John McGrath - Why 3 In 10 Homes Are Selling Pre-Auction And How To Buy This Way
Three in 10 capital city homes scheduled for auction are selling prior in today’s market and in Sydney, it’s even more at four in 10, according to latest CoreLogic data.
With strong market activity across our cities and many regional areas, it probably seems counter-intuitive that some vendors are choosing to sell prior to auction when clearance rates are so high.
The average clearance rate in the March quarter was an extraordinary 80% across the combined capital cities, up significantly from 69.4% in the December quarter, according to CoreLogic.
Clearance rates were also very high in key regional areas like the Illawarra (85.1%) and Newcastle (82.3%) in NSW; the Mornington Peninsula (86.1%) and Geelong (82.9%) in Victoria; and the Sunshine Coast in Queensland (69.4%).
During the quarter, home values rose by 5.6% across the capitals and 6.3% across the regionals. In short, the market is hot. So, why sell before auction? Here are the two main reasons today.
1. Increasingly strong pre-auction offers
Stock levels were low during the first quarter, which is very frustrating for buyers. Those who have missed out many times and are feeling FOMO are getting more assertive with pre-auction offers. They’re not testing the waters, they’re going in strong with a big first offer, usually well above the price guide, in the hope of securing the home quickly and avoiding public competition.
When a vendor is happy to take a pre-auction offer, the agent will give other serious buyers a chance to make an offer, too. This can set off a bidding war and lead to even better offers. Buyers today are not afraid to raise their offers by tens or even hundreds of thousands, too.
Strong pre-auction offers can be very appealing to vendors, especially those who find auctions and opens stressful. Selling early might also allow them to compete for a home already on the market. Selling before buying gives them budget certainty and a great price might allow them to buy better.
2. Disparities in price feedback from buyers
When one buyer is well above the other buyers on price, going to auction might not be the best strategy because that buyer isn’t likely to be pushed to their maximum by the competition. Vendors might prefer to take their best offer before auction instead, especially if there is a risk of losing them.
In slow or normal market conditions, selling prior can mean there is only one serious buyer on the property in total, so there’s no point going to auction. But today’s market is very strong, so it’s more likely that homes selling prior are still attracting multiple buyers but perhaps only one is a stand-out.
John McGrath's top tips for buying before auction
- Ask the agent if the vendor is open to pre-auction offers. You don’t have to have your offer ready yet. Some vendors will be determined to go to auction and will simply refuse to engage with you beforehand. So, just find out if it’s a possibility first.
- Make your first offer close to your walk-away price. In weak markets, you can be cautious but not today. Auctions are delivering incredible results for owners so you really need to tantalise the vendor with your first offer in order for them to even consider selling early.
- Make your offer in writing. Mention that you have pre-approved finance and that you’re willing to waive your right to a cooling off period to show you’re serious.
One of the risks of making a pre-auction offer is that you’ve shown your hand. You’ve given the vendor a line in the sand to set the reserve.
Your pre-auction offer can also be used to lever other buyers up to a higher price. You could find yourself in a bidding war without the benefits of transparency that on site auctions provide. Auctions might be stressful but at least you can see your competitors, hear their bids and watch their body language.
If you’re worried about paying too much pre-auction, consider hiring a buyers’ agent to advise you. Many charge a simple fee for service to handle pre-auction negotiations or bid for you at auction.
Buying in a strong market is tough, so don’t baulk at the comparatively small cost of a qualified local expert to help you buy the biggest financial asset of your life. It will take the pressure off and give you more confidence.
The views expressed in this article are an opinion only and readers should rely on their independent advice in relation to such matters.
This article originally appeared in The Real Estate Conversation (May 3, 2021)
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