Why you could be paying too much at auction

Transcript:

Kevin:  I went to an auction yesterday. At one stage, I’m nearly sure that one of the bidders actually bid against themselves. They had placed a bid and they placed another one. According to my next guest, Patrick Bright, that’s a fairly common occurrence.

Good day, Patrick. How are you doing?

Patrick:  Morning, Kevin.

Kevin:  So you’ve seen this happen quite often where the highest bidder will actually bid against themselves?

Patrick:  It’s quite common, yes. It is. I’ve been bidding at auctions on behalf of clients for nearly two decades, and it’s a very common occurrence. I’m formerly an auctioneer myself, and I watched people do it when I was calling them, and I speak to many auctioneers and they say probably every second or third auction, they’re getting one or two people doing it.

Kevin:  Yes. I’ve been to many, many auctions. As an auctioneer, I’ve conducted a lot as well. It’s a very emotional state, isn’t it, for the bidder? And it’s quite easy to understand why when the auctioneer does call and give that high inference of sale, they’ll stick their hand up to make sure that are, in fact, the highest bidder.

Patrick:  Yes, they do. They lose track. They lose track of it. You are in an emotional state, and if people are very nervous and they don’t expect just how much pressure is on them until they’re actually bidding with their own money, in the moment, and they want this property. It’s different if you go and watch a few auctions, which I always recommend clients do and people do if they’re going to bid at one, but it’s just not the same when your own money is on the line.

Kevin:  Now, there’ll be a number of people listening now saying, “Well, the auctioneer should then turn around or someone should turn around and say, ‘No, I won’t take that bid because you’ve already done it.’” But they’re under no obligation to do that, Patrick, are they?

Patrick:  No. An auctioneer is under no obligation to tell you you’re bidding against yourself. And at the end of the day, they want the thing to flow, and if they pause and lose momentum by even thinking of doing that, it’s going to slow things up, and that’s not what they want to do. They want it to push on, and their interest, they’re representing the seller, so if you want to bid against yourself, who are they to stop you?

Kevin:  You said you’re an auctioneer, so you’ve obviously had this experience as the auctioneer where someone’s done this. What did you do?

Patrick:  We kept going. That’s what you’re trained to do. As an auctioneer, you’re under no obligation to tell anyone, and you’re being paid by the seller. The agent and the auctioneer are being paid by the seller, not the buyer. So they’re not there to represent the buyer. If the buyer isn’t confident in knowing what they’re doing, they should get their own professional representation to avoid that.

Kevin:  At any stage, if someone did that… Let’s play a bit of a hypothetical here now. You’re the auctioneer and I’ve just placed a bid against myself and then I realize that I’ve done it or someone whispered in my ear and said, “Hey, listen you. You’ve just bid against yourself,” have I got the ability to withdraw that bid?

Patrick:  You do. A buyer can withdraw his bid. They can withdraw a bid at any time prior to the fall of the hammer.

I have seen that happen on the odd occasion, where someone’s bid an incremental amount or realized they may have gone over their budget, and they’ve had a conversation with their partner, their spouse, and realized that they can’t back up that bid. Yes, I have seen people pull the agent to one side and say, “Hey, I’ve bid over my limit. I’ve been caught up in the emotion. I need to pull out of that.” And they will withdraw the bid.

I’ve also seen the agents have that conversation and then they have someone else to take over and keep going with it. It’s never ended up in a disaster – that I’ve seen – but it certainly can rock the momentum of an auction.

Kevin:  As a bidder, you bid on behalf of your clients. You’re in a situation where you’re in the auction. You probably are the highest bidder. You’re getting pressure from the agent, who’s probably whispering in your ear, and then the auctioneer is calling for you to either increase your bid or try and negotiate you up. How do you resist that?

Patrick:  Well, I simply say if we’re the highest bidder you’ve got no better offer, why would I bid against myself? And I just sit tight. You know, there’s no need to bid against yourself. They have it on the market, or even if it’s not on the market, they’ll be pressuring you when it’s not on the market more so than if it is, because once it’s on the market and hit the reserve, it’s a matter of it’ll be sold.

But prior to hitting the reserve, if you are the highest bidder and you’re short of the reserve, or what the vendor hopes to get, then they will put pressure on you, and you just have to sit tight.

Kevin:  Do you always use the same bidding strategy, or do you vary a bit – sometimes you might decide that you’re going to go straight to the price with the king hit bid? Do you have a strategy like that?

