by Carly Susic, Melbourne Buyers’ Advocate
When you’re buying a home and a house is passed in at auction to you, it’s time to negotiate. This can be a bit daunting, as estate agents are ready with a strategy to encourage you to buy.
So you need a strategy too.
When a property is passed in at auction, it means that the bidding has stopped at a price that is unacceptable to the owners. There’s a gap between the demand from the buyers and the owner’s expectations.
By law, the person making the highest bid at the auction has the first right of negotiation when the property is passed into them — hopefully that’s you.
As the auction unfolds, spot the buyers
If you are bidding at auction for a home, you should prepare for the possibility of the house passing in at auction. Start by taking a look at other buyers to determine who’s a genuine buyer.
If the crowd is smaller, this may be an indication that interest is not strong (but not always). But generally, a small crowd is a good thing. In any auction crowd, there will be serious bidders, people just researching and curious neighbours. Serious buyers may have a nervous demeanour, may bring family along, and they may have an advocate to bid on their behalf.
If you have a sense that there aren’t many serious buyers, you should be prepared for the house to be passed in at auction.
During the auction, place yourself where you can see everyone so you can monitor the bidding. Try to read body language to see if people are coming close to the top of their bidding limit.
If you suspect the property will be passed in, your number one goal is to ensure the property is passed in to you
As the auction proceeds, you may get a sense that the bidding is slowing down, and the auctioneer hasn’t declared that the house is on the market. These are signs that the property may be passed in.
If the bidding is within your budget it’s important for you to be the final bidder, so you have the first right of negotiation with the owners after the auction.
If you are the final bidder and the property is passed in to you at auction
Great! You are now the one in the driver’s seat and you are free to negotiate privately.
Typically, the agent will try to bring you inside the property to start negotiations. Meanwhile, another agent will be canvassing other buyers in the street, to see if they have more room in their budget.
Therefore, it’s a good idea to decline the offer to step inside the house. If you stay on the front porch or in the front hall or room, you may see what’s happening in the street. Otherwise it is a good idea to have someone on the street that can tell you what is happening outside . Try keeping an eye on other bidders to see their level of interest and potential to negotiate. Because agents may be claiming there is a strong level of interest outside, when that may or may not be the case. So you’d prefer to see for yourself.
Keep your nerve
During negotiations, the agent will likely present you with an asking price. But remember, you are the one who put your hand up with the highest bid at the auction, so you have the right to negotiate.
Do not simply agree to the asking price. Even if you really want the property, you should start negotiating rather than just blindly taking the first offer on the table.
The first price the agent presents is not likely to be the true reserve — they’re firing a shot and hoping you’ll accept. They are therefore likely to be willing to accept a lower price.
It’s important to assess the difference between your final bid, and the passed-in asking price. For example:
- Let’s say you are bidding at an auction and the property is passed in to you at $1.4 million.
- In the private negotiations, the agent tells you that the asking price is $1.6 million, a considerable difference of $200,000.
- You can rightly point out that the market demand is clearly at the $1.4 mark. No one is competitive at the $1.6 level.
- Instead, you may suggest a more reasonable increase just over your final bid to kick off negotiations.
- Meanwhile, keep an eye on the discussions outside to see if the other bidders have given up and left or seem to be chatting with agents.If you do have someone outside, to report on what’s going on—they may be just chatting about the weather and not interested at all.
- This approach sets you up for a strong negotiation as you aren’t showing your hand, you are keeping an eye on what’s happening outside and you increase your offer in small increments.
There are plenty of possible scenarios for what may happen when a house is passed in at auction, so it’s difficult to give general advice.
However, this advice always sticks:
Never reveal your budget
If the agent is asking for more than you can afford, never tell them your maximum budget. Even if the negotiated price is less than your budget, keep that information to yourself.
Instead, tell the agent the reserve is unrealistic and not within your budget. Then name a price somewhere between your highest bid and the owner’s reserve. If your highest bid is the top of your budget, hold your ground. Tell the agent you are not moving and suggest that you will walk away if the vendor does not meet the market.
Give yourself a powerful position in negotiating by being familiar with recent sales of comparable properties in the area. What have similar homes sold for recently? This will empower you to know when a house is overpriced.
Your negotiations should rely on three factors:
- the gap between your bid and the reserve
- the number of other bidders (or lack thereof)
- where the other bidders saw value
Take your time in negotiations. And of course, never exceed your budget in the heat of the moment. It’s much better to walk away than make a purchase decision that you regret later.
Things to say to the agent in negotiations
- If the agent names a price beyond your budget: ‘The market isn’t at that price.’
- If the agent knows you love the house: ‘I still like the home, but I am concerned that no one else wants to buy it.’
- If the agent says there are other bidders outside waiting to buy: ‘No one else here is ready to buy at the level I’m at.’
- If the agent asks to name your budget: ‘It’s not about what I can pay, it’s about what the house is worth to the market and where I see value.’
