Pros and cons of making a pre-auction offer
Buying a house through an auction can be a stressful experience. For this reason, making a pre-auction offer can be a good option to avoid the stress of competing with other buyers.
Making a pre-auction offer before the property goes under the hammer is an increasingly common tactic for potential home buyers.
If you’re trying to buy a home, the competition has never been more fierce as surging house prices force prospective buyers to battle it out.
It’s getting increasingly hard for frustrated buyers to compete at auctions in a seller’s market with clearance rates soaring above 80% and properties being sold for well above the vendor bid.
One tactic some buyers are using in the hot property market is to make an offer before a property goes to auction. The thinking behind this is that if you make an offer enticing enough, you could convince the vendor to sell before early, cutting out the rest of the competition.
Regardless of how strong the market is, there will always be sellers who are scared about going to auction, or who need a quick sale - this is where a pre-auction offer can work in your favour.
So, how does it work?
How does making a pre-auction offer work?
Making a pre-auction offer is basically the same process as making an offer on any other property. However, sometimes owners won't be looking to accept offers prior to auction. So, the first thing you should do before submitting your offer is double-checking with the agent that the sellers are accepting them.
If the owner is accepting offers, you can submit a written offer either a few weeks or few days prior. The idea is to make an attractive offer that the owner believes would be better than what they could get at the scheduled auction.
Depending on the market conditions, as well as the type of house you're looking to purchase, the offer you go in with can vary. For example, if the market is ‘hot', most real estate professionals recommend that you go in with a highly competitive offer. But if the market is ‘cooling', you could put in a “low-ball” offer.
Making a pre-auction offer can be advantageous to avoid the extra competition, but it's slightly more complex than making a normal offer. This is because you might not be given a price guide, so you won't know what ballpark the offer should be within.
On the day, the auctioneer will steer the bidding and won't start accepting offers until the ‘reserve' (which is the minimum price the owner would accept) is met. So, if you're going to make an offer prior to auction, it can be helpful to know what you're doing.
How to make an effective pre-auction offer
1. Do your research
Possibly the most important thing to do before submitting an offer prior to auction is to do your research. You don't want to go in with the wrong offer; whether it's too low or too high.
Research similar properties that sold around the area to get a ballpark idea of what the property might be worth.
Free property reports contain a wealth of information about a specific property including its estimated value, previous sales history, comparable sales and details about the suburb.
A property report can put you in a stronger position if you’re making a pre-auction offer because it can tell you if the sellers price guide lines up with what the data for that suburb is, as well as comparable sales in the area, which gives you a better idea of what to offer.
Potential buyers need to consider very recent comparable sales as well as taking into account what the vendor is asking. For example, there’s no point in offering $1.2 million if the vendor is seeking offers above $1.4 million - they’ll just take the property to auction where they know they’ll be able to drum up competition and get a higher price.
Additionally, attending a few inspections can help you scope out the competition (i.e. how many people are realistically interested in buying). This can help you make the most educated offer possible.
Download a free property report online.
2. Understand recent sales
If you’ve been out of the game for a while, you’ll probably notice that property prices have rapidly risen above what they were even just 12 months ago.
A property report can help you understand recent sales in the area, but you should also consider other ways of researching the market, like talking to agents, attending auctions, and keeping up to date with research data on websites like CoreLogic, Domain and realestate.com.au, as well as closely following property market news.
It’s always a good idea to attend a few auctions anyway even if you’re planning on making an offer so you have a better understanding of what prices are doing as well as familiarise yourself with the auction rules and processes. If you can become a good judge of the market value of properties in the area, you can avoid overpaying at auction.
3. Be ready to go
Time is a huge factor when it comes to making an early offer to buy a property. If your offer is accepted, you should be prepared to get the ball rolling and a contract signed. That means having your deposit ready, getting your finances sorted, finding your solicitor, plus any other logistical things you'll need sorted before buying your new home.
