Thinking About Buying Pre-Auction?
There are various pros and cons to buying property pre-auction, it's not for the faint-hearted... Submitting an acceptable offer pre-auction can turn what was going to be a very transparent process (public auction) into a messy and stressful situation, fast!
Whether or not submitting an offer pre-auction is going to be the best way to ensure you buy the property completely depends on the circumstances. You need to ask a few questions before you take the leap of faith.
1. Is the contract ready?
This is a very important first question to ask the agent. Back in the day (it still happens to some degree), agents would ‘hold back’ the contract until at least the 2nd week of the campaign to generate more interest and deter buyers from making pre-auction offers. So by the time buyers receive the contract, and complete their due diligence, auction day is just around the corner and the agent is more equipped to corral buyers to be there and compete on the day.
If the contract isn't available you can’t make a ‘formal’ offer, at this stage it is pointless showing your hand.
2. Will the vendor accept a pre-auction offer and at what level?
In current market conditions and in certain areas of Melbourne, agents will typically say yes to this question. In a more bullish market, they’ll tend to suggest that the owner is not open to pre-auction offers as they know they are going to have strong buyer competition at auction. In conjunction with that it’s important to know at what level the vendor is likely to sell. Is it within the range, or does it need to be above the top end - if so how far above? If a vendor is too high on price, it may be beneficial to you as the buyer to let the auction campaign play out as a way of ‘conditioning’ the vendor to meet the market at a more reasonable price.
3. How will the agent handle a pre-auction offer?
This is the most important part to get an understanding of. Every agency and individual agent in Melbourne will handle this process differently.
If your pre-auction offer is acceptable on both terms and price, the property is then considered ‘on the market’ and the agent will then run their chosen process from there. You have not purchased the property just yet.
If there are multiple buyers with interest at a similar level, the agent may simply bring the auction date and time forward so these buyers can compete with you in an open forum, this may be in an online auction, in the agent's office or on site at the property. This is the most transparent way to run the process.
Otherwise they may disclose your offer to other buyers and call for any competing offers beyond that, and then go back and forth (usually on the phone) between the interested parties until someone comes out on top… also referred to as a ‘Dutch auction’.
Alternatively, they may keep your offer undisclosed, ask other buyers to submit their ‘best and final’ and then come back to you for one final attempt, without disclosing the other offers. Giving you the ‘first right of refusal’ or starters rights.
There are many other scenarios that can play out but these are the most common.
4. What format does the agent want the offer submitted in?
They may request you document the offer on the contract of sale. If you are unsure of how to do this you can contact the agent for assistance. Otherwise you may be sent a pre-filled contract for signing via an online signing platform such as docusign to formalise the offer. Some agents will simply ask you to email it through. But be aware, submitting the offer over email is not considered ‘a formal offer’.
5. Do you have your finance sorted and have you done a building inspection (if you want one done)?
Even though you are not buying ‘at auction’, the vendor will still want an ‘unconditional’ offer as that is one of the biggest advantages to selling at auction for a vendor. The sale is unconditional. So make sure you've done all your due diligence including the contract review prior to submitting your offer.
6. Do you know the value of the property?
Typically to ‘trigger’ the process pre-auction the offer will have to be in excess of the vendors reserve and enough to eliminate the possibility of what could have occurred on auction day. We hope you’ve received the message loud and clear by now that there is no hard and fast rule when it comes to property value/reserves and quote ranges. You need to drill down on the value and make sure you know what you think the property is worth. Don't forget, the bank (if you are borrowing money), will need to come in after you have bought the property and agree with the price you've paid aka, value the property at the purchase price so there is no surprise gap payment you’ll need to come up with!
It's a gutsy move for the average punter to put forward a pre-auction offer, as there are a lot of moving parts. When we walk through an inspection, we often hear buyers ask the agent ‘will the vendor selling before auction’, without really understanding what that process entails. However it is still a good question to ask. Even if you aren't thinking of submitting something, your competition (us!) might do and you don’t want to be caught off guard and out of the race before you can say ‘I bought a house!’.
As always, if you want the big guns on your team throwing spanners in the works with pre-auction offers for you, you know who to call.