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.

How to run a silent auction

Just like a public auction, there are times when a silent auction works better than a standard private treaty and vice versa.

The success of a silent auction is equally dependent on the right agent and the right circumstance.

A public auction sells to the highest bidder above the reserve price. It is common for the highest bidder to win an auction merely by beating the second highest bidder by $1000. The tragedy, from the seller’s point of view, is that the person who just bought the property often has $50,000 or $100,000 left in their budget that they did not need to spend to win the public auction. They did not need to go to their maximum price because the process did not demand it of them.

The objective of the silent auction is to elicit each and every buyer’s maximum price for the subject property.

Market conditions – In May 2009, real estate veteran Bill Malouf chastised his industry colleagues at a national conference. Malouf was critical of agents that persisted with auctioning properties in market conditions that were clearly a non-auction environment. The market was suffering a crisis in confidence after the banking crisis, yet real estate agents were still listing properties for public auction as the clearance rate floundered below 50%.

Whether it be a public or silent auction, the market conditions need to be conducive to run a sales campaign that needs multiple bidders. If the market conditions are extremely flat, it’s advisable to run a normal private treaty campaign rather than a silent auction.

Marketing – The marketing campaign to promote the silent auction is the same as if it were listed as a public auction or private treaty. It is crucial that you remember buyers are interested in your property first, and the process of sale second. Regardless of the sales process you employ, provided your agent runs a competent marketing campaign, the same prospective buyers will emerge.

Price guide – A mistake that many home owners make with private treaty (for sale) is they set their asking price too high. To overprice with the intention of reducing down to the market price will cause your property to languish on the market and look stale. Conversely, many home buyers will attest to the reverse with public auctions, where they often see properties advertised 10 to 15% below the vendor’s reserve.

The good news is you only need to quote an accurate market price to attract multiple bidders. ‘Market price’ is different to ‘best & highest price’. It is completely legal, fair and reasonable that a home owner lists their home to be sold at the ‘best & highest price’ above the market price. In doing so, the owner (and agent) is not misleading anyone into bidding on a property they have not a chance of winning.  Equally, they are making the understandable commercial decision to accept the highest offer.

Deadline – Public auctions put a public deadline on the sale from the get go. As the auction deadline looms, the pressure that was meant to be on the buyers to act begins to mount on the vendors, particularly if the market is disengaged with the price guide the agent is quoting. Unless forced to do so by a court order or trustee, it is best to avoid putting a public deadline on the silent auction at the beginning of the campaign. Keep the use of a deadline open and only put a firm deadline on the sale once you are near certain that you have sufficient bidders/buyers. Deadlines in a negotiation are classic brinkmanship. To set out on day one of the campaign with a deadline brings a high stakes pressure situation on oneself. The Sydney and Melbourne property markets kicked off the first weekend of Spring 2016 with clearance rates of 80% and 78% respectively. This is as good as the public auction market gets. Yet 1 in 5 still failed in a most public fashion. In normal markets, the fall-out rate is even higher. If the owners allowed themselves more time, they could have saved themselves the public humiliation of failing to sell in front of the neighbourhood.

Lower the barriers to entry – Many buyers refuse to bid at auctions because they have previously lost thousands of dollars on due diligence. To maximise the number of bidders in your silent auction, provide easy access to due diligence. Have pre-prepared strata reports, building reports and a straightforward contract so that the buyer can draw on communal due diligence reports at a lower cost. The agent will garner more respect and trust if they advise those buyers that are highly unlikely to win the silent auction of this fact before they spend money on due diligence. It is unconscionable how agents often watch buyers spend thousands of dollars on due diligence knowing their budget won’t buy the property.

