How to Win at Closed Auctions

Winning closed auction

You should, by now, know that the auction process is one of the more popular ways a selling agents can sell a property in a hot seller's market. Most people are familiar with open auctions whereby all interested parties gather at a set place and time, and openly shout out your offer for the property. But have you heard of "closed auctions"? What exactly is a closed auction?

What is a Closed Auction?

A closed auction 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 also choose to use the term "make your best and final offer" (BAFO). Some may call it an "Expression Of Interest (EOI)". Or some may called it a "sealed bidding" or "sealed bids" or "closed bid auction". You can also look at this as a tender process, where all interested parties submit their offers within a set dateline.

Sounds complicated eh? Yes it is, and it is one of the techniques in the agent's bag of tricks, aimed at creating a sense of urgency and anxiety and to gauge the buyers interest in the property.

Why are Closed Auctions used?

During the selling agent's sales campaign, they are supposed to gauge the level of interest in the property, and to gauge what interested buyers are prepared to pay for it. 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 'closed auction', and bring forth a pending auction. Holding a closed auction is 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 open auction sales campaign 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 novice buyers may even try to squeeze out 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 Closed Auctions work?

There are no right or wrong ways to run this closed auction. But this is what typically happens:

1. Vendor and Agent decides to call for a closed auction

2. Agent calls all buyers who have indicated interests in the property

3. Agent tells buyers they are holding a "closed auction" and / or to put in their "Best and Final offer"

4. Agent gives buyers a dateline (can be as short as 4 hours) by when all written offers should be submitted

5. 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 closed auction 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 chose 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 scheduled public auction or end date.

Problems with Closed Auctions

As with a typical property purchase, closed auctions are usually very emotional. This is intentional, as emotions are what cause buyers to think with their heart, and the subsequent fear of missing out (FOMO) will usually lead to buyers overpaying. Agents know that. Inexperienced buyers always fall into this trap. However, this would usually not work with experienced, professional buyers agents.

Closed 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 Closed Auction?

Treat your preparations for a Closed Auction like a preparation for an Open or Public Auction. The tips given in our "How to win at Auctions" [link] will apply to a closed 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

This is where you have to decide what price to offer for the property. No one can do this for you, but as part of our service, our buyer's agents would be able to help guide you.

• Know how much you can afford to pay.

• Know your serviceability.

• Have sufficient funds for the 10% deposit.

• Have the appropriate way to pay the required deposit.

• Determine the absolute best price you are willing to pay for the property. A good test to know if you've set the right price is this: ask yourself "if the property is sold for $100 more to someone else, will you regret walking away".

If you've been following this blog, you will know what happens next, gets murky. While the agent may indicate that you only have that "one chance to make the best and final offer", in Victoria, the agents or the vendors might choose to further negotiate or give everyone "one final chance to review your offer". This means "one final chance to improve your offer". This usually causes buyers to second guess their offer. You might decide to improve the offer, or if you've already submitted your best-best-best offer, choose not to improve the offer.

Now, always bear in mind, you do not know who the other bidders are, and what bids they have submitted. Your bid might already be the highest, and the vendor and selling agent might just want to try their luck to extract more from you. There might not even be any other bidders, and you are bidding against yourself. Interesting, eh? If you have done your preparations well, you should be able to confidently know what the likely scenario is. Our buyers agents would usually be able to advice based in their experience and intelligence on the property.

Does the best offer in a Closed Auction always win?

Short answer: usually yes. But not always.

It depends on the motivations for this closed auction. Remember, one of the reasons of holding this closed auction is for the vendor/agents to gauge the level of interest. They may choose not to select any offers, and let the sales campaign run its course, or choose to proceed with the scheduled public auction.

Usually, if done properly, a genuine closed auction will almost always result in a sale. But it may not always be awarded to the buyer with the best offer. A closed auction is treated like any other standard written offer. IE, you CAN submit a conditional offer, which includes conditions such as building and pest inspection clauses, finance clause, or any other clauses you need or can dream of.

