Ep 55. Setting Your Auction Limit
In this episode, Michelle discusses the importance of setting your limit for an auction.
Here’s what you’ll learn from today’s episode:
How to stop over committing in the heat of the moment
The importance of researching comparable sales
How to assess the competition
How to emotionally prepare yourself for an auction
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Hi, and welcome to another episode of The Buy Your Side podcast. The property podcast to help you make smarter property buying decisions. My name is Michelle May, and I am the Principal of Michelle May Buyers Agents here in Sydney.
Today I want to talk about going to auction and setting your auction limit, because I think one of the reasons why people tend to be up against it themselves and keep missing out at auction is because they don't give it enough thought before they go to auction. So let me talk you through a few things that I discuss with my clients before they set their auction bid limit.
The first thing you need to do is to leave your emotions at the door and really start working on the data that you have collected and then put it all together, along with things like your budget. The first thing you need to do is really look very carefully at the comparable sales in the area, to the properties that are relevant to the property that you're trying to buy. You need to look at things like land size, the number of bedrooms, off street parking, aspect, but then also at the finer things such as the quality of the location so, is the street better or worse than the other properties that have sold recently and what does that look like. But also things like the level of finish within the property, that's very important because if you have a house that is completely almost derelict inside, versus one that has had a new kitchen put in in the last 5 to 10 years, then of course it's going to have a different value.
Once you have put your comparable sales together, you should have a good indication of what the property is worth and let's forget about the price guides altogether, because you and I both know that price guides by and large in New South Wales are nonsense. So, work on your own research. That's not to say that you shouldn't talk to the agent to gain more information. It's really important to let them do more talking and you do more listening and asking questions. The more you let the agent talk about the situation around the auction, and the vendors motivations and the other buyers out there, that'll give you a much clearer picture of what is actually possible.
Asking questions like, if the vendor were to sell prior to auction, or if the vendor were to get their dream price, what does that look like, because that then gives you an idea of where the vendor's head is at, but also what the agent is pitching for. The other thing that you can say would be things like what's the other buyer feedback been. What did the other buyers miss out on, because agents know very well what buyers are up to. They very often attend other agents' auctions to see where their buyers are at and what their maximum bid limit is, so don't for one minute think that if you've been to other auctions and you've put your hand up that they don't know exactly what you've been up to, because they do. So be aware of that. But also, it's good to get that information about the other buyers that may potentially be interested in that property. So again, try and collate as much information as you can because then you can create a much clearer picture as to where the true value of the property sits, but also what your likely competition is going to look like.
Ask things like what type of buyer is it, is it an Investor, is it a first home buyer, is it the bank of mom and dad, is it an empty nester, because let me tell you one thing which you probably already know, but the bank of mum and dad and the empty nester are either looking for their children or looking for themselves, are a very powerful bunch. They have a lot of money, unfortunately, and quite often a little bit of ego goes hand in hand with the person with these deep pockets so they will keep going until they basically run out of money, which tends to be a lot more than those people needing to borrow money or a larger percentage at least. The empty nester, the boomer, the bank of mum and dad typically would have sold a bigger property and are now downsizing, or are using the equity in their property to help their children, so there's a different limit there, particularly if the child has missed out on a few properties themselves before, dads in particular, can let their ego get in the way sometimes I've seen it many times at auction. They are typically the hardest to compete with. If you are looking to purchase in an area or the type of property that they are interested in themselves, I wish you good luck because again they are very hard to beat, and they will sometimes pay very crazy prices just to get the property in their name, and again it's not something you can compete against, but if you are not in that situation, let's hope, then it's important to still understand who the other buyers are, and what their competition is likely going to look like and the numbers as well. So that's something to consider.
The other thing you need to really think about is your budget, obviously. What has the bank told you you can have, and pay, as my cat enters the room, and what is your serviceability like. So this is a question and a discussion that you really need to have with your broker, I can't give you any advice on that because that's not my area of expertise, but you have to be really honest with yourself particularly in the landscape that we are in now, where we've obviously had numerous interest rate rises and the RBA had said, no this is not going to happen and it did, they are not paying your mortgage for you, so make sure that you calculate in variables of certain percentages so that you can still afford to pay your mortgage. That's one thing to consider your limit when it comes to borrowing okay.
