Real estate auctions present many opportunities for property investors, but they also bring some unique challenges. The purchase process is very different from that of a normal purchase carried out privately or through an estate agent. Most importantly, you’ll be competing with other bidders, some of whom may be prepared to pay much more than the property is really worth. You’ll need to come prepared to minimize the risk of overpaying, and good negotiation skills are a must.
Researching Property Auctions
Needless to say, real estate auctions tend to be highly competitive environments, so you’ll need to carry out some research before bidding on any property. To start with, check recent sales in the area you’re looking to purchase property in to get a better idea of local market values. Try observing a few property auctions in your region without bidding, since it will give you a good chance to learn how the system works and help you understand market values and demands.
Prepare Your Finances
Unless you have a special written agreement in place before bidding, a successful bid is legally binding, meaning that the bidder will be legally obliged to carry out the purchase. If you haven’t arranged the necessary finances already, you could end up paying enormous fines. If you need a mortgage, ensure that you have it in writing that you will receive the required funds. You’ll also be expected to pay a cash deposit on the same day, which will typically be around 10 percent of the property value.
Getting Ready for the Auction Day
You’ll need to make all of the necessary preparations before bidding, since there’s no turning back if your offer ends up being successful. You should have the contract checked over by a conveyancer and have inspected the property in person. Finally, and most importantly, you’ll need to determine the maximum amount you are prepared to pay for the property. In the heat of the bidding war, it’s easy to get carried away, so make sure you set a strict budget.
Making an Offer before the Auction
Since property sellers often choose auctions to sell quickly, there’s a good chance you’ll be able to avoid some of the competition by making an offer before the auction starts. While you should still keep the maximum price you’re prepared to pay to yourself, making a pre-auction offer does give you the chance to increase the reserve, thus reducing the chances that others will bid on it. You may get a better price by making an offer anyway, since the seller will have the opportunity to avoid some of the expenses associated with promotion and carrying out the auction.
Mastering the Bidding Strategy
Property auctions can be exciting places full of opportunities, but it’s also easy to get caught up in the intensity of the bidding battle and lose control of your strategy. Bidding is a specialized skill in its own right, and it requires excellent negotiation tactics and no small amount of self-discipline. Consider the following strategies to master the bidding war:
- When the property you’re interested in comes up, avoid bidding straight away. Instead, use the opportunity to analyse other bidders and get a better idea of their intentions.
- Bid like you’re a professional poker player. After all, you don’t want to give competing bidders any idea of your intentions. If you look too enthusiastic, you’ll inevitably end up paying more.
- Also just like in a game of poker, bidding at property auctions tend to work best if you bluff your way to the top by bidding small amounts at first. Once other bidders are reaching their limits, you’ll be better equipped to put off the competition by making a much larger bid after the last one.
- Be decisive. The auction house is a fast-paced and ruthless environment where the pressure is on and the momentum will be in full swing as soon as the auctioneer introduces a new property. You’ll need to stick to your budget without exhibiting the indecisiveness of a slow bidder.
Once the auctioneer’s hammer falls, one of two things can happen. If the hidden reserve has not been met, the property will be passed in, in which case you can make an offer to the owner or agent directly. However, if the property has reached the reserve, the highest bidder will be legally obliged to sign the purchase contract and pay the deposit by a set deadline.