When the hammer falls

Author: Susan Wellings
Date: September 27, 2008
Publication: Sydney Morning Herald (subscribe)

Some see now as a great time to buy at auction. Follow these 12 golden rules.

Why do normal, sensible people who are confident enough to be buying property, often for great sums of money, suddenly become like children who are scared of the dark?

Auctioneer Kate Lumby goes further: "Why do they freeze up and their bodies look as though they've had a metal rod launched down their spine?

"Why do some become so traumatised they can't even speak or get a word out?"

The answer is simple, she says, and the syndrome is common: they're off to buy a property at auction.

There were 815 properties in Sydney sold at auction last month alone, for a total of $562.6 million, according to Australian Property Monitors figures. Given the number of properties being listed for auction on the rise as we head for summer - and given continued sharemarket turbulence - buyers will have to either shape up or face watching their dream homes slip through their fingers.

But with a little help from the experts and taking heed of their 12 golden rules for dealing with auctions, many could bid on their next home with confidence and leave with success.
Do your research

"Know your area like the back of your hand," says Lumby, the general manager of auctions company My Auctioneer. "Find out, for example, the size of land, size of home, number of bedrooms, rental income, potential uses."

Then go to the local council to buy the local environmental plan maps, which give you a bird's-eye view of the area, and the development control plan, which outlines what you can and can't do within the relevant council zonings, and talk to the town planner.

"It means when you invest, you'll do so wisely, not only for capital gain or rental return but for potential use in the future," she says.
Be selective

There were 1496 properties listed for auction in Sydney last month, 2 per cent up on this time last year, says Liam O'Hara, senior economist with Australian Property Monitors. But the clearance rate was just 54 per cent, 1 per cent up on July.

"Obviously, this low clearance rate is the consequence of supply outstripping the demand for houses and units at the prices being asked," he says.

With more homes on the market than buyers, therefore, it's important not to get too emotionally attached to any one place that has a number of bidders. Move on for the chance of a bargain.
Find the true value

With so much information available, there's no excuse for not doing enough homework on what should be the correct price for the house you want to buy, says Louis Christopher, the managing director of SQM Research and Adviser Edge. Check prices of neighbouring and similar properties in the same area and note forced sales, particularly in the west. "Ask the agent, straight out, what price the vendor wants to sell for," he says. "And then assess what the true market value is."
Attend open homes

Here's where you can assess the level of interest in the property you're interested in.

Lumby says: "In addition, personal inspections - where the agent takes just you through - are a great way of getting to know the agent one on one and getting more information and help from them."
Consider making an offer

In some circumstances, this can make good sense, says Mark Armstrong, of the mortgage consultancy Property Planning Australia. If you've set your heart on a property and plan to be there for a long time, it could be worth paying a little extra - an "emotional premium" - to make sure you get it.

But there are dangers. "To entice the vendor, the offer would have to be more than what he believes he'll get from the market and if your offer isn't accepted, it could be used to bargain the price up higher still," he says.
Talk to your bank early

Make sure you're in a position to bid and buy at the auction, says Steve Martin, the president of the Real Estate Institute of NSW.

"We've seen many instances of people at an auction seeing a property being sold for a lot less than they'd anticipated but they can't put their hand up," he says.

"I've been in that position myself, too. It's not a good feeling. Go to the bank early so you can buy when you want."
Attend auctions

Martin says it's worth observing how an auctioneer behaves, so you'll know the mannerisms and the language and won't be intimidated when your time comes.
Stick to your limit

It's easy to get carried away with the drama of the moment but be ready to drop out the minute the bidding goes over what you can afford. At the same time, be realistic, says Armstrong, also the author of book Property For Life (John Wiley and Sons, $25.95). "Set your spending limit 5 to 10 per cent higher than what you believe is the property's market value," he says. "Markets can move by as much as 10 per cent from week to week and month to month.
Be prepared

Make sure you turn up early to the auction with plenty of time to get settled and calm your nerves, says Dennis Kalofonos, principal of buyer's agent Sydney Property Finders. "Make sure you're not carried away by the emotionally charged environment," he says.

"Stay cool and calm and grab a glass of water - never alcohol."

Then choose your seat carefully. Kalofonos recommends you take a seat or stand towards the back of the room, from where you can see all your competition clearly.

With shrewd observation, "You can then see if rivals are exhausting their budget."
Bid late

Kalofonos says let others bid until the property is "on the market", ie, it reaches its reserve so is definitely for sale. "Then you can become involved in the serious bidding."

But if it looks as though it's not going to reach its reserve, make sure you've put in the last bid - that way you have the right to negotiate with the vendor afterwards.
Don't worry about dummies

Reforms to the auction system, in 2004 and 2007, outlawing dummy bidding - with fines up to $27,500 for an individual and $55,000 for a company - have pretty much stamped out the practice, says Graeme Hennessy, the chief auctioneer with LJ Hooker.

"Ninety-nine times out of 100, you'd know if there was a dummy bid," he says. "And with such large fines, very few people would ever involve themselves in such a thing."
Go slow

Don't be hustled into bidding too much, too soon. Sometimes, an auctioneer might ask for the price to go up by increments of $10,000 or $20,000.

"But give him $5000," says Peter Kelaher, managing director of Sydney PK Property Search & Negotiators. "Slow it down. Then, if he can't get higher offers, he'll always come back to you."

And is now a good time to buy at auction? Many believe so. If the clearance rates keeps crawling up and if there are further interest rate decreases, there'll be a lot more buyers coming into the market soon.

"It won't be a boiling market," Kelaher says, "but it will start to gurgle."
Bid late and often

With three houses bought at auction in past years, Chris Harpur felt quietly confident going into the auction for the three-bedroom "renovator's dream" house in Alexandria that he'd had his eye on.

"I have certain tactics I use," he says.

"You never start off the bidding and you wait until you see the bidding starting to level off. Then, as soon as it levels off, that's where I come in."

This time, Harpur, 61, a retired food and beverage manager, was surprised by the amount of competition for the Kingsclear Road house, especially when no fewer than four bidders settled in for the long haul. "It was a very spirited auction," he laughs. "The bidding was quite strong but I just notched it up $500 at a time and psychologically wore the final ones down. They'd go up by $1000 a time and when the auctioneer tried to break the pattern and ask for more, they bid $2000. But I just went another $500. Luckily, I was able to hold my nerve."

Harpur, who spent $808,500 on the end terrace with a large garden, is looking forward to moving in and starting work on it.

"I enjoyed the auction," he says. "But people who've never done it before have to be careful and know when to stop."