APRA’s power increased. Policy options now set by postcode

The Federal budget always seems to throw up plenty to discuss. The media understandably pounce on the headline elements of the budget.

Sometimes budget measures which are the least discussed can be the most intriguing.

The Government has upgraded the ability of the Australian Prudential Regulation Authority (APRA) to curb excessive and poor lending into the housing sector. APRA now has the authority to limit bank lending on a regional basis and even postcode basis, if need be.

The Australian economy is a tale of depression and boom. The Reserve Bank of Australia (RBA) would probably like to cut interest rates further to assist and stimulate the WA & SA economies. Conversely, they would probably prefer to see rates rise in Melbourne and Sydney to curb the booming housing market. Alas, interest rates are a blunt instrument, as it is for one it is for all.

Reports and commentators are now warming to the fact the RBA may need to cut rates again – in late 2017 or early 2018. This is far from certain but the next move is likely to be down more than up if we examine current data. Unlike previous rate cuts, the benefits of future interest rate cuts are less likely to flow through to the Sydney or Melbourne housing market, as APRA will tighten on behalf of the RBA where required.

The housing boom was never the intention of the RBA. It was a side effect of the RBA cutting rates to lower the AUD and offset the mining downturn.

These budgets measures that enhance APRA’s influence on the banks and non-bank lending is intelligent on the one hand and too late on the other. The Sydney market is already showing signs of cooling after property prices have risen 70 – 80% in the past 5 years. These gains were a direct cause of foreign buyers and cheap money.

The market has begun to cool as a result of several measures introduced by the APRA. The most recent was a crackdown on interest-only loans, which have been some of the riskiest, historically.

As aggressive lending or price bubbles show up in the data APRA will now be able to step in and enforce prudent lending, even if the lenders are not. The Government did not provide these powers for them to be ignored, so expect it to play a role in the property market going forward. In the past, lower interest rates meant higher property prices. Provided APRA enforces its power, lower interest rates won’t necessarily have the same stimulatory impact on property prices as it has in the past.

Hot locations within a booming property market or locations deemed to have an apartment oversupply risk are the most likely to be the first targets of the APRA’s new powers. Non-bank lenders have also had additional regulation heaped on them to ensure they don’t step to fill the bank’s void.

Smart policy. Let’s just hope it’s not too late.

What’s the kicker?

When negotiating commission rates with a real estate agent, be very careful about incentive schemes, particularly in rising markets. On the surface, incentive schemes seem sensible enough – identify fundamental market price and offer the agent an incentive above that.

Agents call incentive schemes ‘kickers’. It’s common for kickers to be 10% to 20% above the perceived market value. The owner pays the agreed base commission rate PLUS the kicker!

As an example,  if you have a property that you feel is worth $1 million, an agent may agree to a lower commission rate at $1 million but a higher percentage of everything ‘over $1 million’.

The agent may ask for a commission of 2.2% on $1 million. You suggest 2.2% is on the high side compared to other agent’s quotes. The agent floats the suggestion about a lower commission rate up to $1 million of say 1.5%, and 10 to 20% of everything over $1 million, payable to the agent. This seems fair on the surface, everyone wins together.

The trap for home sellers is the agent knows from the beginning of the campaign that the price is highly likely to exceed market value – assuring them of an excessive commission.

The owner takes false comfort in a kicker fee arrangement protecting their commercial interests when it simply exposes them to a large commission.

Every Sunday morning, you read newspaper articles about homes selling for $100,000 or $200,000 and even $500,000 above the seller’s reserve price. The kicker, for example, on $200,000 means that you pay the agent a commission premium of $20,000 to $40,000 for simply doing their job – selling your house.

Admittedly, the best agents can have a positive influence or impact on the final sales result, but not by $200,000?

At a public auction, the success is largely determined by what the under bidder bids to, as opposed to any negotiation efforts of the agent. The only reason that so many houses sell excessively above the reserve price is the reserve price is set too low, to begin with.

The reserve price should be set relative to the market feedback and offers, not relative to the sale down the street last month. In a rising market, the worst way to set a reserve price is based on past sales. If you do, you are likely to set it too low. A low reserve price with a kicker in place means you will unknowingly overpay the agent on the commission and thank them for it in the process.

If the sales price of your home exceeds the market price, that’s your good fortune.

Most agents ‘value offering’ is that they can achieve a high price for your home. Paying an agent a kicker is simply giving your premium price to the agent as a commission premium.