Structure/bidders guide – Once the agent has established the field of bidders, it is crucial that everyone is working on the same structure. In order for this to happen, the agent and vendor must first agree on the bidders guide. The bidders guide contains pertinent information that the buyers need to factor in to their offer and the practicalities of the process. Issues such as:

  • Undertaking that all buyers offers will be kept strictly confidential and only disclosed to the vendors and agent
  • Deadline for final offers to be submitted to the seller’s agent or lawyer
  • Only offers on signed contracts with deposit will be considered
  • Required deposit on exchange of contracts
  • Settlement period of the sale
  • The price at which offers ‘at and above will be considered’.
  • The vendor and agent reserve the right to sell to the highest offer without first informing the under bidders
  • Any special conditions outside the normal.

As the vendor, if you negotiate a compromise with one buyer, ensure that the same concession is then offered to all bidders. For example, a buyer may ask for 5 months to settle, so they have more time to pull the necessary funds together. Other buyers may also be prepared to pay a higher price if offered the same concession that you just agreed to.

Agents that have been working in sluggish markets are often caught by surprise when a boom rolls in. In 2013, the monster of all housing booms moved through Western Sydney after several tough years for vendors and agents. Agents started selling everything for full price after 3 days on market, thinking they were doing their respective clients justice. Homes were being listed on a Monday and sold by Friday, without a weekend on the market.

In these situations, it is crucial that a structured bidding process is employed. When multiple buyers want to buy the one house, it is a tactical error to exclusively negotiate with individual buyers, rather than offer the open marketplace bidding terms.

Furthermore, if the agent distributes the silent auction bidding terms without the consent and full support of the vendor, the process will fall apart. The power in the bidders guide is that the buyers, the seller, the lawyers and the agent are all acting on the terms and conditions outlined in the bidders guide.

Confidential bidding – If there is clear upward pressure on the price from the original advertised price guide, be sure to telegraph this to the market. Do so for two reasons. Firstly, it is the right thing to do to those buyers that are priced out of the running. Secondly, it shows the remaining bidders that the property is in high demand. If you list a property with a price guide at $1 million yet the feedback quickly comes in that the buyers are thinking beyond $1.2 million, you are missing an opportunity to increase market expectations if you don’t increase the price guide. In some states, it would also be illegal for the agent to persist with a price guide of $1 million when the feedback is $1.2 million.

The essence of a silent auction is to keep all specific offers confidential. Just as you would not give an opposition player a little peek of your cards in a hand of poker, don’t give the buyers a peek at the offers they are competing against.

Understand unique, generic and in demand – A unique property requires a unique buyer. ‘Unique anything’ does not translate into ‘abundant demand’. Many a vendor has felt that their property ‘must be auctioned because it is unique’. Don’t mistake unique for in demand. Auctions require multiple bidders to fuel the process. Putting a $20 million waterfront property to auction in a recession will almost certainly end up in no bidders or only one bidder being present on auction day.

If you attempt to run a silent auction on a generic two-bedroom apartment, when there are 200 similar apartments on the market in the same suburb, you are doomed to fail.

It is crucial that you ensure the environment and product is right before running a silent auction.

Emotion – While this article articulates the clinical structure of a silent auction, rest assured the execution of it is an emotion-charged event. Many people feel that public auctions are the right selling path because of the emotion an auction generates. The buyers’ emotion exists because the buyers love the property and they know it won’t be available tomorrow; it will be sold today. It is crucial to the success of the silent auction that the buyers are aware the property will be sold and the sale is competitive. The same intense buyer emotion that exists in a public auction will be in play with the silent auction.

Binding contract – It is crucial that the winning bidder submits their offer on a signed contract. You cannot have a circumstance where buyers are able to submit non-binding written offers against contract offers. It is the agent’s responsibility to get all interested buyers in a position to sign a contract by the deadline. If you accept a non-binding offer in favour of a signed contract, you are taking a gamble on that buyer, given your under bidders are unlikely to return to the bidding in two or three weeks’ time.

Passing in – It is an inevitability that some auctions, both silent and public, will fail to meet the owner’s reserve price. If you do have to pass the property in at a public auction, you are doing so in front of a large crowd. The price at which you passed in at becomes public knowledge. This price will probably turn up in the Sunday morning auction results published across your city. It will more than likely be recorded by data houses, such as Core Logic RP Data, forevermore. This becomes powerful information for a buyer and haunts the seller’s campaign post auction.

