How do you Negotiate after the Property was Passed in at Auctions?

As the property market cools, and auction clearance rates falls, we're seeing a lot of properties being passed in at auctions in recent months. Frenzy biddings at auctions are a rare sight in most auctions now.

When a property did not sell in the auction, it is known as being "passed in". What happens when a property was passed in at auctions? How do you negotiate for the property?

Why did a property get passed in at auction?

First, let's understands the basics. Property get passed in at auctions because the bidders at the auctions could not or would not meet the reserve price for the properties being auctioned. And, in some cases, there simply isn't any bidders for the property at all.

That happens when an auction process is used for a property sales campaign, when it should not be. Inexperience, seller's demand or rapidly changing market condition are the primary reasons for this.

What happens when a property did not sell at an Auction?

A few things can happen when the hammer falls (or did not fall in this case) at the auction, and the property is left without a buyer. First and foremost, the property is considered passed-in, and unsold. There are no buyers. But what happens next?

What happens next, depends on what happened during the auction, and the state the auction is held. Each state in Australia has their own variation of auction process and rules. In most cases, it can take one of these scenarios:

1. Bidder with the highest bid usually get the first right to negotiate with the vendor and agent.

2. Property is put back on the market, often as a private sale.

3. Property is taken off the market.

4. Vendor decides to change the real estate agent and/or marketing strategy.

5. Property is being repossessed by the mortgagee.

If the auction gives the highest bidder the first right to negotiate, and if you are not the highest bidder, you probably would not be invited for negotiation. Some more diligent agencies will also monitor who the 2nd highest bidder is, and leverage your presence and bid against the highest bidder.

What is the First right to Negotiate after an auction?

The first right to negotiate means you will be the first to be invited to the negotiating table. The auctioneer will not invite anyone else, and you will be the only person negotiating with the sales agent and / or seller, after the auction.

In most auctions, the bidder with the highest unsuccessful bid will usually get the first opportunity to negotiate with the vendor and/or agent.

This negotiation phase is when the pressure sell starts. It is usually yourself against a team of experienced sales agents and negotiators working together, against you, to "help you buy" that property. They are negotiating everyday, and they had been observing you, your body language, and your reactions throughout the auction, trying to gauge how much you wanted the house, and how deep your pocket is. And trust me, the negotiators will go for every cent you have. They are experienced and are trained for that.

It is in the vendor's interests and the agent's interests that a deal is struck there and then, because properties sold at auctions (and within 3 days after auctions, in Victoria) are unconditional. It is a confirmed sale, and if your offer is accepted, you are legally obliged to buy it unconditionally. If you think the auction was pressurising, this stage will be at least 10 times more pressurising. Both the vendor and agents have the need to sell. The agents want their commission. The vendor wants to offload the property. And there you are, the buyer sitting alone in the room, with a team of them against you. They are trained and they are keen to make you buy for top dollar. It will take as long as it is necessary to negotiate. It could be minutes or it could be hours.

And if the negotiation fails, the property is usually put back on the market, opened to all other purchasers, if it is not taken off market.

How do you negotiate for a property after it has been passed in at auctions?

Now, if you did not have the first right to negotiate, and if the property is put onto the market without a buyers, here is what you need to do.

While doing your due diligence for the property, you would have an idea what the property is worth. And you would hopefully, got your darts in a row, and know how much you can afford to pay for it.

Couple of question you need to ask yourself:

• Is your budget still relevant to the property?

• Are the owners expecting a lot higher than your budget?

• What was the real reason why the property passed in during the auction?

How do you start buying a property which was passed in at an auction?

When you come across a property that had been passed in at an auction, contact the agent. Some sales agents may openly tell you it had been passed in at an earlier auction, while some agents may needs a bit of prompting before they disclose this. Good buyers agents would usually have the right tools and market informant to access these information. Sales agents know they cannot get away with lying to buyers agents, and so, most sales agents are usually upfront and honest with buyers agents. After all, no one wants to look silly, and be caught lying when the information is already known.

Understand your local laws on auction and sales made before and after the auction. In Victoria, sales made within 3 days before and after the auction, is unconditional.