Patrick:  I do have various strategies. It depends on the mood and the amount of people bidding. One I did a couple of weeks ago, the property was really heavily under-quoted and there were literally 20-something people holding bidding cards. I knew where value would stack. We’d made a pre-auction offer that was rejected, and it was a sensible offer. I knew the reserve was going to be around there, and I knew that it’d probably sell for more than that anyway.

We opened with that bid straight off the bat. I looked around, and it basically knocked out three-quarters of the room that were there, of the crowd. They were just stood out. We then only had to play the auction out with about three other bidders.

That rocks people and that sends a message. Now, you have to be careful doing that, and you really need to know your values and numbers, because I’ve seen people do that and they make only one bid and no one else bids, and they’ve bought it.

Kevin:  You’re on pretty safe ground in a situation like the scenario you just gave us because you’d made that offer prior to auction. You were obviously prepared to pay for it and pay that figure for it. So you were one pretty safe ground, I would imagine.

Patrick:  Reasonably yes, but we know their numbers. We’ve done our research, and we’re confident of where value sits. If you’re going to make a strong opening bid, you really need to know your numbers, because I’ve seen people do this a number of times. They’ve been given a bit of advice – open strong, knock the competition out. They certainly did, and they paid a figure that no one else even made a bid against, and it was on the market with one bid. So that tells you that they’ve gone way too aggressive.

Kevin:  Do you ever get the chance nowadays to buy prior to auction, or do you find that most sellers are happy to go to auction, obviously to get that premium bid?

Patrick:  Yes. It moves around. It’s quite interesting. Quite a lot is actually selling before auction. You have to understand the clearance rates that are calculated – we’re sitting around 70% to 80% clearance rate is where the auction stats sit, just using Sydney as an example – that includes all sales prior to auction, sales on the day of the auction, and sales that happen within seven days of the auction.

The real clearance rates, on the day, at the auction, is probably closer to 50% if you calculate and take into account all the pre-auction sales so it’s quite a different figure. I would say, at the moment, at least a third, maybe even more, are going before auction.

Kevin:  Is that sign that the sellers or the agent lose their nerve?

Patrick:  No, it’s not. There are two reasons one sells before auction from my experience, and as you know, I was previously a sales agent as well. The reason people generally would take a deal before auction is because someone was offering a figure that we just didn’t think anybody else was going to get near at the auction, so we needed to take this money and run, because auctions are only ever going to get the second-highest price.

If you have somebody who’s offering $1 million before auction but you think that most of the market is sitting around the $900,000 or $950,000 mark, then you’re wise to take that million because you’re not going to see it on auction day. You might see it around $900,000 or $950,000 where the competition is. So that’s one reason.

The other reason is if the seller has already bought and rather than take the bird in the hand, it’s at a figure they’re comfortable with, it’s a figure that allows them to move on with their life and make their commitments of the next purchase they’ve made or you give them the settlement date they want.

One of the things I’m always looking for as the agent is has the seller bought? What’s their settlement date? Is that important to them? Can we give that to them? And then let’s talk about price, because price is important but it’s not as important in those circumstances as terms and timing.

Kevin:  Sometimes the auction does actually achieve that really big premium price, Patrick, doesn’t it?

Patrick:  Very. Here’s the thing. An auction is lotto outcome for the buyer and the seller. It really is, and you are playing a bit of a lotto game there. In my experience – and there are at least 40 auction weeks a year, and I’m doing anything from one to five a week, and I’ve been doing it for 18 years – to give an idea, my estimation is around about a third of the properties that sell at auction do get a very strong price that they probably would not have got had they just been stuck on the market with a price.

About a third of time, I think, they’re still around about fair money – pretty much within a few percent of what they would have got with a price guide – and about a third of time, we’re getting a below fair-market bargain.

Understand this: not everybody goes to an auction. Probably half of my clients who hire me, who have been looking on their own and they’re fed up with it, say to me, “I’m not interested in going to an auction, Patrick. We’ve been to three or four. We’re sick of wasting money on building reports. We’re sick of the disappointment. We’re sick of the under-quoting.” So they lose a percentage of the buyers.

But they don’t need everybody to get a sale. However, you have to understand that it’s not going to capture everybody in the market.

Kevin:  Patrick, we’ve going to have to go, mate, but I want to thank you once again for being with us. Patrick’s book, of course – look out for it – is The Insider’s Guide to Saving Thousands at Auction. A great read.

Patrick, thanks again for your time, mate.

Patrick:  Thanks, Kevin, as always.