If you publicly pass in for a low price, you have no chance of getting a high price.

In a silent auction, if the price fails to meet the reserve, there is no public failure for the property, the vendor or the agent. The only people who know what the property passed in for are the buyers, the owners and the agent. The owner and the agent can continue to sell the property without the stigma of a public failure hovering above the campaign.

The first step to successfully executing a strategy is to ensure it works on paper. If the plan does not work on paper, it won’t work in reality.

A silent auction is the right sales strategy to adopt in a multi-bidder situation provided the agent and vendor are working as a team.

 

How much will it lease for?

Investors entering the property market need to protect themselves against overzealous rental quotes. Often the agent spruiking the proposed rental return is a sales agent and not a property manager.
To protect yourself against an unwanted and unexpected shortfall in the income on your new investment, disregard a selling agent’s rental assessment.
That’s not to say that every agent will inflate the rental estimate to make a sale. The reality is that there is an incentive to do so, though.
To get a true read on the market, have an experienced independent local property manager assess the property’s respective rental value, before you buy it.
Property investors often make purchasing decisions and value assessments on the return a property produces. This is particularly relevant in the commercial property market and a common theme in the residential market.
Any time a real estate agent can inflate the good news in order to make a sale, there is a risk for the consumer on the receiving end of that promise.
In the commercial property market, the lease arrangement has a huge bearing on the likely sale price of the property.
A vacant property will often sell for 10% less than fair value. A leased property to a quality tenant on a secure fixed tenancy with lease extensions will sell for 10% or more above fair market value.
Commercial tenants are much harder to secure than residential tenants. The upside being that commercial tenants tend to stay a lot longer than residential tenants.
The impact of the rental return on the asset’s value is not as extreme with residential property, but it is still a component of the value offering.
Given finding a return on cash is so difficult in the modern world, many investors will and are taking cash out of the bank to invest in property. Investors are likely to play a crucial role in supporting the market against a severe price drop as the market eventually cools in the years ahead.
The most common trick used to dupe investors in the market is developers offering fixed guaranteed rental returns. Investors are reassured about the merits of the apartment in the high rise due to the developer’s promises to lease it back for 2 years, at a very generous price.
The apparent security of a high rental return compels the investor to pay a purchase price relative to the inflated rental income.
Two years after completion of the apartment block, all the rental guarantees expire, leaving the investors exposed to the open market.
Unsurprisingly, the open market is significantly lower than where the developer’s price guarantee was set at.
While this happens in the world of off plan apartment sales, investors looking to buy in the open property market also fall victim to rental over quotes. It is common for properties to lease for $100 to $150 per week, less than what the sales agent told the buyer.
The loss goes beyond the weekly shortfall though. If you buy a property believing that it will lease for $800 p/w and its true value, unbeknown to you, is $650 p/w, it takes time for you to discover the disconnect.
The property will undoubtedly sit vacant for whatever period you leave it priced at $800 p/w. This vacancy period can quickly run into thousands of dollars in lost rent if you wait a month or two looking for that $800 p/w tenant.
At a time that feels as though everyone is making pots of money from property, it pays to remain clear headed and prudent.

Mystery shop the agent

The selection of the selling agent is usually decided upon from an interview and/or a sales proposal process.  Whether it’s an interview or a sales proposal that you are using to determine your agent, neither actually shows the agent in action. Agents are fully rehearsed with scripts and dialogues to ensure a slick presentation when they are being interviewed by sellers.

Given you are employing an agent to market, sell and negotiate the sale of your home, it is worth seeing them in action.

To gain a true perspective of the agents you are considering, mystery shop them as a buyer.

When you mystery shop the agent, ask a few probing questions. You will quickly gain an insight into whether you want that agent representing you.

Questions such as ‘why hasn’t the property sold yet?’ or ‘do you have sales evidence to justify the price guide?’ can garner surprising answers.