Commission incentives work best in slow markets where there is downward pressure on price, this ensures the agent is not just focused on a quick sale to maintain turnover. In a rising market, the price is high and the days on the market are minimal – therefore the market is doing the hard work on the agent’s behalf.

Employing a selling agent

Before employing an agent to market and sell your home, ensure you are clear about what you expect in an agent. Real estate agents often spruik their clearance rates or their profile in the marketplace.The true determinant of a good agent is their ability to deliver a premium price – in a risk-free and stress-free manner.

The true determinant of a good agent is their ability to deliver a premium price – in a risk-free and stress-free manner.

You will only sell your property once. Therefore, it is crucial that you get the right price when you go to market.

Agents that constantly focus on getting the property ‘sold’ as opposed to achieving you the ‘best possible price’ are signalling their intent.

The best sales people are not high pressure ‘closers’. They are calm, professional and supportive in providing you with the right information. They are assertive but they are not aggressive. Before employing any agent to sell your property, meet with them several times to gain a sense of their style.

Before employing any agent to sell your property, meet with them several times to gain a sense of their style.Your selected agent is going to be your guide throughout the campaign. Therefore, it is crucial that there is mutual respect and trust.

The most expensive market

A lot is made of how expensive the Sydney property market is on a global scale. There is a second market that Sydney is a world leader in when it comes to expensive – real estate internet advertising. Homeowners pay more to market their homes on the internet in Sydney and Australia, broadly speaking, than just about anywhere else in the world.

In the days of newspapers, agents became addicted to a model called VPA. That’s Vendor Paid Advertising. The agent convinced the client to spend excessive amounts of money on advertising their home, using the ‘old chestnut’, more advertising equals a higher price.

Homesellers collectively ‘invested millions of dollars’ each year thinking they were selling their home when they were actually buying advertising. The seller inadvertently paid to build the agent’s profile and branding, regardless of the success of the sales campaign.

Then the internet became the dominant marketing tool and essentially wiped newspaper advertising out. Now everything old is new again as VPA has returned with a vengeance and a digital veneer. Agents are now looking to outspend each other on the internet with bigger ads at the owners expense. That would be fine if the homeseller and agent gained a joint benefit from all this advertising. Alas, homebuyers are interested in the property not the size of the advertisement.

Real estate internet advertising expenditure has exploded in the past 20 years from nothing to being billon dollar companies. Some individual web ads cost as much as $2000. On a global scale, this puts Aussie home sellers at the top of the heap when it comes to outlay for real estate advertising on the internet. One stockbroker made insightful comments prior to the release of the recent Fairfax results. The firm was looking for ‘any indication that real estate agents were beginning to resist price increases’ from Domain.

While everyone is asking, how high can house prices go? Others are asking, how high can these advertising rates go?

Agents may be showing subtle signs of stress at the price increases. Off market transactions are increasing as agents aim to use their database as opposed to chase excessive VPA. Neither consumers or agents are showing an appetite for annual price increases three times the rate of inflation.

Opportunists sense the gap in the market too. This is why your television and radio is awash with discount agents and referral firms promising the ‘same for less’ as full service realtors.

The key when assessing the right campaign for your home is the outcome you desire. Once you are clear on that, pick the most economical and efficient path to that outcome. If a total marketing campaign delivers genuine buyers to your doorstep for $2000, why spend $5000 or $10,000? If someone, asks you to spend $5000 ensure they justify the extra expense. If expensive internet advertising is such good value, let the real estate agent pay.  They’re the party getting the most benefit from it.

Battle of the disrupters – No agent v cheap agent

The traditional real estate agent is under attack from the left and the right. On the one hand, companies such as Buy My Place are teaching consumers how to sell without a real estate agent. On the other, UK outfit Purple Bricks hit Sydney in recent times to offer home sellers a real estate agent whose total fees are under $6000.

The traditional full service, full fee agent is coming to realise the real estate office next door and down the road is not their only competition.

Removing the traditional agent from the equation, it does set up a very interesting discussion. Are consumers better off giving their listing to a cheap agent or doing it themselves and no paying no fees?

Selling with a cheap agent

The main benefit in dealing with a cheap agent is you save on the commission. However, consumers must first and foremost decide if they are getting value for money in their $6000. If the agent undersells the home, the commission savings are simply transferred to loss in sale price. It is completely in correct to suggest Purple Bricks are the Uber of real estate. It sounds catchy, but the facts don’t support it.

