You should, by now, know that the auction process is one of the popular ways selling agents can sell properties in a hot seller's market in Melbourne. Most people are familiar with open auctions whereby all interested parties gather at a set place and time, and openly shout out your offers for the property. But have you heard of a slightly different type of auction called "Best and Final" Offer (BAFO) auction? It is a different form of Auction. But what exactly is a "Best and Final" Offer?
What is a "Best and Final" Offer?
The "Best and Final" Offer is also known as a closed auction. It is an auction where the bidders make their formal offers, usually in writing, without knowing who the other bidders are and without visibility of what their bids are. Some agents may called it:
expression of interest (EOI); or
sealed bidding; or
sealed bids; or
closed bid auction; or simply
You can also look at this as a tender process, where all interested parties submit their offers within a short notice.
Sounds complicated eh? Yes it is, and it is one of the techniques in the agent's bag of tricks, aimed at creating panic and anxiety and to force buyers to think with their hearts and make irrational offers for the property.
Why are "Best and Final" Offer Auctions used?
During a selling agent's typical sales campaign, agents are supposed to gauge the level of interest in the property, and to gauge what potential buyers are prepared to pay for the property. Agents are usually skilled at finding out what a buyer is prepared to offer.
However, there could be times when buyers simply have no idea or refuse to disclose any information. So, in order to get a good feel of the level of interest, one way is for the vendor and agent to call a 'Best and Final Offer auction', and bring forth a pending auction. Holding a BAFO auction is also a quick way to sell the house and/or to force the interested parties to disclose where their interests sit.
Other triggers of a closed auction include:
the agent has received a formal offer
there are many interested parties who refuse to disclose where their interests are
the agent and/or the vendor wants to shorten the campaign
the agent and/or the vendor wants to gauge the market interest
the agent and/or the vendor wants to bring forward an auction without officially cancelling it
Some agents believe this is transparent, and offers are not subject to any negotiations, in theory. In practice, the fear of missing out (FOMO) will usually force buyers to make their best offer. Some inexperienced buyers may even try to squeeze in a few extra pennies to try to outbid other bidders.
But this is not always true, as we will see in the next section.
How do Best and Final Offer Auctions work?
There are no right or wrong ways to run this Best and Final Offer process. But this is what typically happens:
Vendor and Agent decides to call for a Best and Final Offer auction
Agent calls all buyers who have indicated interests in the property
Agent tells buyers they are holding accepting offers and interested buyers are to put in their "Best and Final offer"
Agent gives buyers a dateline (can be as short as 4 hours) by when all written offers must be submitted
Agent then presents all offers to the vendor.
What happens next is where it gets interesting and can vary between campaigns, agents or vendors. This is also where the Best and Final Offer process creates the most controversies, anxiety and angst. The selection process may take one of the following paths:
Vendor may simply select the highest offer and end the sales campaign
Vendor may choose the best 2 to 3 offers if they are very similar, and start a closed negotiation process with the bidders
Agent may choose to give the first bidder, a second chance, if their initial offer is not the highest
Vendor may choose not to select any offers, if they believe none of the offers are good enough. The campaign will then continue to its planned public auction or end date.
Problems with Best and Final Offer Auctions
As with a typical property purchase, Best and Final Offer auctions are usually very emotional. This is intentional, as emotions are what cause buyers to think with their heart, and the resulting fear of missing out (FOMO) will usually lead buyers to overpay. Agents know that. Inexperienced buyers always fall into this trap. However, this would usually not work with experienced, professional buyers agents. Which is why, if you can afford it, you should always seek the advice of an experienced Buyers Advocates.
Best and Final Offer auctions are usually:
very overwhelming for the inexperienced buyers, such as first home buyers or buyers who have not done sufficient research
lacking in transparency
conducted with urgency
conducted with poor levels of communications
Some interested buyers might not be informed of the auction, if they had not made their interests known with the selling agent. Or if the agent believe they have sufficient interested buyers, they may stop informing other less promising buyers, due to time constraints.
How do you Prepare for a Best and Final Offer Auction?
Treat your preparations for a Best and Final Offer Auction like a preparation for an Open or Public Auction. The tips given in our "How to win at Auctions" [link] will apply to this BAFO auction as well.
Generally, you need to:
1. Do your due diligence.
Doing your due diligence is critical to preventing yourself from buying a property that doesn't suit you. Understand what you want from the property, why you want the property and your plans for the property. Knowing the real market situation will help you understand the market demand for that property type, in that particular street and in that particular pocket.
2. Know the real price of the property
Most buyers wrongly trusted the price guide in the Statement Of Information (SOI) provided by the sales agent. While the SOI aims to give you an indication of the price for the property, it usually does not mean the auction will end within the price range indicated in the guide.
You should always do your own homework.
If your research is very different from the price guide in the SOI, always feel free to ask why the agent thinks it should be so different. There could be a gold plated toilet in the house. Or a few embedded 1kg gold bars in the bedroom. Or a subterranean termite infestation. Or a history of flood and/or water damage. However, more often than not, you are likely going to get a standard reply "that's based on sales data. We cannot predict how much buyers will be prepared to pay at the auction"...
A good independent buyer's advocate who knows the area, location, street, buyer demand, supply situation, buyer demographics, property characteristics, will be able to confidently give you an idea of the auction price range.
3. Determine your offer