07 May Why buyers are terrified about auction – Cate Bakos
Cate Bakos walks us through a report by the peak buyers agency group in Australia – REBAA – that looks at the number one concern auction bidders have and how to overcome it and bid with confidence.
Kevin: An interesting survey released this week actually from REBAA, which stands for Real Estate Buyers Agents Association of Australia. Buyer’s agents all around Australia are members of that organization and they monitor and help buyer’s agents work better with their clients.
An interesting part about the survey was it said that 60% of respondents cited overpaying as their number one hurdle facing them when they bid at an auction. I’m not surprised by that. In fact, I would have thought it might have been a little bit higher, but that would come largely from people who are actively bidding at an auction.
Cate Bakos is a buyer’s agent. She works in the Melbourne market and has her own company called Cate Bakos Buyer’s Agency. She joins me to talk about this.
Good morning, Cate. Thank you for your time.
Cate: Thanks for having me, Kevin. Nice to be back.
Kevin: I’m talking to you because Melbourne is the home of auction in Australia. That’s the place almost where it was born and where it continues to flourish, and that’s the most popular way for people to buy and sell property.
That 60% figure: what should people be doing, if that’s their biggest concern, to make sure they don’t overpay, Cate?
Cate: It’s a great question. People often wait until they’re in the heat of the moment and they have a guy yelling at them with a gavel in his hand and a hundred onlookers standing at them, and that’s when they make their critical decisions.
Facing an auction can be quite a nerve-wracking thing for a lot of people, but when you’re there and you have a critical couple of seconds to make a decision, that’s when things can go pear-shaped.
Obviously, people who have been in the market and looking for property have probably attended quite a few auctions and they’ve seen those results where two emotional buyers fight it out. And it’s the auctioneer who’s in control of that situation, not those buyers. They’re the occasions where you see a really strong, crazy result that gets talked about by the neighbors for a long time.
People are terrified of doing that. You do want to buy, and under competitive competitions, you need to be strong, but nobody wants to set the land speed record for a house sale under pressure like that, so it’s a very, very significant fear for plenty of people.
And it’s not just relating to paying too much and doing so in front of a sea of people, it also is all about how they pay for their property if they’ve gone over their designated budget, and also being concerned about what the bank might say, because it is unusual, but there are occurrences where lenders will decide that the buyers have paid too much and the valuation can come in short. So, it’s a serious issue and there are ways to try and mitigate that happening to you.
Kevin: Overpaying at auction is, as you say, a very real situation – so much so that agents who when they’re selling the auction concept to a seller will say, “Look, if there’s any chance of us getting a premium price, we should take the price offer then take it to auction,” because that competitive bidding brings out that premium price.
Have you got a rough feeling as to how many properties you think would actually achieve a premium because they went to auction, Cate?
Cate: Absolutely. In the seller’s market where we have auction clearance rates around 80% in Melbourne at the moment, most properties that are mainstream and don’t have issues that are putting off mainstream buyers are going above and beyond where expectations are set. We’re seeing records being set every weekend in this moving market, and even agents are quite surprised by some of those results.
But the houses that typically achieve really strong results are the ones that are crowd-pleasers and particularly if they’re on the market without other similar houses threatening the success of their sale.
In other words, if it’s a bit of a scarce diamond for its genre, you’ll find the number of buyers on that property will be higher than normal, and you might have ten competing bidders fighting it out. That’s a lot of bidders for a successful campaign.
Kevin: When you’re in the heat of the moment and you have people watching you, it almost becomes a bit of an ego thing as well, and you have maybe your wife or your husband sort of digging in the ribs and saying, “Come on, just another $1000 is not going to make all that much difference; let’s make sure we get this house now.”
Especially the fear of missing out, that’s heightened in the market right now, Cate, isn’t it?
Cate: Yes, it’s huge. I know as a buyer’s agent when I go into an auction scenario, I’ll quiz the agent about who I might be up against, and when the agent says, “Oh, we have this couple; they’ve missed out on quite a few,” that’s a warning bell for me because they might have that fear of missing out motivating them to go above and beyond.
Often, those crazy prices and that squeal of elation is from someone who has missed out a few times and they have paid a crazy price but they’re just pleased the job is done. We are seeing a lot of that out there.
But as I said earlier, there are things that a sensible buyer can do to avoid being in that situation where they are overstretching themselves or getting competitive or just bidding to get the job done as opposed to bidding sensibly to buy the right house.
Kevin: Yes, you have to do your research. But I’d like to take you just in another direction, if I may, in terms of bidding strategy. When you’re bidding on behalf of someone, could you tell me about the strategy?
How many prices do you have in your head? Is there a price that you know that if you secure that, you’re doing really well? Is there a market price, and is there a price that you’re probably prepared to pay a premium for? Do you structure it that way?
Cate: I actually do. I call it our X-Y-Z pricing, and I came up with that concept a while ago when I had two buyers tell me that they had given me the uncomfortable stretch. That was the stretch price at which they are happy to see it sell to someone else for a dollar more. And in fact, that wasn’t their stretch price, because I was bidding and my phone was going off with texts saying, “Go another five, go another five.” That’s not how I like to roll, because they’re not in control then and they’re potentially emotional.
My X-Y-Z relates to obviously three sets of prices, and X is the price that we’d like to get it for that’s within the realms of possibility if competition is low and the vendor is motivated. That would be a thrill for me to come in at X, particularly in this market.
The Y price is where we think it is probably going to land based on the scarcity of the property in the market that we’re in, the number of buyers who are showing interest, the comparable sales, and where we think it really sits. If we come in at Y, then there shouldn’t be any surprises. I’ll feel that I’ve read the market well and the job is well done.
The Z price is where it could get to with strong competition, and it’s that price tag that the client really is prepared to stretch to – with a bit of discomfort, but not a price tag that will throw them into an awkward situation or an upsetting situation. So, it’s the price at which for a dollar more, they really are okay to see someone else secure the asset.
Kevin: Yes, it’s a really difficult situation. I had a young chap call me just the other day who was preparing to buy a property for himself, and he said, “Look, I’m not prepared to pay any more than $650,000 for it,” and I said, “Okay, so that means if it sold for $660,000, you wouldn’t be upset.”
He said, “Yes, I probably would be,” and I said, “Well, therefore you are prepared to pay more than $650,000.”
I think that that question, “How would you feel if you found out the next day that it sold for $1000 more,” and if your answer to that is “Well, I couldn’t care less,” then you’re at that limit.
Cate: That’s the right price, that’s exactly right. I often say to people if you come second – you have the silver medal; obviously, there’s only one prize – someone else will buy that property probably for $500 or $1000 more than you, because that’s how auctions work. It doesn’t mean that you missed it by $1000; they might have had another $50,000 up their sleeve.
But you have to draw a line in the sand and have a figure at which you’re okay to say, “At a higher price, I could get a better asset, or at that figure, I’m in financial discomfort and it’s not appropriate, or I don’t think that house is worth a cent more to me.”
Kevin: Yes, it’s a great question to ask yourself.
Cate, it’s been fantastic talking to you. Cate Bakos, a buyer’s agent out of Melbourne, and that report coming out of the Real Estate Agents Buyers Association of Australia. We thank them for providing that to us as well.
Cate, thanks for your time.
Cate: Thank you, Kevin.