Uber is an automated web transaction that competes in service and cost with the humble taxi driver. The risk for a consumer is essentially zero. Conversely, Purple Bricks take their fee upfront regardless of the result. If you drive the car from west from Balmain on Victoria Rd you will get to Drummoyne, guaranteed. If you list your house on the market, it may or may not sell for a price that you are happy with. Last year in a boom, the auction clearance rate was 80%. That means 1 in 5 failed. There are no guarantees in selling anything. Ask a fruit shop. So the risk is $6000 before the starters gun has gone off.

Finally, good real estate agents don’t work for $6000 a sale. If you are selling a home, its nice to think you will get a high level service for $6000, but you won’t.

Selling without an agent

A great way to look at the difference between selling without an agent v a cheap agent is to run the maths. On the one hand, you have a self acting, self interested home seller looking to save $20,000 to $50,000 in commission. Aside from the sale proceeds, that is the reward if the owner achieves a sale.

On the other hand, you have a real estate agent that will get about 35 to 40% of the $6000 fee in their hand after the costs and split with their boss.

A self-acting owner is saving $20,000 to $50,000 in commission and acting from self interest aligned with the sale.

The cheap agent is relying on a low fee with high turnover in a small time frame.

Time will tell whether Australians adopt the sell without an agent strategy. The cheap agent strategy has been tried many times and failed miserably.

Signals and signposts. The key indicators that will determine the 2017 market

The 2017 property market could see a continuation of the boom. Predictions across a range of analysts predict growth anywhere between 5 and 15%. Conversely, the correction that many have felt was imminent for the past few years could occur.

The key to anticipating the market whether you are buying or selling is to follow the relevant signals and signposts that are likely to determine the market.

Interest rates – there are two interest rates to follow. Firstly, the Reserve Bank of Australia’s (RBA) cash rate, which is currently set at an all time low. Make no mistake, the RBA cash rate is at a record low and house prices are at an all time high. There is a direct correlation here. The second key interest rate setting is the retail banks rate movements. In the past few years, the retail banks have moved rates, up and down, independently of the RBA.

Employment/Unemployment – The national economy is struggling, the NSW economy is booming. In the short term, following the NSW unemployment rate is more important to the Sydney housing market than the national unemployment rate. The respective state economy is a better immediate indicator of how the property market is likely to perform that the broader national economy.

Rents – If property prices continue to rise as rents stagnate, investors will shun the Sydney market in favour of regional centres and interstate capitals. Newcastle and Hobart are just two examples of where investors have looked to in recent times in favour of Sydney. All stable property markets appeal to a broad range of buyers. Low yields that fall further will cause Sydney investors to focus solely on capital growth. After 5 years of strong growth, that’s a big call.

Time on market – how long does it take for a property to sell? In a strong market, sales occur in a rapid timeframe and vice versa. By anecdotally following time on market for properties in your immediate area, you will gain an insight into how easily (or not) buyers and sellers are coming together on price.

Apartments – for the first few years of the current boom cycle, apartments performed equally well as houses, in terms of price growth. As high rise after high rise came up for completion, apartments subtly begun to underperform houses. Sydney does not seem to have the apartment oversupply that Brisbane and Melbourne does. But if rampant oversupply of apartments were to occur, it could easily weigh on rental returns and house prices. It is worth noting that the new NSW Premier Gladys Berejiklian plans to address the housing affordability crisis through development/supply. The

Black Swan event – Regardless of the apparent strength in the property market, its wise to be aware that Black Swan events occur. They are rare but they exist. A Black Swan event is usually rapid (like the collapse of Lehmans Brothers in 2008) and have dramatic knock on effects. Given the amount of debt swooshing around the world at present, systemic risk is real.

Bidders per property – the market depth is more accurately reflected in bidders per property as opposed to buyers at open inspections. It costs nothing to walk through an inspection. To place an unconditional bid on a property means the buyer is serious. The more bidders per property, the stronger the market and the deeper the buyer pool. Attend auctions and see for yourself the vigour in the bidding.

Demographic Disruption

The property market is always susceptible to disruptive forces of one kind or another.

The last two decades has seen constant digital disruption as websites and databases decimated print. The digital disruption changed the way real estate is purchased and sold forever more.