4. Talk to the agent
If you're not sure whether or not to submit a pre-auction offer, have a chat to the real estate agent. While they might not be able to advise you on the price, they can often give you an idea of how many people are interested and whether or not putting an offer is worth it.
See how much specific information you can get about the property itself too. For example, ask the agent if there is a contract of sale or if there are any building and pest inspections available.
They should know their vendors, the property, and the potential parties that are interested. If anything, it can give you an idea of what your chances are in submitting an offer, or whether it might be worth waiting for auction day.
5. Pre-arrange finance and show them you’re serious
In the current market, pre-approval can take up to two months to be processed instead of the usual two-three weeks because of a surge in demand.
To counter this, make sure you submit your application for pre-approval as early as you can so you can go into negotiations knowing exactly how much you have to spend.
This will also prevent you from overbidding, and will put you in a better position if the buyer accepts your offer because you can settle quickly. Having your finance pre-approved will also help you set a clear limit on what you can afford to pay.
Speaking of settling quickly, if you want to show the vendor you’re serious it can be a good idea to make an unconditional offer if you’re in a position to do so.
What are the pros of making a pre-auction offer?
There are a few notable benefits of making an offer prior to auction. Again, it's highly dependent on the individual situation, so you'll need to have a think about whether the below pros are going to be applicable to you.
1. It might be less stressful for you
If high-pressure situations make you nervous, you probably won't like the auction process. Bidding at auction might seem like a very intense and nerve-wracking situation to openly compete with the other buyers around you going for the same prize (the property). If you want to avoid this altogether, a pre-auction offer can come in handy.
2. You could beat out the competition
Depending on how much you want the property, putting in an offer can secure you the property before most of the offers roll in. This is because interested parties might be waiting for the auction date to submit their official offers. If you can submit an offer too good to refuse, the owner might not proceed with the auction.
3. You can negotiate terms of the contract
If you buy a property at auction, the contract you sign will be unconditional. This means that there's no cooling-off period, it can't be subject to finance, building and pest, or any other special conditions.
Submitting an offer prior to auction means that you might be able to negotiate on the terms of the contract, meaning you could have a conditional contract, which could provide you with an added layer of security. You may also feel more comfortable in this situation in case anything goes wrong.
What are the cons of making a pre-auction offer?
Of course, there are also drawbacks to going in with an offer prior to auction. While an auction situation might seem scary, you can actually have them work in your favour. Meaning, there are drawbacks to going in hot early, rather than sitting back and strategically using the auction situation to your advantage.
1. Your offer might be too high
Without the auctioneer guiding the bidding, and knowing the ballpark the people around you are offering within, going in early might actually mean paying too much for a house. For example, if you go in with an offer of $1 million, but the highest offer that would have been received at the auction was $950,000; you've essentially cost yourself an additional $50,000.
2. The property might still go to under the hammer
If you're scared of laying all your cards on the table, submitting a pre-auction offer might be doing just that. If the owner doesn't accept your offer, this might actually influence their set ‘reserve' price and fuel them to go for an even bigger result on auction day.
3. Limited bargaining power
Despite having more room to negotiate the terms of the contract, submitting a pre-auction offer might reduce your wiggle room on the price. This is because you're essentially showing how interested you are in the property, which might leave you with little room to budge on the offer.
FAQs
Can you withdraw a pre-auction offer?
Yes, you can withdraw any offer you make on a property as long as no contracts have been signed. If you've signed the contract and then need to back out of the deal, things can get quite a lot more complicated. So, before you sign all the paperwork, make sure you're certain and comfortable about the conditions of the contract and your ability to fulfill them.
When should I make a pre-auction offer?
Again, this will depend on the individual situation. However, if it's clear that the vendor is looking for a quick sale, it might be helpful to make your pre-auction offer as soon as possible. This way, your offer is more attractive, and the seller is achieving their goal of getting the property off their hands quickly.
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