Every agent will find it easy to hold the line with a new listing that has a lot of interest in it. But you will get a better perspective of the agent’s ability if you mystery shop them on one of their failed auctions or struggling campaigns. Look for clues as to whether the agent is protecting their client’s interests or breaching confidence.

The best agents are the best at protecting their clients, even when the campaign is not going to script. A dangerous agent for the seller is one that becomes desperate when the campaign does not go as expected.

All agents look good when there are 3 buyers trying to buy 1 house. How does that same agent look when the property has failed at auction, the advertising money has been spent (wasted) and the crowds have stopped turning up to the open inspection?

What you want to see when you mystery shop an agent

Available and follow up – in order to mystery shop an agent, you first want one that is available. Does the agent respond to messages? It is a phenomenon in real estate that the stronger the market, the worse the service buyers receive from agents. Essentially, in a boom, service to buyers goes down as agents advertising for buyers goes up!!

Does the agent follow up and follow through. If you asked for information, did they get it to you. Were you followed up after the inspection for feedback and a second inspection? Were you informed of similar properties being listed the week after you inspected? Is a senior or listing agent handling your enquiry or was it the office junior that started in real estate last week? Once you mystery shop an agent, what happens from that point can offer all of the information you need to make a listing decision.

Enthusiasm – Was the agent enthusiastic about the property and you as a buyer?

Knowledge – The best agents have thorough knowledge of the property and the local area. If there is a question the agent cannot answer on the spot, the agent chases the answer and responds.

Assertiveness – Look for agents that are pleasant but assertive. When you ask probing questions to test the agents, they confidently and assertively protect their clients. A pleasant pleaser won’t help you when the negotiating gets down to the pointy end of proceedings.

What you don’t want to see when you mystery shop an agent

Personal details disclosed – if you walk into an inspection and leave feeling as though you know the owners life story, because the agent divulged all, that’s not a good thing. It is a terrible betrayal actually. When you are mystery shopping agents, ask probing questions of the agent to see how they handle them.

If you find out that the owners are selling because ‘the job loss caused financial difficulties that led to stress in the marriage, that saw one of the owners begin an affair which was the cause of the divorce’ then don’t hire the agent.

Short, rude or unavailable – the best sales people know that the next enquiry could be the best buyer. Conversley, if the agent is abrasive and pre-judges buyers, they are likely to turn buyers off the home.

What other buyers have offered – some agents will freely disclose the offers that have been made by other buyers. This breeds instant mistrust in buyers. If offers are disclosed to you, expect yours to be disclosed to others. An agent that freely discloses offers during the campaign is effectively running a ‘Dutch auction’. The property will be ‘sold to the buyer that offers the best price’ is a simple and assertive response that negates a messy Dutch auction.

There are many elements to selecting the right agent. The most dangerous (and lazy) selection method is to request 3 agents inspect your home and send a written sales proposal through. Given $50,000 or a $100,000 can be easily made, won or lost by the agent during the campaign, it is worth finding the right agent.

Expensive web advertising drives off market transactions.

Real estate agents across the country are increasingly moving toward off market transactions. An off market transaction is defined as one where the agent only markets the property to their database and known buyers rather than listing on prominent media websites.

Given the sophistication of industry Customer Relationship Managers (CRMs), it is plausible that an estate agent can expose a property to the vast majority of active buyers in the market. But these CRMs have existed for quite some time. Whilst they facilitate the effectiveness in off market sales, they are not the cause of the recent spike in transactions.

Off market transactions have spiked because agents and consumers are looking to avoid the high cost of real estate websites. Start up companies that were started in a garage less than 20 years ago are now billion dollar companies on the back of real estate advertising. The price that agents and home sellers have been asked to pay for a web listing has increased nearly every year for the past 2 decades.

Agents happily went along with the price increases because they simply passed the increase onto the vendor. Now, the vendor does not want to pay!

We are now at a stage where the market is beginning to reach a price resistance point. Private sale companies promising to save the consumer commission flank agents to the left whilst excessive advertising fees flank them to the right. The real estate agent is being squeezed by a cheaper competitor on one side and an unjustified expense on the other. Agents need to innovate to survive.