In 2014, there was an influx of foreign buyers into the Sydney and Melbourne markets. The presence of so much foreign money swooshing around those cities disrupted the market to the point many locals were priced out of their respective hometown. The Federal Government was forced to introduce restrictions and taxes to curb the demand.

As baby boomers reach retirement, their changing property needs will disrupt the market. Disruption should not be construed as negative. Disruption simply means to significantly alter the status quo.

Baby boomers are a demographic born between 1946 and 1964, as defined by the ABS. History has shown that whatever the baby boomer demographic does in unison it causes a boom. Given society experienced a baby boom in the past, it is understandable that one day it would experience a retirement boom and all of the adjustments that come with it.

Baby boomers are the largest represented demographic in modern society. Given their needs in the property market are changing, it’s worth taking note.

Before exploring what boomers are likely to do, it’s worth exploring what they won’t do. There was a theory that boomers would sell up and head out of town for the coast once retirement arrived. While many have done so, more are choosing to stay connected to cities and towns where family, friends and medical infrastructure are.

It’s not that the sea change (tree change for others) is entirely off the agenda, but the amount of boomers retiring in the city was somewhat unexpected.

To assist in understanding how the baby boomer demographic will impact on the market in the next 5 to 10 years, it is worth categorising their likely moves.

Selling the family home – There will be a mass and rapid transfer of large family homes to the next generation in the near future. The property market in Sydney and Melbourne is clearly overvalued (not to be confused with a forthcoming crash). Therefore, the time is right for boomers to begin downsizing from both a wealth and lifestyle perspective. Given the boomers numerical dominance as a demographic, if the selling is too fast, you may see oversupply in large family residences. A great question to ponder – is there enough demand from Gen X and Gen Y’s to support house prices at current levels once Baby Boomers sell down?

The answer will vary depending on whom you ask, but it is a segment of the market worth watching.

Selling the investment property/properties – as a result of the GFC, stock markets and superannuation has been poor for boomers in comparison to property. Since the 2008 GFC, the Sydney property market was in boom mode for 2009 & 2010, followed by a second boom from late 2012 to the present. Those fortunate enough to own investment properties will look to cash in while the going is good. Property has become the best superannuation for many boomers as they head into retirement.

Buying a property for the kids – many parents are delighted at property prices on the one hand and horrified on the other, when it comes to their children entering the market. Increasingly, boomers are assisting their children into the market. This phenomenon is certainly a secondary phase to the boomers wealth transitioning. But the key point here is that boomers are using their wealth to assist their children into property, not the stock market or new business ventures.

All general comments sure, but anecdotally, no one would suggest that boomers are passing on their wealth to children to enter into business ventures or money markets enmass. Boomers are clearly more interested in real estate than other asset classes when it comes to assisting family.

Therefore, even though boomers will be selling down their assets, expect the cash to be largely recycled in the housing market.

Buying a luxury apartment – If baby boomers are selling the family home, it is worth factoring in where they are going. Secure apartments close to the Harbour or beach have been popular. Luxury apartments for example in Drummoyne East along St Georges Crs that have great water views have skyrocketed in price in the past 3 years. In this segment of the market, it is safe to expect the demand will exist for the next decade.

Buying a single level house/property – the most desired yet undersupplied product in the inner ring of the Sydney marketplace is single level homes. This is true for many other markets too. Baby boomers primarily sell the family home to unlock wealth and downsize because the family home is too large. Escaping stairs is a secondary reason for selling yet a huge consideration on the purchase. Single level homes in popular locations will benefit from baby boomer demand, much to the chagrin of the aspirational young family. Make no mistake; baby boomers are formidable opponents in a bidding war.

As you can see, the boomers may leave an oversupply in large expensive family homes and create a shortage of luxury apartments near water. Hence the disruption that has already begun in the market. We are already seeing all of the above and more occur in the marketplace. This disruption is in its infancy and will accelerate into the near future.

In room vs onsite auctions

Auctions will be held onsite at the subject property or off site at what is commonly referred to as in room auctions. There are no fundamental differences in how in room or onsite auctions work. There are subtle differences that it may be worth keeping an eye on though.

At an onsite auction, while you may be greeted by a massive crowd, it’s worth remembering they are mainly neighbours observing not actual bidders. At an onsite auction, if you stand in the right position, you should be able to view the competing bidders.

Many experienced bidders like to stand close to the auctioneer and look at the crowd from that vantage. Such brazen confidence from a bidder can be unnerving to other bidders.