Ask yourself how badly do you want this property? If you want it so badly that you are happy to buy it unconditionally, put in an offer whenever you are ready. Otherwise, avoid that 6-day window. Sales agents would definitely want your offer within that windows, but you know the risks, if you do.

What do you need to do before you make an offer for a property that was passed in?

If you are interested in a property that had been passed in at an auction, you should always treat this as a newly listed property. You will need to redo your due diligence, even if you have already done your due diligence prior to the auction. There must be a reason why a group of buyers did not offer a good enough price for the property and thus, it DID NOT SELL during the auction. And you need to determine that. A few questions that needed answers include:

1. Was the price too high?

2. Was the vendor's expectations unrealistic?

3. Was there something wrong with the property that you weren't aware of?

4. What are the vendors expecting?

5. What is a reasonable price for the property?

How do you negotiate for a property that was passed in?

Negotiate as if it is a new listing. Obviously, the group of bidders at the auction did not think the asking price was reasonable. Will you pay that price? You might, if you want the property bad enough, but, as buyers advocates, we wouldn't.

As with any negotiations, you are against a team of professional negotiators. Our negotiation service can help you negotiate for the best outcome. Get in touch if you are keen with our services. It is ok if you choose to negotiate on your own. Just be firm, know what the property is worth, know what you want to pay, and negotiate.

Will a property that got passed in at an auction sell at a lower price?

No. It is not necessarily true. It depends on who the bidders were during the auction. And what the reserved price was. If the bidders at the auction happened to be unrealistic under bidders, the vendors definitely will not want to accept the low-ball offers.

A townhouse in Melbourne South East suburb of Pakenham, with a price guide of $500k, was passed in at an auction which we attended last year. The highest bid of $470k during the auction did not meet the reserve price. Subsequent negotiations with the vendor and sales agents closed the sale at $538k. The sales agents definitely did a good job at negotiating for the vendor, as the price was way above market value. We initially shortlisted this property for a client, but we walked away from the purchase as we could not see value at that $538k price point.

Will a property that got passed in at an auction sell at a higher price?

No. Again, this is not necessarily true. It, again, depends on who the bidders are during the auction. And what the reserve price was. If the reserve price was too high for the property, bidders who had done their due diligence correctly, will definitely not want to pay that. Imagine overpaying for a property? You could be overpaying, sometimes, by half a million dollars.

A house which we bought in Melbourne inner-city suburb of Ashwood, was passed in at an auction, with a highest bid of around $2.75 million. It obviously did not meet the reserve price, and subsequent negotiations by the sales agents failed to secure the sale.

This house with a valuation of about $2.7M was subsequently re-listed for private sale, with a single price of $2.55M.

As buyers advocates acting on behalf of our client, we made our offer, negotiated, and bought this property for $2.45M. A massive $300k cheaper than the highest auction bid and a $100k savings from the post-auction list price. The sales agent subsequently revealed that the property had a reserve of "around $3M", during the auction. Ie, if there was a successful bidder, they would have to pay at least $3M, during the auction.

And we managed to bought it for a massive $500,000 savings post auction!

Advice for Property Buyers

With property auctions and making offers for a property, it is all about knowing what price to pay and when to walk away. Winning at property auctions is not always about successfully buying the property during the auction. You are way ahead of other property buyers when you know the market value. Know what the property is worth, and know when to walk away. You will definitely not want to pay more than an over-payer at any auctions.

If you're unsure of the market, engage a professional Melbourne based buyers advocates who knows the local area to do help buy it. In the second example in this blog, the client paid a relatively tiny $20,000 buyers' advocates fee and in return, it saved them a whopping $500,000 when you realise it had a auction reserve price of close to $3million.

Property Negotiation Service from Concierge Buyers Advocates

Our property negotiation service helps buyers understand the valuation of the property, and negotiate and buy the property for the best possible price. Our Negotiation Plan will help you to negotiate up to 3 properties or an discounted upgrade path to our full buying service, giving you the comfort and confidence that we will have your back.

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