before you can confidently arrive at a fair value figure for your dream home, a process that will take many weeks.

If time is a problem or you want to double-check your figures, it would be worth considering hiring an experienced valuer, which will generally cost a few hundred dollars. Once you know the value you can work out your "walkaway" price which is fair value plus maybe a premium for emotional value as it’s going to be your home, Bright says. "This is your limit and if bidding goes above this figure, you’re out." No ifs no buts.

If you do not think you can be this disciplined, get someone you trust to bid for you and do not even attend the auction.

Remember you will need to have your money lined up and any inspections carried our before the action because if you do buy under the hammer it’s unconditional – there is no cooling-off period.

Moves to stamp out dummy bidding in NSW, Victoria and Queensland have generally made the auction process more transparent. But dummy bidding, non-genuine bids meant to inflate the price, can still be carried out by vendor’s relatives or friends without the selling agent knowing warns Bright. So watch out!

For more of Bright's bidding tactics, buy this month's Money magazine.

Email your real estate questions to pwalkley@acpmagazines.com.au

Money Magazine's June 2008 issue is out now