Buyer’s agent Patrick Bright says that an onsite auction can be more emotional than an in room auction. ‘Given the buyers are actually standing in the house they are bidding on, it can play to the vendor’s advantage. Conversely, a rainy day, aircraft noise or excess car traffic can have a negative impact on an onsite auction. These issues are irrelevant with in room auctions.’

Bright highlights that the order of the properties to be auctioned at in room auctions is highly relevant. From his experience, Bright says that properties certain to sell well will be auctioned first. The agents are aiming to create a ‘positive tone’ to the proceedings. The agents will also want to place a certain seller last in the pecking order to ensure that the event both starts and finishes well.

The weaker auctions are likely to be buried in the middle of the schedule.

Given there are so many bidders for so many different properties at an in room auction, it’s much more difficult to know who you are bidding against.

The power play at an auction is fluid, ebbing back and forth between the vendor and the buyers. The more buyers there are bidding the more power to the vendor and vice versa.

If buying at auction is daunting to you, outsource the bidding or make your best offer prior to auction. Just because the agent wants the vendor to auction, it does not mean you have to buy that way.

How to bid, buy and win at auction

Even if you are fiercely determined to avoid being caught up in an auction when buying, you still may find yourself having to bid at one to secure your dream home

At an auction, the property sells to the buyer who submits the final bid above the vendor’s reserve price. Most people attend auctions without a bidding strategy. The good news is you may win an auction without having reached your predetermined maximum price. The bad news is you may be the under bidder at a few auctions before you win one.

But there are bidding strategies that you can adopt give yourself every chance of winning an auction.

While you may have watched many auctions, there is a different element at play when you are bidding. Patrick Bright is one of the original buyer’s agents in the Sydney property market. Bright has bid at more auctions than most people have attended. He is also a former selling agent and licensed auctioneer. His experience is invaluable in understanding the undercurrent at play and how best to manage the auction, the auctioneer and the competing bidders.

Bright reports that there has been a noticeable increase in the number of buyers that now employ someone to bid on their behalf at auction. A vendor will readily employ a selling agent to maximise their price. Therefore ‘it makes sense that more people are hiring someone of equal knowledge and skill to save them money when buying’ he says.

Bright encourages those that think ‘registered bidding’ has killed off the ‘dreaded dummy bidder’ to think again. From experience, he is convinced that dummy bidders are still very much apart of many  auctions. It is conceivable dummy bidders could be placed by either the vendor or the agent however Bright believes few sales agents would take such a risk

Auctions need competitive bidding to perform. As a vendor, it is so simple to ask a friend to register and bid up to the reserve price creating the illusion that the property is in demand.

How do you have an auction with one buyer? If you are an agent, you under quote the price to attract more bidders. According to Bright and others in the industry, you may also be bidding against a dummy bidder, placed by the owner or agent!!

Each auction is a fluid and unpredictable event. The simple advice for buyers is to avoid bidding unless the property has met or exceeded reserve. In the past, less skilled auctioneers would call the property on the market as soon as it hit reserve.

Skilled auctioneers won’t immediately advise the crowd when the auction has been met. Bright says the auctioneer doesn’t want to give bidders a sense the auction has just reached the vendors walk away price if the auction is doing well.

A good aggressive bidder will have no qualms in asking the auctioneer if the property is ‘on the market yet?’. You may or may not get an answer to that question, but it is worth asking and continuing to ask during the auction.

For simplicity sake, there are two types of auctions.

Auctions where the pressure is on the buyers, due to buyer competition.

Auctions where the pressure is on the vendor due to insufficient competition above the reserve price.

To adopt the right strategy, you want to get a handle on which category the auction you are bidding at falls into.

 

Out bidding the competition

If there are more than 5 or 6 genuine bidders at the auction, it is either a really desireable property or the agent has under quoted the price. Remain calm in the face of multiple bidders. Many are there looking for a bargain, because that’s what the agent’s price guide suggested was on offer.

To flush out the serious buyers, Bright suggests  that one strategy you could deploy is to bid early and relatively close to fair value. He recounts the story how his first bid on a property with a price guide of $850,000 was $1 million.

‘Many of the underbidders were misled into being there on the day and I just wanted to knock them out early’ recounts Bright and send a message to those that were left. The selling agent told Bright that he made him ‘look bad in front of the underbidders’ because Bright’s opening bid was so strong.