It is in the vendor's interest to consider all offers and conditions when reviewing and selecting the offers. They are likely going to select the offer with the most suitable conditions, even if it is not the highest price. Selling agents may not like it though, as it may mean they are receiving a lower commission. A good buyers agent will be able to help you navigate this.

So, what to do in a Closed Auction?

So, you have been contacted by an agent, telling you they are holding a closed auction, and you have been invited to submit your best and final offer by X date and time. What do you do next?

How to submit an offer in a Closed Auction?

If you have been contacted and informed by the vendor agent that they will be conducting a closed auction for the property and you are supposed to make your "best and final offer", they should also inform you when the deadline is. You should always ensure you submit your best offer before this deadline.

If the agent has not told you how or when they want to receive the offer, ask them. Make sure you know what the expected format it. Some may accept offers in an email. Some may have a formal offer form or an Expressions of Interest (EOI) form, that you have to fill in, sign and submit. Whatever it is, make sure the offer reaches the agent BEFORE the deadline. The agent is not supposed to accept any offers after the dateline. Not even if you are 1 minute late.

Typically, your offer should include:

• Your name

• Your contact details

• Your best and final offer price for the property

• Any conditions you want to include

• Settlement date or period, usually 30, 60 or 90 days in Victoria.

Some agents or EOI offer forms may ask for more information. Make sure you understand what is expected, and provide them if relevant.

What happens after submitting your offer in a Closed Auction?

Submitted your offer? Wait. And keep your fingers crossed. You'll find out what's next.

If your "Best and Final Offer" is being considered, the agent will let you know the next steps. You might need to be prepared "review your offer" (aka "improve your offer"), or you might win it without any dramas.

If your offer is the winning offer, the agent will usually prepare the formal contract of sales for your signature, and you will need to pay the holding deposit. If your winning offer is a conditional offer, it's time to start ticking off the conditions. Know when these dateline are. Get those building and pest inspection organised, get that finance process started, or get any other due diligence processes done. And as they say, the rest is history.

Generally speaking, if you have not heard from the agent within 4-6 business hours of the deadline (usually half a working day), your offer is 99% not being considered. If you have done your due diligence correctly, and you can truly put your hand on your heart and say you've genuinely submitted your best offer, you know you have done your best. The property is not meant to be yours. There is always a better one somewhere. But you will have to go through the same process and anxiety all over again. It could be months or even years before you find another one. And chances are, in a rising market, you will need to pay more for the same property or start looking in less desirable suburbs.

If you have not heard from the agent after 4 hours, call them, ask for an update. If you get a vague reply, or an iffy reply, chances are, they have selected other offers. That's usually the bad news. But the good news is, because they have not outright rejected your offer. Your offer is their back up. If the other offers fall through, you might just win the closed auction or you might be called to "improve your Best and Final Offer". The fact is, in a hot market with lots of keen buyers, or if other buyers have the guidance of professionals such as a buyers agents, you are highly unlikely to win it. As a side note, vendor agents secretly prefer to work with buyers agents because most buyers agents only work with qualified leads, who are ready to buy, our offers are more realistic, and they have to spend less time to close the sale.

If you have done the right due diligence, your Best and Final Offer should be your very best for this property. You should not have any "buyer's remorse" and you would not have regretted not offering an extra $500 more. Do not be that buyer. Get one of our professional buyers agents to manage your offer, if you are not confident.

Professional Help to buy in Closed Auction is Available

If you're still uncertain how closed auction works, or not confident with your preparations, or just want the confidence to buy the property, it might be time to consider engaging the services of a buyer's agent.

Our Melbourne based Buyer's Advocacy service prevents buyers from overpaying, and helps buyers buy their properties with confidence.

Get in touch, find out if our services are right for you.

More home and investment property buying news and tips here.