How to negotiate a pre-auction purchase

How to negotiate a pre-auction purchase

My partner and I bought our first home together in 2019 in our mid-late 20’s. It was an inner-city apartment that was super close to our work and when we set our eyes on it the first time, we knew we had to buy it. It ticked a lot of boxes such as being a ground floor apartment with a sizeable backyard which was awesome for our adopted rescue (it even came with a cat door that Shenzi could fit through), relatively low strata fees due to the lack of amenities provided (love it!), proximity to work (so we can both walk and save on public transportation cost which was costing us about $240 a month), in a gentrifying area with plenty of transport and retail amenities and most importantly, we didn’t want to continue paying off someone else’s mortgage (our rent at the time was about $550 per week and increased to $580 per week after we adopted our puppy). It was late 2019 and the housing market in Sydney was in recovery mode and we wanted to buy it before it went to auction. In a booming market, this could prove to be advantageous, in that the premium you pay to purchase before the auction will be offset by the future gains as the market shifts.

This was the first time I would purchase a property before the scheduled auction and so I set out to research on the internet to see how other people have successfully done this before. Here are some of the things I’ve learnt which hopefully helps you in your property purchase pre-auction.

  1. Inspect the property

With every property purchase, I firmly believe you have to walk the property to understand it. We went through the property twice (once when it was first put on the market, and a second time during the first open house). Remember to ask the agent all the questions that are important to you; When was the property built? How many units in the strata? Is it mostly rented or owner occupiers? What’s the demographic? How’s the area at night? This was especially relevant to the area I was purchasing given it was inner city and can seem dodgy at times.

  1. Do your due diligence

Get a strata report (most agents have them done for units, just like mine already had a strata report done for this unit) and a building & pest inspection (c.$300). Given the scandals lately with Olympic Park and Mascot apartments, I wouldn’t hold out doing a building & pest inspection report. The unit I was purchasing was built in the ’80s which is actually quite solid (it is also a walk-up so not many moving parts so to speak) but I still spent the money for a report to be done. Read the reports in detail which should highlight any deal-breakers or red flags.

For the strata report, read the AGM minutes which should tell you whether there are any dramas within the strata, whether that’s related to building defects, large upcoming costs, annoying personalities etc. You’ll also want to check the sinking fund is healthy and the types of money being spent yearly. Of course, check what the levies are currently and whether they will increase drastically in the foreseeable future (through reading the report I found out that the strata levy on the agent’s website was actually higher than what it was).

  1. Contract review

Get your contract reviewed by a solicitor. Normally they’ll charge you a small amount for reviewing a contract pre-auction and then quote you for the entire conveyancing job if you’re successful at the auction. Make sure you have a good solicitor as they can save you a lot of trouble down the line. Get any changes agreed to by the vendor (or their solicitor). Hustle and follow them up to get it agreed asap. My solicitor actually doesn’t charge anything for the pre-auction review provided that they are commissioned to do the conveyancing work (if you are successful at the auction). This could save you some money if you plan to go to a few auctions and have the uncertainty of the outcome.

  1. Don’t be afraid to let the agent know you’re interested

This will play in your favour down the line. Especially for a property that will go to auction, the agent will need to demonstrate to the vendor that they have a strong purchaser who is in position to close and thus worth it for them to take it off market. Of course, do this via show not tell. This means inspecting it twice (for your own benefit but also to tell them you’ve gone through it in detail and there are no surprises), get the DD reports done (as above, and do them quickly), get the contract review done and changes agreed. The faster you can move (against other potential competition), the better.

  1. Sort out your deposit/loan in the process

Make sure that in the event that your pre-auction offer gets accepted, that you will have the funds to make the deposit and also close the transaction at settlement. Submit all the documents you need to your broker/lender for a pre-approval and also to make sure they can run with it to get the funding on time for settlement. A good broker will help you throughout this process. Make sure that what you’re offering is, of course, within the means of what you can afford.