When you know that fair value is $1 million and beyond, why waste time bidding at $800,000 in any event? You are in a far stronger position by bidding decisively early as a means of dictating terms.

If you are in an auction with intense buyer competition, Bright says bid assertively, quickly and confidently. By starting strongly, you rob the seller’s agent and the auctioneer of the spectacle. While Bright may only win 20 to 30% of the auctions he bids at on behalf of clients, he bids confidently on everyone one up to the agreed maximum price. You need to be equally confident in your last bid as you were with your first.

The reality is inexperienced bidders can become easily perturbed in the auction environment. It is almost a cliché that under bidders will remark, ‘we knew the other guy was going to keep bidding, so we just stopped’. If you can bluff the competition from bidding against you, the amount you save becomes a saving for you and a loss for the vendor. It happens all the time at auctions.

‘Project confidence down to your last bid and never look as though you are near your limit’ counsels Bright. ‘Spook underbidders with the ferocity of your bidding, people don’t want to bid against a crazy.’

Stand in a position where you can see the entire field of bidders and look for signs of distress amongst your competition. If this sounds savage and unnecessarily confrontational, welcome to the auction system. Remember, as a buyer, you are only responding to the vendors selected process of sale.

Bright insists that every client provides him with a written maximum prior to the auction. He refuses to speak with the client during the auction and does not allow a client to increase their maximum price once the auction has started. We have the tough conversation about price before the auction begins. A buyer cannot get caught up in the drama of the auction. The property’s value has been researched and the buyers finance has been approved.

The question that bidders ultimately need to ask themselves prior to the auction is ‘what is our walk away price for this property?’ No matter how special a property may be, every buyer has a walk away price. The price may be governed by common sense, good judgement or finance restrictions. Regardless of the reason, you need to establish your walkaway price prior to the auction.

You need to enter every auction knowing you may not win it. You need to win an auction on the right price and terms.

Bright says that in his experience, even in a strong market, about 33% of sales are above market value. About 33% are at market value and the balance are sales where the vendor drops their price on the day to get a sale.

Given that about 1 in 3 auctions will sell above market price, you need to be clear on your predetermined limit going into the auction. Just because you set a predetermined limit above fair market price, it does not mean you will necessarily be called upon to pay that amount.

Bright says that in 20 years, he has never reached his authorised maximum on the auctions he has won. “The only time I reach the client’s maximum price is at the auctions I lose. So I inform clients upfront ‘you will likely kiss a few frogs before you win one’ when it comes to auctions. The auction you win will  be won below your maximum bid though, because the only people that reach their maximum at an auction are the underbidders.”

Gavin Norris as the CEO of Chinese real estate website Juwai was interviewed about Chinese bidding tactics at auctions in August 2016. Norris was quoted as saying ‘Chinese buyers are the most sophisticated at auctions. It’s not because they overpay, it’s because like every smart buyer, they fight for every dollar.’

‘If a Chinese buyer doesn’t feel comfortable at an auction, they will ask a friend to bid on their behalf. That tends to produce individuals who are very cool and comfortable under pressure.’

In the same article, auctioneer James Pratt offered buyers advice. ‘Don’t be afraid to slow the auction down or to bid in uneven increments. At auctions, buyers used to be too nervous to challenge the pace or the increments that bids are going in, but not anymore.’

Bidding and buying at a slow auction

Fortunately, not every auction that you bid at will be vigouros. Even though the vendor has been told an auction will put pressure on the buyers, the pressure often rests with the vendor.

A slow auction is an excruciating and agonising event to witness. The vendor has gone to auction with visions of 5 bidders trying to knock each other out with a big cheque. The buyer’s belief and resolve that the owner wants too much is hardened when they see a lack of buyer competition.

A slow auction with only one or two registered bidders is more like watching a negotiation than a competitive auction.

When an auction is struggling to get started, Bright’s preference is to place a bid as opposed to seeing the auction pass in. If the auction passes in, the owner’s resolve around their reserve price tends to firm up. While ever the auction is still alive, the owners are more likely to make a price concession under pressure to gain a sale.

Once the auction has finished and the crowd has left, the pent up pressure the owners have been feeling diseppates.

If you make a bid, even if it is below the owners reserve, you are likely to elicit a counter bid from the auctioneer and/or the vendor. This counter bid is usually in the form of a ‘vendor’s bid’. A vendor’s bid will give a good insight into the vendor’s price expectations.