- If the agent names a price you feel is above market: ‘I’d be silly to pay that when similar properties sell for XX’ or ‘The auction shows that market is clearly not at that price.’
If the vendor is being stubborn, be prepared to walk
Above all, the agent wants to sell on the day, so they can get their commission and move on. However the owner may have unrealistic price expectations. Perhaps they are selling a much-loved family home, and emotions are getting in the way. ‘I’ll only sell for top dollar,’ could be their mindset.
However, the owner’s emotional connection to the house is not your business. Your focus is the level of market demand, and that has been established at the auction. Even if you love the house, you don’t want to buy an overpriced property.
The agents want a same-day sale and they will work hard to get the vendor down to a realistic price. There is more pressure on the vendor than you as a buyer. The vendor needs to sell but you are free to walk away and find another house next week.
So if you can’t agree on a resolution with a stubborn vendor, it’s time to walk. It can feel very disappointing to miss out. But there will always be another one.
After working with buyers for many years, I can assure you that many buyers who do walk later agree it was a blessing in disguise. Often, they later found a property with better value elsewhere or purchased the house later that day or week for a reasonable price.
Other conditions of purchase to negotiate
When a house is passed in at auction to you, there are other factors you can include in the negotiation. You may be able to use the settlement terms or finance to your advantage.
For example, if the vendor wants a short 30-day settlement, but you’d rather the 90 days, you can offer two prices. One price for a 30 day settlement, and another price for 90 days.
If the vendor takes the 30-day offer, they can avoid mortgage payments and delays for two months, so they might be willing to reduce the price accordingly.
Of course, not all vendors are in a rush to sell, so you need to determine this before negotiating settlement terms.
You can also emphasise the finance arrangements in your negotiations. Agents might tell you there is someone outside that wants to buy it but their finance hasn’t come through. For example, they might tell you there is another buyer outside who’s offering a better price but it’s subject to finance. You can emphasise that you already have finance in place. Be strong and reinforce that your offer is unconditional. Auction conditions are in place, so the competing offer with finance attached is not relevant for three clear business days and then will be a conditional offer. Therefore it’s a risk to the vendor, if it is even really there at all.
However, do not offer a larger deposit or agree to releasing the deposit sooner as part of your negotiation terms. Larger deposits are appealing to cash-strapped vendors. If you default, you lose the deposit, so it’s not in your interests. And whilst it’s common for an early deposit release, don’t sign a section 27 on the spot. You are much better off to wait for advice from your conveyancer or lawyer on Monday.
When the property has not been passed in to you
Obviously, this is the less-than-ideal scenario because you miss out on the right to negotiate inside. If this happens, hang around and wait.
Usually an agent will be on site, speaking to you just in case negotiations inside fall through. You can follow all the rules listed above and negotiate lightly. Your goal is to understand how negotiations are faring inside and what numbers are on the table. Remember they want the buyer inside to see that they are talking to someone else. Tell the agent you are ready to buy at the market value. If negotiations inside fails, be ready to step in and follow the same steps as outlined above. In this case, one buyer has already walked away so you have more room to negotiate, but avoid paying too much!
If you wait a while, and nothing is happening, leave the auction and simply text the agent later in the day to express your interest should negotiations falter. Agents want to sell a property on the same day, and if they have to sell a home at 10pm on Saturday night, they will.
One more tip: when you are outbid at an auction, the agent discovers your budget. So don’t be surprised to get calls later in the week with properties they’d love to sell you, at your maximum price. Read our tips on when you’re the underbidder at an auction to learn more.
To recap, what to do if a house is passed in at auction to you:
- Do your best to have the property passed in to you, so you have first right to negotiate
- Try not to go inside to negotiate or stay close to the front to keep a sight of buyers waiting on the street outside
- Don’t willingly accept the first offer the agent suggests
- Focus your negotiations on the market value, not your own budget
- Always stick to your budget, even if you love the property
- Focus on avoiding buying an overpriced property
- Meet the vendor somewhere in the middle by offering a price between your highest bid and their reserve
- Negotiate on settlement terms as well
- Be prepared to walk away
Consider our buy-it-for you service
If the idea of bidding at an auction or negotiating with agents has you squeamish, then we can help.
You find the property and we’ll handle the negotiations when you’re ready to buy.
This service includes:
- inspecting the property
- liaising with the agent to determine buyer interest
- researching comparable properties to get a strong price expectation
- preparing a property report outlining where the property sits in the marketplace
- submitting the offer and/or bidding on your behalf at the auction
- managing subsequent negotiations if the property is passed in
Want expert market insights in your inbox each month?
Become a VIP subscriber and get our exclusive monthly analysis of the Melbourne real estate market including:
- advice for selling your home
- advice for home buyers
- current market insights from real estate industry insiders
- latest articles and news
Join via the sign up link in the footer below.