  1. Sales comparables

This is probably in your mind throughout the whole process. What would be an attractive offer that the vendor is willing to accept. To be honest, there is no set rule for this one but always keep in mind a dollar figure and if it goes above that figure you are willing to walk away from the deal. Property purchase can be emotional so you want to think logically, so keep telling yourself that if it is above $X, it is not worth it. You don’t want to overpay because there is also a risk that the bank valuation (for an off-market transaction) will come in below your purchase price. This means you’ll have to come up with the difference in equity or risk losing the deal altogether.

Now to determine $X, you should look at all the sales that has occurred within the same complex or close by, with the same configuration of bedrooms, bathrooms, and car parks. Domain.com.au sometimes has building profiles which lets you investigate the previous sale prices and rent levels within the same complex. You can then check the strata report (obtained earlier) for the size of the units so you can really get a feel for like-for-like comparisons (divide the sale price by area to get a $ psm value; usually the smaller the unit, the higher the $ psm value and vice versa). If there are no recent sales within your complex, look at sales that’s occurred recently (within the last few months). If you’re using a broker, they can also help with getting the RP data report for you for particular properties which may not be publically available information.

  1. Pre-auction offer

Now, as you’ve prepped the agent along the way to let them know you’re interested in this property, that you have the funds all sorted, all the due diligence has been complete and the contract is in order, let them know you’re prepared to submit a pre-auction offer on the premise that everything is ready to go. I also had the added advantage that the auction time was near the end of the year that if the sale went through auction and the standard settlement timeframe, with all the downtime in between, settlement will likely occur in January. I proposed that we can close this out before Christmas, much better for the vendor if they’re keen to get their money quickly. I also had the added advantage that as normal auction campaigns are 4 weeks, I got all the above sorted in 2 weeks.

They will say to you that they’ll have to speak to the vendor and see if they’re interested at all. They will come back and let you know that the vendor will consider a pre-auction offer at $X or above. Now, I wouldn’t simply tell the agent on the phone what your offer is as without a written contract, it’s pretty meaningless. Organise a time to go into the agent’s office, perhaps on a Friday morning (people like having wins before the weekend). Get them to print out a copy of the contract (the one that’s been amended and agreed to between the lawyers). Sign the contract with the offer you’re prepared to give – don’t play low ball here if you actually want to take it off the market as it shows you’re not serious, haven’t done your homework on what it’s worth and so on. Put in a competitive bid, sign the contract and wait until the broker calls you back. Hold firm as he calls later in the arvo to tell you there’s another buyer and they’re trying to get x y z sorted. If the other “buyer” doesn’t have it all ready (like you do), and they don’t have a signed contract, then it’s all just talk. Now, you can also tell the agent that you are willing to walk from the deal if you don’t hear from them by COB (they will be shopping your offer around to other potential buyers in the meantime but that can’t be helped). At the end of the day, the agent will also do the best to close the deal and that can only be done with a contract that’s already signed and ready to go. Have your deposit ready once the offer is accepted (the agent might tell you to transfer to their trust account before the vendor executes just to show that everything (and that’s literally everything) is ready to go.

It was probably the longest 2 weeks of my life but when I got that call on Friday afternoon from the agent saying that the vendor has accepted our offer, I was over the moon and relieved.

In hindsight, I don’t think either of us regrets the decision to buy our home before the auction (although we may have paid a slight premium to what it may have been through an auction process). We often think about the “what if” but I guess we will never know.

Has anyone successfully purchased their property before the auction? What steps did you take and what learning do you have?

This Post Has One Comment

  1. Alex

    Long time supporter, and thought I’d drop a comment.

    Your wordpress site is very sleek – hope you don’t mind me asking
    what theme you’re using? (and don’t mind if I steal it? :P)

    I just launched my site –also built in wordpress like yours– but
    the theme slows (!) the site down quite a bit.

    In case you have a minute, you can find it by searching for
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    Keep up the good work– and hope you all take care of yourself during
    the coronavirus scare!

    ~Alex

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