Pouncing on a good deal when a property fails to sell at auction

Auctions can throw us all kinds of unexplained surprises, but a key for buyers is knowing what to do when the property they like passes in.

More than 2,000 properties will sell at auction in Australia in a normal week, just under half that could be expected as private sales.

But not all auctions deliver an immediate result under the auctioneer’s gavel.

Known as a pass-in, this occurs when the bidding has fallen short of the vendor’s reserve. If there are no genuine bids from the crowd, the auctioneer will pass the property in on a vendor bid, (a bid placed by the auctioneer on behalf of the vendor).

When this takes place, the price tag will be set, and the sale will revert to a private sale. Any buyer who can meet the sale price will be eligible to purchase the property.

There’s no doubt auctions are stressful. Vendors dread them, agents fear a pass-in and buyers worry that they’ll miss out. Interestingly though, if the conditions are right, auctions can lead to the best outcome for all parties.  We never let a client’s fear or preference to avoid auction stand in the way of a stealthy move to buy at auction.

There are some important elements to note for auction campaigns before forging a strategy to handle a pass-in.

Auction campaigns: These generally run for 3.5 to 5 weeks and properties are commonly open twice per week at set times. During the campaign, agents will employ tactics and do what they can to create a sense of competition and entice buyer interest.

Quote range: The quote range doesn’t necessarily include the vendor’s reserve price. In fact, though underquoting has come under scrutiny and attracted a lot of media attention, in plenty of cities, it’s not uncommon to still see properties significantly eclipse the advertised range.

Many people get upset about this underquoting practice, but a buyer who has conducted pricing research from recent, comparable sales will be less likely to fall prey to underquoting.

The perception of competition: Agents will do what they can to encourage a buyer to fall in love with a property and they will try to create a sense of competition.

You may hear things like, “We’ve had massive numbers, 27 groups through on Saturday, another 15 tonight”.

After all, it’s an agent’s job to get the best possible outcome for the vendor.

The contract: Depending on the state or territory, contracts should be ready either at the start of, or before the mid-point of the campaign. The contract tells us about the property and the vendor’s conditions for the sale of their property.

Contract review: Buyers should always have the contract reviewed by a legal representative (conveyancer or solicitor) prior to auction and with enough time factored in for any recommended conditions to be included or struck out.

The review also confirms that the contract is suitable. Any concerns about either the terms of the contract or the property itself will be flagged at this stage.

Conditions: People commonly assume that conditions can’t be added to a contract or negotiated for an auction, but this is not the case. If conditions are mutually agreeable and agreed to by the vendor, their solicitor, and the agency before the auction, then everything is negotiable.

It isn’t often, but we have bid for many clients over the years with “subject to….” conditions worded into their contract.

It’s highly unlikely that a vendor would agree to a “subject to finance”, “subject to satisfactory bank valuation”, or “subject to satisfactory building/pest inspection”. We have bid under all these conditions before, but the occurrences have been rare and only when the vendor’s campaign was looking dismal.

However, once a property has passed in, any condition is negotiable.

When genuine bids are received below the reserve price, the auctioneer will pass the property onto the highest bidder. That bidder will be given an opportunity to have exclusive right to purchase the property at the vendor’s reserve price, (or at a level negotiated and mutually agreed).

Reasons for property pass-ins vary, and sometimes the reasons can be hard to identify.

And sometimes there is no reason; just a case of luck.

Some of the identifiable reasons can include the following.

• limited interest in the property based on the advertised price
• limited interest in the property based on difficulty financing this property
• limited interest in the property based on its quirks (i.e. diminished number of suited buyers)
• difficulty gaining enough buyer access to the property
• vendor having an unreasonable reserve on the day
• increased number of competing sale properties in the same genre during the campaign
• buyers who feel unwilling to participate in the auction process.

Buying a property that passes in

Good properties don’t always sell under the hammer, and bad properties don’t always pass in.

Once the property has passed-in to a bidder, their next steps are critical.

The agent(s) will state a reserve price that the vendor is prepared to sell at. Sometimes this figure is higher than the buyer is prepared to pay, and sometimes it represents a lower figure than the buyer was anticipating.

Not all vendors will be negotiable, and it’s important to recognise when this is the case, because the exclusive opportunity to purchase could come to an end if the agent deems that the parties cannot agree on a price.

When this happens, the agent(s) will open the opportunity to purchase at the reserve price to all buyers. The moment of exclusivity will be gone.

However, we have to remember that agents are skilled negotiators, and many will be working hard for their vendors if the property passes in.

Some agents will be privy to a buyer’s past attempts to purchase, particularly if they have been active in the property market within their franchise/company.

Customer relationship management (CRM) systems these days capture buyer behaviours, bidding limits and past offers made.

The most empowering thing a buyer can do when a property passes in is to be briefed with past sales and due diligence.

Buyers should never assume that an agent is driving a particular price tag, either. Sometimes on auction day, vendors have friends and family guiding them, and some have an unreasonable expectation of value in their mind.

Psychology of auction success

Not all pass-ins result in an immediate sale, and occasionally a buyer needs to be prepared to walk away. In most cases though, vendors who have launched and paid for an auction campaign will be quite motivated to sell on auction day.

Maintaining composure, keeping the negotiation respectful, and being prepared with past sales and due diligence will give a buyer their best chance of buying well in a pass-in situation.

The very worst thing that a buyer can do when the property they want passes in, is to let social proof (the psychological concept that people are influenced in their decision making by others, compelling them to act within societal norms or expectations) foil their plans.

So many let clouds of doubt enter their head and they ask themselves, “What’s wrong with the property if nobody else bid on it?”

Often people will assume that the price level the property passed in at is representative of market value, also.

There are myriad reasons why a good property can pass in.

The trick is making sure you don’t miss out on the purchase and then have regret on Monday when it sells to someone who wasn’t at the auction.