Depending on where the vendor’s bid is in relation to your bid will govern whether you strike a deal or walk away.

A lot of buyers actually reduce their predetermined limit mid auction in a slow market and/or a slow auction.

They go to the auction prepared to pay $1 million but watch the competition drop out at $930,000. Suddenly, $950,000 seems like a fair offer in the buyer’s mind. Why would we pay $1 million when everyone else has dropped out at $930,000 they reason?

In a slow auction, the agent has a lot of work to do to get the sale together. The agent will aim to bring the seller down in price and the buyer up in price. At a strong auction with multiple bidders above the reserve, the agent can afford to simply watch proceedings. They don’t need to have any heavy conversations with their vendor. This luxury does not exist if all the bidding is below the reserve price.

If the auction is struggling and you are the highest bidder, ask the agent to disclose the reserve price to you, so that you can make a decision on it. By doing so, you will gain a specific number that will buy the property at that moment in time.

If the bidding stalls below the reserve and the owner won’t drop their reserve to ‘meet the market’, it may be best to move onto another opportunity in the market. The good news is you won’t have to pressure the owner to drop their price. The agent is likely to be employing every conditioning and crunching tactic they know to get the vendor down in price.

Remember, the objective is to buy a good property at a fair price. If you attempt to steal the property for a bargain price, the vendor will likely relist on the market as a private treaty.

In summary, it is reasonable if you aim to work the vendor down from an above market price reserve to a market based reserve. If you attempt to work the price down from a reserve price to a bargain level, another buyer is highly likely to come in over the top of you.

The auctioneer James Pratt and buyer’s agent Patrick Bright agree on one thing. If the property is going to be passed in, be sure to make the last highest bid. This ensures that you have the first right to negotiate with the seller once the auction has failed.

VPA on the rise – Sellers asked to foot the bill, again

The cost of advertising a home is rising and beginning to resemble the newspaper era. Owners are being offered or sold advertising campaigns up to and above $10,000. The cost of the campaign is paid upfront by the seller regardless of the success of the campaign.

VPA stands for Vendor Paid Advertising. Agents will also charge a commission in addition to the VPA. As one observer noted, VPA is for profile, the commission is for profit.

Sellers need to establish the true cost of advertising their home and avoid inadvertently paying to promote the agent.

Before the internet changed the world, newspaper classifieds were known as the Rivers of Gold. Cars, employment and real estate advertising created an absolute bonanza for the publishers.

As consumers migrated from print to digital, previously non-existent companies/websites such as carsales.com.au, seek.com.au and realestate.com.au stole the classified market from their print rivals.

The move into digital classifieds was a win for everyone that moved into that space. Consumers enjoyed a better experience with search functions and more photographs being available. Those placing the ads such as agents, direct vendors and third party operators were exposed to a larger market on the internet. At a lower cost too. And the owners of the websites enjoyed a healthy profit margin in comparison to print rivals.

Suddenly the cost of advertising a property has done a full circle. The costs are similar to what home sellers previously paid in expensive print campaigns. Maybe the agents know where the home sellers, pain threshold for VPA is from back in the the glory days of print?!?!

A real estate trainer recently cautioned his clientele that ‘Australia was now the world’s most expensive market to run an internet campaign’.Essentially, agents are so busy trying to out-promote each other with vendors’ money that they are driving the cost of advertising up.
As the ads become more expensive, the agents aim to convince the next vendor to spend more.

The good news for home sellers is that buyers are interested in buying your house not the size of the advertisement. Just because an agent asks you to spend $10,000 on a VPA campaign, it does not mean you have to agree.

One home seller recently challenged an agent that asked for an excessive sum for advertising. The agent very quickly slashed the advertising in the hope of being granted the listing.

The agent’s lack of belief in the proposed campaign was apparent very rapidly. Understandably the owner wanted to know why the agent asked for $10,000 in VPA if $3000 was sufficient, after a few tough questions.

Some agents have adjusted positively to the benefits of the internet and slashed operating and marketing costs in the process. Others are aiming to replicate the print and vendor pays model from a bygone era.

When employing an agent, negotiate a package that involves them selling your house rather than you buying advertising. Bundle the advertising and commission into one fee, only payable on settlement of the sale. You will find the agent is suddenly economical and thrifty with the amount of advertising required to sell a property. The savings is yours to keep.