Then you have got to think about how well does this property actually suit me. When it comes to buying property, I always say that you really need to think about longevity in a property. If you think that you are going to outgrow the property, or you will no longer be needing the property due to a change of circumstance within 5 years, less than 5 years, I would seriously reconsider not purchasing in New South Wales because the cost of acquisition i.e. stamp duty, conveyancing, building repair, strata report, buyer's agent, are so high, and then the cost of selling as well, think selling agent charges anywhere from you know 1 to 2%, and styling, marketing, and all those things again, conveyancing cost, if you add all those costs up, any capital growth that you would have had in that period will most likely be eaten up, all if not most or you know still have cost out of that in that time period of any capital growth there, because it's too short a period of time to really make that much money in general so be very conservative when it comes to that, and make sure that you find a property that's going to meet your needs beyond the 5 year mark, so if you are a young couple and you're thinking about having children, does it have the space for a baby for example, or an extra child, or you know think about your work, will you be always commuting to the same place or does it have an option to work-from-home, or if you think about changing careers, things like that can you add maybe studio in the back garden, or can you upgrade the property in a different way that will add space and value and money over time. So be really frank with yourself, and honest with yourself, and your partner about how well you think this property is actually going to meet your need, or is this just a FOMO move, are you that desperate to buy that you'll literally just buy anything. That is a very dangerous place to be in, and I'd hate for you to overpay for something, that's really not really going to meet your needs. I always say to my clients, we do not want you to buy anything that as soon as you unpack your boxes in that place, you realise, oh my gosh, instead of elation and just excitement you're just going to be absolutely devastated that you've made this huge commitment and the anxiety sets in, that's not what we're going for. We're going for absolute happiness, that you now are no longer a renter and that you've bought a great place. Don't forget that no matter what the budget is, there's no such thing as a perfect property, so there's always going to be compromises there and but that's something to consider. How well out of 10, say a score out of 10, does this property meet your needs, and you can break it down into various things such location, size, internal light, walkability to amenities, things that are important to you but will also be important to capital growth for example.
You've asked the questions of the agent, and you've got the buyer feedback from the other from the other buyers, so you've got an idea of where the other buyers heads are, you've got an idea of where the agent's head and the vendor's head is at, you've got an idea of the comparable sales right, so that's all very good information to have on top of the fact that you've got your budget and then you've got ‘how well does this property meet your needs’, so if your property scores say an 8 out of 10, it does very well, you think you're going to be very happy here for quite a period of time, it would be the kind of property to push yourself for right? So, you might want to think you're going to the top of your pre-approval limit, and that goes and hand-in-hand with ‘What's the feedback’ is that still going to be within the realms of possibility.
So, for example I was talking to potential clients this morning and they said we want you to help us buy this house. It's got a guide of $1.7million, we've got a budget of $1.9million, a very quick search up for me in RP Data and Price Finders, those are the data banks that agents use to record all the data where the land titles office records sales and rental that etc. That's where I find our information, it was very easy to see that the agent clearly had expectations over $2million based on the land valuation and just comparable sales in the area. When I looked at the property itself, I thought, I know they're guiding $1.7million but this is going to hit $2million, if not more. I confirm that because I then did a quick phone call to the agents who we work with on a very regular basis and they said look yeah, we're guiding $1.7million, however, the buyer feedback is already the high ones, so high ones means anything over $1.8million to $2million, which was sort of in line with what I thought. I then went back to the potential clients and said listen, I don't want you to waste your money on me if you've got $1.9million, you're not going to get it across the line, because most buyer feedback before auction is usually lower than what they're prepared to go to at auction itself, be mindful of that. There is a very famous saying in real estate that goes ‘Buyers are Liars’ unfortunately, most buyers don't show their full hand when they're talking to an agent and understandably so, so sales agents tend to take whatever the buyer feedback is with a pinch of salt.
