The traditional real estate agent is under attack from the left and the right. On the one hand, companies such as Buy My Place are teaching consumers how to sell without a real estate agent. On the other, UK outfit Purple Bricks hit Sydney in recent times to offer home sellers a real estate agent whose total fees are under $6000.

The traditional full service, full fee agent is coming to realise the real estate office next door and down the road is not their only competition.

Removing the traditional agent from the equation, it does set up a very interesting discussion. Are consumers better off giving their listing to a cheap agent or doing it themselves and no paying no fees?

Selling with a cheap agent

The main benefit in dealing with a cheap agent is you save on the commission. However, consumers must first and foremost decide if they are getting value for money in their $6000. If the agent undersells the home, the commission savings are simply transferred to loss in sale price. It is completely in correct to suggest Purple Bricks are the Uber of real estate. It sounds catchy, but the facts don’t support it.

Uber is an automated web transaction that competes in service and cost with the humble taxi driver. The risk for a consumer is essentially zero. Conversely, Purple Bricks take their fee upfront regardless of the result. If you drive the car from west from Balmain on Victoria Rd you will get to Drummoyne, guaranteed. If you list your house on the market, it may or may not sell for a price that you are happy with. Last year in a boom, the auction clearance rate was 80%. That means 1 in 5 failed. There are no guarantees in selling anything. Ask a fruit shop. So the risk is $6000 before the starters gun has gone off.

Finally, good real estate agents don’t work for $6000 a sale. If you are selling a home, its nice to think you will get a high level service for $6000, but you won’t.

Selling without an agent

A great way to look at the difference between selling without an agent v a cheap agent is to run the maths. On the one hand, you have a self acting, self interested home seller looking to save $20,000 to $50,000 in commission. Aside from the sale proceeds, that is the reward if the owner achieves a sale.

On the other hand, you have a real estate agent that will get about 35 to 40% of the $6000 fee in their hand after the costs and split with their boss.

A self-acting owner is saving $20,000 to $50,000 in commission and acting from self interest aligned with the sale.

The cheap agent is relying on a low fee with high turnover in a small time frame.

Time will tell whether Australians adopt the sell without an agent strategy. The cheap agent strategy has been tried many times and failed miserably.

The 2017 property market could see a continuation of the boom. Predictions across a range of analysts predict growth anywhere between 5 and 15%. Conversely, the correction that many have felt was imminent for the past few years could occur.

The key to anticipating the market whether you are buying or selling is to follow the relevant signals and signposts that are likely to determine the market.

Interest rates – there are two interest rates to follow. Firstly, the Reserve Bank of Australia’s (RBA) cash rate, which is currently set at an all time low. Make no mistake, the RBA cash rate is at a record low and house prices are at an all time high. There is a direct correlation here. The second key interest rate setting is the retail banks rate movements. In the past few years, the retail banks have moved rates, up and down, independently of the RBA.

Employment/Unemployment – The national economy is struggling, the NSW economy is booming. In the short term, following the NSW unemployment rate is more important to the Sydney housing market than the national unemployment rate. The respective state economy is a better immediate indicator of how the property market is likely to perform that the broader national economy.

Rents – If property prices continue to rise as rents stagnate, investors will shun the Sydney market in favour of regional centres and interstate capitals. Newcastle and Hobart are just two examples of where investors have looked to in recent times in favour of Sydney. All stable property markets appeal to a broad range of buyers. Low yields that fall further will cause Sydney investors to focus solely on capital growth. After 5 years of strong growth, that’s a big call.

Time on market – how long does it take for a property to sell? In a strong market, sales occur in a rapid timeframe and vice versa. By anecdotally following time on market for properties in your immediate area, you will gain an insight into how easily (or not) buyers and sellers are coming together on price.

Apartments – for the first few years of the current boom cycle, apartments performed equally well as houses, in terms of price growth. As high rise after high rise came up for completion, apartments subtly begun to underperform houses. Sydney does not seem to have the apartment oversupply that Brisbane and Melbourne does. But if rampant oversupply of apartments were to occur, it could easily weigh on rental returns and house prices. It is worth noting that the new NSW Premier Gladys Berejiklian plans to address the housing affordability crisis through development/supply. The

Black Swan event – Regardless of the apparent strength in the property market, its wise to be aware that Black Swan events occur. They are rare but they exist. A Black Swan event is usually rapid (like the collapse of Lehmans Brothers in 2008) and have dramatic knock on effects. Given the amount of debt swooshing around the world at present, systemic risk is real.

Bidders per property – the market depth is more accurately reflected in bidders per property as opposed to buyers at open inspections. It costs nothing to walk through an inspection. To place an unconditional bid on a property means the buyer is serious. The more bidders per property, the stronger the market and the deeper the buyer pool. Attend auctions and see for yourself the vigour in the bidding.

The property market is always susceptible to disruptive forces of one kind or another.

The last two decades has seen constant digital disruption as websites and databases decimated print. The digital disruption changed the way real estate is purchased and sold forever more.