Agents that have signed lengthy contracts committing to put every listing as an upgraded prestige or premiere listing are feeling the price pressure the most. Consumers inherently know that you don’t need to spend $5000 or $10,000 on web advertising to find buyers.  Particularly in a boom.

The vast majority of the money spent on web promotion is about building the agents profile or brand. There is absolutely no research to suggest that home buyers respond more favourably to a property because it is or isn’t a large expensive advertisement.

Home buyers buy homes not real estate advertisements. Sellers are well advised to keep this in mind.

If an agent asks you to fork out huge amounts of money on a expensive web campaign, tell them you want to sell your home not buy advertising. If the agent passionately believes in the product, they can pay.

It is this push back from consumers that is inadvertently driving off market transactions.

The consumer refuses to pay for expensive web ads and increasingly, so too are the agents. Off market transactions are increasingly becoming the happy medium between agent and consumer.

It is understandable that consumers will need to weigh up the potential benefit of listing on the open market vs trading off market.

Agents are increasingly building real and perceived benefits into their pitch when it comes to off market selling.

The consumer needs to ascertain whether the agent is simply looking to avoid the excessive advertising costs they have committed too.

How to protect yourself from conditioning

Irrespective of whether it is shortly after you have signed a listing agreement, or your property has remained unsold for a lengthy period of time, you are always susceptible to being conditioned. Protecting yourself from being conditioned should start before you employ an agent. If you are mid campaign and your agent begins to condition you, it can be hard to extricate yourself from that agent, particularly if you have signed a lengthy agreement.

Conditioning is most easily identified in circumstances where the agent bombards you with negative news about your home, usually disguised as buyer feedback. You know you are being conditioned when the agent offers few solutions other than to ‘drop the price’.

To protect yourself from being conditioned by the agent, adopt the following strategies before you sign an agreement:

Only sign a short agency agreement – One of the most powerful elements agents adopt to set up the conditioning of ‘overpriced vendors,’ is trapping them into signing a lengthy listing agreement to begin with. If your motivation to sell is high and the listing agreement is long, the agent has all but secured a sale. If the agent has overpriced the home, they will spend the next couple of months whittling the owner’s price expectations down by giving them negative feedback about the property.

By only signing an agency agreement with a short ‘exclusivity period’, you can deliver the ultimate response to an agent who begins to condition you – you can fire them. It is your home and you are the boss. If you sign a short agency agreement, you maintain the power. If the agent insists on an agency agreement longer than 60 days, don’t hire them. There is no such thing as a ‘standard agreement’!

Ask for a list of both positive and negative features on your home –A hallmark of conditioning is when an agent praises the property in pursuit of the listing and then highlights every known/possible ‘negative’ once it’s on the market. The agent will act as though the negative feedback from buyers is a complete shock to them too.

Prior to listing with any agent, ask for a list of the positive and negative features of your home, in writing. Then the agent cannot use any negatives listed against your property later as seemingly new information, to get you to lower the price they originally gave you. Ask the agent, ‘How do you propose to overcome those negatives during the sale?’ It may be prudent to shortlist agents with the best responses to this question.

Select your agent based on strategy not price – If your property is priced correctly, the agent won’t have to condition you – they will be too busy negotiating with buyers. The reason agents have ‘overpriced vendors’ is because they ‘overpriced the listing’ to begin with.

Unfortunately, many home sellers select their agent based on the selling price they quote. They inadvertently turn the ‘agent selection process’ into a bidding war. The big problem here is that it won’t be an agent who buys your property. If you select the agent with the best selling strategy as opposed to the highest selling price quote, your chosen agent avoids being caught in a nonsensical bidding war.

Many people become angry when they learn that conditioning is a low rank premeditated sales tactic. They are surprised and disappointed that their agent of choice has taken the conditioning path. The key to success is to insure yourself against conditioning before you employ an agent, rather being left surprised and despondent after giving them the listing.

