Buying a House at Auction- What to Do When it Is Passed in

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Chris Tolhurst| Domain| 29 August 2016

Hundreds of properties are being passed in at auction as capital city residential listings spike up for spring and buyers become a little more cautious.

A pass-in occurs when the top bid falls short of the vendor’s expectations. The property is then passed in to the highest bidder, and agent-managed negotiations ensue.

So, how do you best negotiate? Is it smart to “meet in the middle” or should you stick to your guns on price?

It’s critical at the get-go to be the top bidder because the highest bidder has the exclusive right to negotiate with the vendor first.

What happens next is that the selling agent will invite you to step inside the property and start negotiations. Meanwhile, other agents will approach the under-bidders to investigate their level of interest and keep them “warm” in case the negotiations with you collapse.

Metropole Property Strategists’ Bryce Yardney says his golden rule is to not follow the agent inside.

“I prefer to stand outside where I can assess whether there is any real competition or just friends who are pretending to be buyers hanging around,” he says.

Mr Yardney says the perceived pressure of having competition outside waiting for an opportunity to negotiate, was a negotiation tool that agents used against buyers.

He recommends quickly finding out what the vendor’s reserve is and then asking: “I understand that’s the price the vendor was hoping for before the auction, but now what is the lowest price he will sell for?”

Don’t count on not raising your offer, however. You need a flexible view of the purchase, recognising that real estate is a long game, so it may not matter if you pay a tad more.

I have personal experience of being the last contender standing. In 2004, I was the highest bidder at the auction of an art-deco apartment, one of six, in inner Melbourne.

The flat was passed into me at $340,000, and I duly went inside.

My sole competitor at the auction, a middle-aged woman, hovered around outside. Watching her through the flat’s lovely bay window motivated me to offer $20,000 more and to purchase for $360,000.

Was I wrong?
Not in the medium term. Three years later, circumstances changed. I painted the flat’s public areas (but not the bedrooms) and sold it at auction for $498,000.

Domain Group chief economist Andrew Wilson points out that residential property is “the ultimate discretionary purchase”.

He says sellers could pull out of a proposed transaction for any reason, so buyers needed wriggle room in the post-auction talks.

“You need to take a medium-term view on the price, because five years down the track the extra $5000 or $10,000 you might pay does not seem that much,” Dr Wilson says.

Buyers should also try to determine “the agenda of the seller” and whether they had bought elsewhere before an auction started, he adds.

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