by Carly Susic, Melbourne Property Advocate
Vendor bids seem illogical—how can the vendor bid on their own house? But they’re an important part of the auction process. Vendor bids are commonly used to kickstart a quiet auction.
We’ve all been at an auction when there’s an awkward silence. The auctioneer’s finished the preamble about the property, the area and what a great purchase this will be for the lucky bidder. And… crickets. We all shuffle, waiting silently for someone to kick off the bidding.
It’s very common for auctions to start slowly as very few bidders want to be the first to play their card. So everyone waits.
This is typically when the auctioneer can place a vendor bid to rev things up. The bidding is non-existent or has not yet met the reserve. The property is not yet on the market so the auctioneer will submit a vendor bid. It’s important to know that the vendor bid is not an indication of the reserve.
Vendor bids are increasingly common in the current market
With the market slow thanks to economic pressures, there’s more homes struggling to sell. This makes vendor bids more common.
Ideally an auctioneer will have no need for a vendor bid. The perfect scenario is a hotly contested auction with plenty of bidders. But at the moment, there’s plenty of homes on the market, cost of living pressures on buyers and economic uncertainty. So homes are by no means guaranteed to sell at auction. Vendor bids act as a prompt.
Victorian Consumer Law specifies that:
- only the auctioneer can make the vendor bid
- the vendor bid must be declared as such
This gives interested buyers transparency—they’re not being duped by fake bidding.
Once the property meets the reserve, and is declared on the market, the auctioneer will typically stop using vendor bids.
Vendor bidding is not the same as dummy bidding
Dummy bidding is a misleading practice that aims to dupe genuine buyers into higher bids. Buyers are not aware they’re bidding against dummy bidders.
Unlike vendor bids, dummy bids are illegal. Auctioneers cannot knowingly accept a dummy bid.
Prior to 2004, dummy bidding was permitted. Working in the 90s, I attended many auctions that used dummy bids. The agent would round up a family member to submit false bids at the auction. Thankfully, the government has now made the auction process fairer for buyers with vendor bids.
A vendor bid strategy is usually planned in advance
Before the auction, the estate agent and the vendor (and hopefully the advocate) will meet to determine the use of vendor bids. They will likely have a good idea of interested buyers. They’ll know this from:
- people who attended open houses, especially if they visited repeatedly
- Number of contracts requested
- requests for building inspections
- clicks on the statement of information online
If there’s an expectation of a slow start to the auction, the agent and the auctioneer will agree to the use of vendor bids.
Different auction scenarios influence the use of vendor bids
Scenario #1: Auction passes in on a vendor bid
In this case, the auctioneer will place a vendor bid, but no genuine buyers match it or meet it.
This is the worst potential outcome for the vendor. The market fails to meet the reserve, and the auction passes in on a vendor bid. There is no one with the first right to private negotiation when the property is passed in to them. The market has determined the reserve is unrealistic and agents will need to find a new buyer.
Scenario #2: One genuine bidder
The auctioneer uses a vendor bid and one other bidder responds. There is no genuine competition as there is only one potential buyer. The property will be passed in and the bidder will be invited in to negotiate.
Scenario #3: Multiple bidders under reserve
With more than one genuine bidder, there is interest, but the price is below the reserve. The auctioneer may use a vendor bid in order to get the bidding closer to the reserve. But if the bidding fails to meet reserve, the property will be passed in to the highest bidder.
Scenario #4: Multiple bidders over reserve
This auction may use vendor bids at the beginning to generate action. But once the bidding meets the reserve, the home will be sold and it is unlikely to see any future vendor bids.
This is the scenario all home owners want on auction day.
Generally agents know how things will play out. They tend to have a good idea of interested buyers. They may even know the price range of buyers—either because the buyer told them, or the agent saw a buyer drop out of bidding at a previous auction. Of course, agents can be surprised by an unknown buyer—but it’s unlikely.
Bidding at auction when vendor bids are at play
During the auction, it helps to be prepared to respond to vendor bids. Considering the scenarios above will help you determine the right strategy.
If the vendor bid is below your ideal purchase price, feel free to bid higher. However, do not get into a bidding war with just yourself and the auctioneer. If there are no other bidders the property should be passed in to you.
If there are other bidders, but the property is not yet for sale, you should aim to make the final highest bid. This will give you priority to negotiate after the auction.
If there are multiple bidders and the home is on the market, proceed with bidding against the other genuine buyers.
Your goal with vendor bids is to not allow the auctioneer to inflate the price above market expectations—or your budget.
To recap: vendor bids
- Vendor bids are used by the auctioneer to kickstart genuine bidding
- Typically used at the start of an auction when buyers are quiet
- Vendor bids are not the same as dummy bids, which are illegal
- Only the auctioneer can make a vendor bid
- The auctioneer must clearly state that it’s a vendor bid
- Vendor bids are typically below the reserve
- If you are the only bidder, do not repeatedly bid against vendor bids—you are better off having the home passed in to you
- If there are multiple bidders but the bidding is below reserve, try to get the highest bid—then the home will be passed in to you
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