Buying a House at Auction: Some Lessons

Last weekend we attended an auction with the intention to buy. We did our homework and expected to come home with a deal or nothing at all. We ended up not getting the house, which was fine, it fit into our expectations. Before we move on to more harrowing house auction experiences, I wanted to capture what happened, the things we did right, and some lessons we learned for next time.

We got to the house early and did the pre-auction walk through. We opened cupboards, draws and generally tried to get a final feeling for the quality of the house. We did the walk through with my parents who had no inhibitions about commenting on all the good qualities on the property (shh). This was good because it confirmed some of my own thoughts, but also further tipped our hand that we were interested in the place to anyone listening in. The auction kicked off with a solid but expected figure. I stood and tried to look as nonchalant as I could. There were no bids. The auctioneer put in a vendor bid of an extra $10K. One, Two, Three.

The auctioneer walked back inside and conferred with the vendor, and eventually came back out. "Time to get serious" he said, looking right at my wife and I. The auctioneer's minions moved about the crowd, and one started needling my father, and then my wife and I. "This is your last chance to get an exclusive opportunity on this property". Whatever. I stood my ground. I my head I was thinking "No one has bid, the market is not interested in this property, let is pass in then negotiate". Last call, One, Two... (my wife turned to me "Should we bid $5K?" she asked. "Nope" I said.) ... and Three.

The auctioneers made noises about a Dutch auction. I wasn't too concerned. I saw one or two other couples walk into the house. We walked into the house knowing we could walk out at any time we wanted, it felt powerful. We learned the unrealistically high reserve and made a low offer, which involved reading and signing the contract. It was rejected. We inched up the offer. It was rejected. We made our final offer at our pre-agreed fair price and draw a line in the sand. Eventually, it too was rejected. The vendors showed movement in their expectations, but not enough. We learned that there were three people in the room all trying to work the deal - a brother, sister and the sisters husband. I could imagine bickering and maybe even fighting, either of which might have worked in our favor if one of the group was powerfully motivated to sell.

The agents worked us. In retrospect we didn't have to budge a dollar from our first offer. There appeared to be no one else in the house putting in offers, and the lack of bids suggested the markets sentiment towards the property at the asking price. The agents worked a few angles, trying to befriend us and convince us that they were on our side and wanted a deal, and eventually pushing us that we needed to get serious and make a reasonable offer.

All -in-all it was a great learning experience, and most importantly, it didn't cost a cent. We noticed that the property is now back on the market for private sale at a price closer to our final offer. Maybe they'll call back in a week or two. In the mean time we have lined up a number of follow-on candidates and I'm looking forward to the games.

Advice we were given: (I'm paraphrasing)

• Go to lots of auctions and get a feeling for the process. (awesome advice)
• Bid as little and as late as possible. (awesome advice)
• Be civil, don't be agressive (awesome advice, it's a big game)
• Agents lie, it's about their bottom line. (awesome advice)
• The reserve price is usually 5%, 8%, 10%, even 20% above the asking price (I've seen it many times in practice!)
• Stories of aggressive bidding, making the first bid and intimidating the other bidders from the beginning. (did not gel with me at all)
• Read the Section 32 many times, a solicitor can read it just as well as you can, why pay. (great advice)
• Location is what matters. (maybe for resale, but so does a comfortable place to live)
• Size of land is what matters. (sure, if you want to demolish and build units, not applicable)
• Pay extra to get a place you love. (na, humans are very adaptable, and houses can be renovated)
• You must get a building inspection. (maybe, but only if I'm suspicious of the vendor/agent/property)
• Schools is what matters. (agreed it is a consideration)

What we did right:

• We were not emotionally invested in the property. It was one of many and we talked plainly about the good features and the bad, and focused on the things that needed to be fixed/renovated and their cost relative to a fair purchase price.
• We worked hard to estimate a fair price for the property based on an investigation of the area and recent sales. Regression is hard simply because the data is not available, but attending lots of auctions and looking at lots of houses helped to build a qualitative model.
• We clearly defined and agreed upon what constituted a deal, a fair price, our soft limit and our hard brick wall limit in terms of what we were willing to spend on the property.
• We read, re-read, and re-re-read the section 32. We researched all things that looked interesting and generally learned more about the documents it contained.
• We spoke with the agent a number of times. We called the agent and asked a bunch of dumb questions. This clearly tipped them off that we were interested in the place, but also allowed us to learn more about the property.
• We asked lots of questions about the vendors. We asked about their status (brother and sister), were they selling to buy (no), was it an investment (yes), etc.
• We talked to neighbours and asked about the street and the other neighbours. This is all to my wife's credit. She seems to have no fear in approaching random people and speaking plainly. We got some useful tidbits.  

What we did wrong:

• We did not get a copy of the contract before the auction. Normally the contract is provided with the Section 32, but in this case it wasn't.
• We should have addressed a builder's inspection before the auction. We tried to organize this late in the week before the auction and even tried to have the contract amended on the spot to be subject to a builders inspection. Both of these measures were too late (although, I thought we should be able to amend and initial a contract - it's just a contract after all). 
• We should not have increased our offer. The market was not interested in the property at the auction price. We should have made our offer at the auction price and left it there. This is debatable, because one could argue that the auction price was not necessarily a fair price (the vendor needs to be placated as well).
• The only stream of information is from the auctioneer and his minions. How do we really know what the vendor was saying or thinking? All we have to go off is what we have been told by the auctioneer. Next time I will listen to them less and try to just think through the situation.

I get the feeling that there are a lot of anecdotes and lot of folk advice, but few people actually study this process (I do know of some exceptions). Sometimes I get quite conflicting advice from seasoned house buyers. With that in mind I'm sure my "lessons learned" would be a different story if I had messed it up. I just hope I can keep my head, try to think rationally and see the big picture next time.

If you've got any additional advice, I'd love to hear it.

Image copyright by Ian Muttoo.