Melbourne auctions offer little more than good street theatre

By Catherine Cashmore

Tuesday, 08 November 2011

We’re coming to the end of a year many agents will be pleased to bid farewell.  Turnover has been down in most states – and prices ordinary at best. Last month should have been one of the busiest of the real estate yearly cycle, but turned out to be one of the quietest.  This has placed a strain on many of the smaller real estate agencies that need to bank enough commission to last through the quieter Christmas months.

Therefore the majority are celebrating the official drop in interest rates and it was widely spruiked during the weekend auction pre-ambles as being the stimulus needed to re ignite the market. However, a 25-basis-point drop will have no noticeable effect on prices – certainly not in the short term. Although there is hope, it will mark the beginning of a change in sentiment.

The Melbourne market is a mixed bag.  There are plenty of buyers looking, but most are reluctant to step into the arena unless necessary.  Those who need to buy are often struggling to find suitable choices – quality has been meagre across the board all year.  In some respects it’s similar to 2008 – investors who need to sell will shed their poorer assets first, owner-occupiers will only sell if personal circumstance demands – and discretionary vendors will only sell if they can get their “wish price”.

In such circumstances overpriced property will often linger on the market for months at a time, equating to large volumes of sub-par stock, much of which does not fulfil the needs of current home buyers.  Some investors have been brave enough to act against the tide and purchase, but most are cautious enough to wait and see.  If we have a second interest rate drop it may push prices. However it would be premature to make such suggestions while there are still serious global jitters.

Clearance rates in Victoria have been stuck in the 50s for a number of months, but many vendors are still opting for the auction system over private treaty.  In bullish markets it can be a remarkably successful way to escalate the price to levels buyers wouldn’t have otherwise stretched to, however in a flat market the effect is reversed.  If a buyer sees no one else bidding, he will naturally lose confidence and tighten the wallet strings – in such cases it will take a skilled negotiator to fulfil vendor expectation. However whatever the outcome, it’s a daunting experience for any buyer – and of course seller – full of hope, anticipation, emotion, and drama.

Melbourne auctions are advertised as a fair, transparent way to sell real estate, and on the face of the process sounds very simple.  Everyone lines up outside the property and providing the bids reach the reserve, the person still holding their hand up when the agent shouts, “sold” is the winner! Right?  Well, not exactly.

The real estate agent shouting “sold” loudly in your direction and masterfully thrashing the contract into his hand does not complete the sale of real estate.

At this stage the buyer has offered nothing but a verbal promise, which – in real estate – is not enforceable and does not count as a successful sale.  Until the purchaser and vendor have signed the contract, the property is not sold. There’s good reason why sales agents rush the winning bidders inside to sign the contracts after the auction, avoiding excessive chatter or distractions.  Those who have been through the process will also be aware they won’t meet the vendor until the ink is drying on the paper.  It’s not been unknown for arguments to occur between the two parties and as a consequence, the sale to be thwarted.

In fact if truth be known, the auction process works in the best interests of the sales agency who get their day in the sun performing to the local vendors. With flags on display and a street full of spectators, it provides a fantastic chance to source other prospective buyers and sellers – any agency worth their salt will use the opportunity well.

Auction rules vary across the states, however in Victoria every agent is obligated to state that the auction will be conducted in accordance with the REIV bidding conditions on display before the event. Following this will be an explanation that no late bids will be conveyed to the vendor and at the fall of the hammer the property will be effectively sold to the “winner”. However this information can be somewhat misleading to the inexperienced ear and it’s important for prospective purchasers to understand exactly what is legally required to complete the purchase.

Firstly there is nothing that requires the winning bidder to sign the contract.  In other words, they are allowed to change their minds if they suddenly notice something they don’t like on their walk inside the property before pen hits paper! As I said above, the verbal agreement to purchase only takes effect once in writing.

Secondly – the vendor can also change her mind or sell to a higher bidder.  For example if she overhears someone shout out after the hammer has fallen that they’ll pay $20,000 more there is nothing to stop her instructing the auctioneer to “re-open” the auction – the rules only state that the auctioneer is not allowed to take or convey bids to the vendor after the property has been knocked down.  She can also decide she doesn’t want to sell if she doesn’t like the look of the potential purchaser. Both these situations have occurred more than once, and shouting “unfair” won’t change things one iota.  In other words, the show that has just taken place outside the property essentially offers nothing but  good street theatre.

What about dummy bidding?  Illegal, right?  Technically yes – however in practice no! The dummy bid has simply been re-termed “vendor bid”.  It serves no purpose what so ever except enable the agent to shout out a bigger number.  It’s neither statement of the reserve, a counter offer, or a realistic idea of the property’s market value.   It’s simply the agent attempting to get the bidder to increase their offer in a vain attempt to get to get closer to announcing the property “on market” and reaching reserve.

Considering the information above, what is the real goal of an auction in Melbourne? It’s certainly not to get the highest price – after all, the successful bidder is only going to offer one bid over what the under bidder is willing to pay. It can however be very successful when two buyers have a similar amount to spend – although there is no easy way to assess this before the event. In fact a skilled negotiator will stand a better chance of getting a purchaser’s highest price through a private negotiation process than he will at auction.  Get two potential bidders in separate rooms – each not aware of the other’s budget – and you’d be surprised what good negotiation can achieve!

Auctions can be great street theatre, and on occasion will obtain prices well above expectation.  However as a method of sale, they are nothing more than an elaborate show – publicising the estate agency, and satisfying the vendor that their property has been marketed well enough to attract a range of spectators to the event.  It’s time we started putting more emphasis on other methods of sale and celebrating the many good negotiators in the industry who achieve excellent results without the need for a public show.

Catherine Cashmore