Eight lessons to learn from The Block's lacklustre auction

By Catherine Cashmore

Tuesday, 23 August 2011

Surprised by The Block result at the weekend? Well, don’t be. This is the new face of Melbourne’s auction market, and it’s not expected to change in the short term. Auctions don’t just need bidders – they need “confident” bidders, and confidence – as we’re all aware – is not in abundance at present.

But then Channel 9 never intended this to be a program focusing on the state of our current real estate market. The houses weren’t picked to make a profit on initial investment. After all, the homes are opposite a car park, in the shadow of the commission flats, with no off-street parking, average floor plans, and aside from the standard of renovation, they didn’t present any real competition to other better-located period properties in and around the surrounding area. The original intention for 37-43 Cameron Street, Richmond was a block of flats, and although this would have produced better returns on the land, Channel 9 had an idea that would ensure a much better profit if they kept the original homes.

This was a huge success for Watercress productions. The advertising attracted thousands to the open homes and the ratings were tremendous. No doubt they would have made a healthy profit from their sponsors, and overall it was a big hit. However, for those interested in property investing it highlighted a few important lessons we can all take on board.  Firstly, anyone thinking it’s easy to get rich quick from “flipping” will now I hope understand that this is not the case. Building wealth from property only safely works when incorporated into a long-term plan. Secondly, contrary to popular belief, most homes listed for auction sell via negotiation either before or after the auction.

This is particularly prevalent in a flat market – and very much the trend in our current Melbourne market.  Melbourne’s clearance rate this weekend came in slightly higher than previous weeks at 60%, however this percentage includes all properties that were sold before and on the day via pass in negotiation – and from my own experience this is the majority not minority.

So it was therefore no surprise to see only two of The Block homes sell on Sunday night (one under the hammer and another via negotiation) and – as is typically the case with passed in properties – I expect the remainder will sell over the next couple of weeks. However, with low confidence, and stock levels not producing an abundance of quality property to really inspire purchasers to part with their cash, the key to securing a good deal is firmly focused on a buyer’s ability to assess a home’s true value and successfully negotiate the purchase. It’s impossible to teach negotiation without employing practical experience. However, if you want to place yourself in the box seat, arm yourself with as much information as possible.  Here are a few tips to help along the way.

• There are three numbers involved in real estate negotiation, and it’s important to get a rough idea of each before you formulate your negotiation strategy. What’s the property worth to you (market value + intention of use – is it an investment or your home for the next 20 years)?  What’s it worth to the vendor – (where’s the vendor’s expectation? Are they expecting a premium due to a costly renovation)?  What’s it worth to other buyers – (how fierce is the competition)? The first question is easy; however the other two will take more assessment. Start to gather information early, because the answers will help you assess the timing of your offer.

• Try to establish why the vendor is selling. The agent may not be forthcoming if you ask directly, however questions such as “What settlement suits your vendor?” can give clues.  A longer settlement may signify they have not yet bought, while a shorter settlement may indicate they’re under time constraints to secure a deal. Vendors will sometimes accept a lower price if settlement terms are favourable – especially if they’ve purchased elsewhere.  Use the information wisely.

• Note the property’s appearance. If the home is vacant (previously tenanted), you can assume it’s owned by an investor and they’ll probably preference a quick deal.  Going in with a lower price sweetened by a short settlement may be the way to proceed. However, if the house has been professionally furnished with show home written all over it, vendor expectation is likely to be high and they’re unlikely negotiate at the bottom end of the price range, especially at the beginning of the sale process.  In this circumstance, should you want to make a pre-auction offer, wait until the last week of the campaign, during which the selling agent will have hopefully tapered vendor expectation to meet the market.  There are many options and shades of grey, but above all, timing is crucial, so think before you act.

• The longer a house has been on the market, the greater the pressure to lower price.  Look for those properties that have been hanging around for a while. Some houses don’t sell because they’re poorly located and don’t represent quality; however others may not have been marketed well or presented in an attractive manner. The latter can often present the best opportunity for a savvy buyer to pick up a bargain.

• There’s always potential for multiple offers, especially if a house stands out from the crowd. Talk to the agent and ask him to keep you informed if he gets an offer in writing.  Nothing can be done until the vendor statement is available so request a copy to be e-mailed as soon it arrives. Find out how the sales agency handles multiple offers.  Some agencies only take a “best foot forward – one shot” approach. Others will favour the buyer who makes the first move by giving them a chance to increase their bid if someone offers more.  Don’t be afraid to ask questions.

• If you love the home the priority is to secure the property within budget, rather than risk being gazumped with lengthy negotiation. In this circumstance preparation is the key – get the documentation checked, building inspection done, and your finance in place before you make a move.  An unconditional offer strengthens the chance of acceptance over a higher offer with conditions attached.

• Consider employing a professional to negotiate on your behalf. One of the first lessons in negotiation is to place a “buffer” between you and the other party.  This takes emotion out of the equation and provides you with valuable thinking time while your advocate deals with the usual tricks selling agents employ. Don’t be afraid to pay for experience in order to potentially save thousands on price.

• Finally don’t worry if you miss out because someone paid more.  Use the knowledge you gathered to help assess other homes on the market, and feel assured you’ll be better prepared next time.

Catherine Cashmore