Gross vs. Net Profit

When a property sells for $1 million and later resells for $1.5 million, many people jump to the conclusion that the owners made about $500,000 profit. You often see this type of commentary in the property pages of newspapers about the real estate transactions of sports stars, celebrities and socialites. We know that there are some expenses in there, but it’s still a good earn; right? Well yes, but it’s maybe not as good an ‘earn’ as we might originally have been led to believe.

Before passing judgement on whether a transaction was as profitable as it seems, doing some back of the envelope arithmetic can be insightful. In real estate, the difference between gross and net profit is usually significant. Transaction costs, for example, are one of those significant costs often overlooked when buying.

There are many factors to consider when working out gross vs. net profit. By being aware of all the factors that can dilute profit, you can more easily set your sights on a realistic net profit, rather than a gross profit. Also, because there may be variances in the types of costs which apply to different properties, using a set formula such as ‘transactions costs are 8%’ does not quite paint an accurate picture. Some of the main costs to consider are listed below.

Stamp duty is a large unavoidable cost when buying real estate. The percentage payable increases as the property becomes more expensive. Given the average house price in the Inner West is over $1 million, most people are at least 4% behind on the day they settle their purchase. Land tax may also apply in some cases, so do your due diligence before you buy.

Renovation and improvement costs is an area that is not captured by the data in any way.  If you overspend on a renovation, your net profit will quickly be diluted, even if the transaction looks good on paper. With the construction boom still occurring across Sydney, building costs continue to remain at record high levels. Disciplined spending and good project planning is crucial to ensuring that your renovation will create a true profit, rather than merely pumping up the price for a zero net profit.

Negative gearing is a fancy phrase for making a loss. Even though you share some of the loss with the government through your tax return, a loss is a loss. Therefore, before getting too excited about the house you paid $1 million for and sold for $1.5 million, you should consider the amount of money you spent propping up the investment over the years you owned it. Negative gearing means that the accumulated amount spent on the shortfall between rental income and costs, has to be added to the base price as a holding cost, before you calculate your profit. Many people who achieve a good paper trade would be frightened to know what their true net position really was, if they subtracted all the ‘prop up costs’ from their gross profit.

Rates can come in a multitude of disguises. Strata rates, water rates, council rates and special levies on strata buildings all need to be taken into account.

Vacancy rates and agent’s fees are applicable costs for investors to consider. One of the realities of owning an investment property is that the bank still wants their mortgage payment, even when the investment property is vacant.  You should allow for at least two vacant weeks each year.

Selling fees are the amount that you pay the agent for selling your property, along with conveyancing costs. Let’s remember that you also paid the conveyancer on the purchase too! These costs are avoidable by going the DIY route. You just need to decide if you want yourself as a client!

Property can be profitable. But it’s crucial that property is not seen as an easy ticket to financial freedom. In recent years, the boom has seen many investors turn a handsome profit. But this boom was unprecedented and came on the back of record low interest rates.

Investors should take note that net profit needs to be your ‘true north’ when investing. Too many people make tax deductions their ‘true north’ when buying an investment property. If you make tax deductions a priority over profit, that’s exactly what you will get.

Expensive Internet ads

Over the past decade, real estate agents have replaced expensive newspaper ads with expensive Internet ads.

Agents strongly recommend expensive Internet ads to vendors, but vendors are asked to foot the bill.For agents – It is easy to be passionate about an expensive product that they are not paying for. Any expense during your sales campaign must be linked to a higher price.

Real estate agents love a motivated vendor. One of the easiest ways to get the home sellers motivated is have them invest in a multitude of products before the campaign begins.Agents are acutely aware that the vendor is more likely to ‘meet the market’ if they can convince the vendor to spend thousands of dollars upfront on expensive web ads.

Before committing to expensive Internet ads that simply increases the agent’s corporate profile, ask yourself and the agent, what justifiable benefit do expensive web ads bring to your campaign?

Home buyers are attracted to nice homes not expensive ads.