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Why auction budget limits matter

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Auctions have changed quite a bit over recent years, but one thing that hasn't is the need to stick to your budget like bees to a honey pot.

That's because, there's more training given to agents today on how to handle auctions as well as how to work the crowd. However, in my early years of investing, one of the best ways to stall an auction was to ask, "Is the property on the market?" That doesn't work anymore with agents simply replying, "Yes, it's been on the market for the past four weeks”, which in my opinion is a result of better sales training.

Know your limit

The number one thing that you must do if bidding at auction is to set a firm limit beforehand, which means completing all necessary research long before auction day. That way, you are less likely to go over your price limit.

The problem is that psychology comes into play in auctions – which is why people sell by auction. Once you've started to bid, most people feel that they should win. They really don't want to lose so they start bidding beyond their limit – and the agents play that to the hilt, using words such as “another bid will win this for you” or “you don’t want to lose this for the sake of a few thousand dollars.”

Of course, the reality is that if you walk away from the auction, no one remembers you anyway so you need to have a reality check in that sense.

Be in control

One of the strategies that I use to remain in control of an auction is to vary my bid amounts to break up the flow. Auction bidding usually turns into a pattern of bids, of say increases of $1,000, so I jump in with an $8,000 bid to break it up and to rattle people. That also means that I am in control of the bidding, which is always well within my price limit. I always prefer to be the first one to bid, so that no one else jumps in and starts way too high.

It seems like a no-brainer, but you must have your finance organized prior to the auction – and I don't mean pre-approved. I mean fully funded subject to the valuation of the property itself. Of course that's because auctioned properties are unconditional at the fall of the hammer – there is no finance or inspection clauses.

You must also negotiate the deposit beforehand and have that ready to transfer if you're the successful buyer. I always negotiate a low deposit because the default is 10 per cent of the purchase price and that money is always better in my bank account than theirs.

The reason why you must have your finance rock-solid is that it will guide you on your non-negotiable auction limit. Now that sounds easy in theory but in practice most bidders get emotional during an auction and end up paying more than their limit. That's no problem if you can afford to stump up the difference between what the bank will lend up and the property price, but in reality, most people can't do that.

And they could pay a very hefty price for it, if they can’t complete.

Up the creek

The thing with an auction sale is that it's cash unconditional, which means it's very difficult to get out of the contract.

So, for example, if you've gone over your budget limit by $100,000 (yes, I have seen it happen!) and your bank won't cover the difference – clearly because you've paid more than market value – where does that leave you?

Up the proverbial creek is where! By drastically going over your budget, there is a strong chance that the bank may decline the loan as the valuation may not come in at that price, or they may ask you to stump up the rest of the cash. You might only have 30 or 42 days until settlement, which doesn't leave you much time at all.

If you can't rustle up the extra funds, you could be in for a nasty financial surprise.

Not only will you lose your full 10 per cent deposit – regardless of what was negotiated beforehand – if the vendor then fails to sell the property at the same price as you didn't buy it at, you will be liable for the difference, plus marketing costs.

Let's consider a $500,000 property where your limit was $400,000 and the market value was the same.

By getting sucked into the competition on auction day that means if you can't complete the contract you will be liable for the $50,000 deposit.

If the property goes on to sell for $425,000, you could also be in line for another $75,000 plus marketing costs.

That's $125,000 that you will have to pay for nothing, all because you couldn't keep to your pre-determined auction limit.

You shouldn't ever go above your limit – even by $500. Be prepared to walk away when you've hit your limit.

Finally, I prefer to be the first bidder, because it announces that I'm dictating the price the auction starts.

Since I have done many, many auctions in my investing life, I am experienced at making financial decisions quickly whereas most people are not, which is usually a bad thing for them, I can calmly keep bidding until I'm the victor or it's gone above my limit. After all, auctions are really a form of accelerated negotiations.

At the end of the day, you must not deviate from your price limit on auction day, just like any normal negotiations.

You must also lead the bidding pack, but calmly walk away when the bidding goes above your limit.

That way you'll financially live to fight another day.


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