All this information that you now have, what do you do with it. It really comes down to setting a limit, that at which point if somebody was to prepare to pay $1,000 more, if they bid $1,000 more at auction, are you happy to let it go, are you like yep that's it I'm done I'm fine with it, or are you going to be one of those people that goes, oh my god I wish I'd put my hand up, I would have paid that basically, are you going to be one of those, which one are you going to be, that is a critical point of where your maximum limit is going to be. Another way to put that would be, it's the price I absolutely hate to pay but I'll pay it in order to be the person to sign the contract and get the keys to this property. So, it's your worst-case scenario. It's very important that you test yourself with this before you go to auction, because auctions are very high pressured, stressful situations, particularly when you're going with other people, whether that's your partner or your friends or your parents, it makes it worse in many cases. I see the stress levels rise in many cases for people, so you can't be making it up during the auction, because I've seen results where buyers have ended up being the winning paddle and instead of joy it was dread and shock actually, holy shit what did we just pay for this property. Because auctions go at a certain pace by the auctioneer, and that's meant to keep you sort of in this lull of, it's only $1,000 more and it's only $5,000 more, and boom all of a sudden you've paid $30 grand over your limit, and that's when shit gets scary because then you have to go back to your broker and say can we please get more money from somewhere else, and you have to a big borrower and steal that extra $30k, if not more, so be very careful with that.
This is why you need to have that limit in place and test yourself and do all this research before you go into an auction. The other reason is because if you're up but up against a Buyer’s Agent like me, I know exactly when your limit is hit, it's when you start talking to your partner, when you start writing things down, I know that you're at your limit, or already slightly above it or very close to it, so don't make that mistake, have it in your head what you're going to be paying absolute top maximum and then walk away, because if you start having a conversation with your partner, with your parents, whoever, I know that you're only going to be adding a minimal amount, and look let's be real in the real world a $1,000 or $5,000 is a lot of money, but not when it comes to an auction, okay, that's minimal, that's the smallest increments, basically that normally gets taken here in the Sydney market, and I know that sounds ridiculous, but it's simply the way it is. So, you adding $1,000 more or $5,000 more when I know exactly what my limit is, and I've been messing with you this whole time, because I do odd increments and I'll beat myself and I'll go twice, and I'll jump in when you haven't even finished speaking yet. It's not going to get you across the line, okay, because that's what I'm paid to do. I go to many auctions, and I have won many auctions. My success rate is about 80-90%. If you are going to auction, make sure that you have that limit firmly in your head, and the other way I can tell is because the increments get smaller. So people who go to auction, even if they bid confidently, which very rarely happens, but if they bid confidently they'll usually you know have increments of say $10,000 or $25,000, but the closer they get to their bid limit the smaller that gets, or the increments get to $1,000 or they start taking a really long time, again, that's you giving away that you're close to or already at your limit, so by having a number firmly in place you can mess around a little bit. Okay, you can add 5 and then you can add 3 and then you can add 12 all of a sudden, so you give the impression of A. knowing what you're doing much more confident which intimidates other buyers, and it doesn't show your hand when it comes to your limit. Okay.
Most people have a round number as their bid limit, so again I would say to you if you have a number in mind, let's say $1million, don't have your limited at a million dollars because it's a nice round number that most people like, make it a million and three or, a million and seven for example, because then you can keep adding odd numbers, and if you get to a million and three people don't know that you're at your limit because you'd be making all these odd increments before, so you could make your final bid could actually be your winning bid and let me tell you that's happened to me more than once. It would really help you to practice that a little bit as well, just adding odd numbers. What it also does is, it throws off the auctioneer because he now can't have a nice equal and another 5 and another ten, and a million and ten and a million and twenty million thirty and then all of a sudden someone says a million and seventeen, so that that throws the auctioneer's rhythm off which is what you want and most importantly, keeps you in control of what you're doing. Think about setting your bid limit before auction and I can guarantee you that if nothing else you will go in much more confidently, about attending it and possibly winning it. So, I hope that helps.
Thanks for listening, and if you have any questions pop into hello@buyyourside.com.au, drop me an email give me a follow on Instagram, TikTok and I look forward to hearing from you. Thank you.