In 2014, there was an influx of foreign buyers into the Sydney and Melbourne markets. The presence of so much foreign money swooshing around those cities disrupted the market to the point many locals were priced out of their respective hometown. The Federal Government was forced to introduce restrictions and taxes to curb the demand.

As baby boomers reach retirement, their changing property needs will disrupt the market. Disruption should not be construed as negative. Disruption simply means to significantly alter the status quo.

Baby boomers are a demographic born between 1946 and 1964, as defined by the ABS. History has shown that whatever the baby boomer demographic does in unison it causes a boom. Given society experienced a baby boom in the past, it is understandable that one day it would experience a retirement boom and all of the adjustments that come with it.

Baby boomers are the largest represented demographic in modern society. Given their needs in the property market are changing, it’s worth taking note.

Before exploring what boomers are likely to do, it’s worth exploring what they won’t do. There was a theory that boomers would sell up and head out of town for the coast once retirement arrived. While many have done so, more are choosing to stay connected to cities and towns where family, friends and medical infrastructure are.

It’s not that the sea change (tree change for others) is entirely off the agenda, but the amount of boomers retiring in the city was somewhat unexpected.

To assist in understanding how the baby boomer demographic will impact on the market in the next 5 to 10 years, it is worth categorising their likely moves.

Selling the family home – There will be a mass and rapid transfer of large family homes to the next generation in the near future. The property market in Sydney and Melbourne is clearly overvalued (not to be confused with a forthcoming crash). Therefore, the time is right for boomers to begin downsizing from both a wealth and lifestyle perspective. Given the boomers numerical dominance as a demographic, if the selling is too fast, you may see oversupply in large family residences. A great question to ponder – is there enough demand from Gen X and Gen Y’s to support house prices at current levels once Baby Boomers sell down?

The answer will vary depending on whom you ask, but it is a segment of the market worth watching.

Selling the investment property/properties – as a result of the GFC, stock markets and superannuation has been poor for boomers in comparison to property. Since the 2008 GFC, the Sydney property market was in boom mode for 2009 & 2010, followed by a second boom from late 2012 to the present. Those fortunate enough to own investment properties will look to cash in while the going is good. Property has become the best superannuation for many boomers as they head into retirement.

Buying a property for the kids – many parents are delighted at property prices on the one hand and horrified on the other, when it comes to their children entering the market. Increasingly, boomers are assisting their children into the market. This phenomenon is certainly a secondary phase to the boomers wealth transitioning. But the key point here is that boomers are using their wealth to assist their children into property, not the stock market or new business ventures.

All general comments sure, but anecdotally, no one would suggest that boomers are passing on their wealth to children to enter into business ventures or money markets enmass. Boomers are clearly more interested in real estate than other asset classes when it comes to assisting family.

Therefore, even though boomers will be selling down their assets, expect the cash to be largely recycled in the housing market.

Buying a luxury apartment – If baby boomers are selling the family home, it is worth factoring in where they are going. Secure apartments close to the Harbour or beach have been popular. Luxury apartments for example in Drummoyne East along St Georges Crs that have great water views have skyrocketed in price in the past 3 years. In this segment of the market, it is safe to expect the demand will exist for the next decade.

Buying a single level house/property – the most desired yet undersupplied product in the inner ring of the Sydney marketplace is single level homes. This is true for many other markets too. Baby boomers primarily sell the family home to unlock wealth and downsize because the family home is too large. Escaping stairs is a secondary reason for selling yet a huge consideration on the purchase. Single level homes in popular locations will benefit from baby boomer demand, much to the chagrin of the aspirational young family. Make no mistake; baby boomers are formidable opponents in a bidding war.

As you can see, the boomers may leave an oversupply in large expensive family homes and create a shortage of luxury apartments near water. Hence the disruption that has already begun in the market. We are already seeing all of the above and more occur in the marketplace. This disruption is in its infancy and will accelerate into the near future.

Auctions will be held onsite at the subject property or off site at what is commonly referred to as in room auctions. There are no fundamental differences in how in room or onsite auctions work. There are subtle differences that it may be worth keeping an eye on though.

At an onsite auction, while you may be greeted by a massive crowd, it’s worth remembering they are mainly neighbours observing not actual bidders. At an onsite auction, if you stand in the right position, you should be able to view the competing bidders.

Many experienced bidders like to stand close to the auctioneer and look at the crowd from that vantage. Such brazen confidence from a bidder can be unnerving to other bidders.

Buyer’s agent Patrick Bright says that an onsite auction can be more emotional than an in room auction. ‘Given the buyers are actually standing in the house they are bidding on, it can play to the vendor’s advantage. Conversely, a rainy day, aircraft noise or excess car traffic can have a negative impact on an onsite auction. These issues are irrelevant with in room auctions.’

Bright highlights that the order of the properties to be auctioned at in room auctions is highly relevant. From his experience, Bright says that properties certain to sell well will be auctioned first. The agents are aiming to create a ‘positive tone’ to the proceedings. The agents will also want to place a certain seller last in the pecking order to ensure that the event both starts and finishes well.

The weaker auctions are likely to be buried in the middle of the schedule.

Given there are so many bidders for so many different properties at an in room auction, it’s much more difficult to know who you are bidding against.

The power play at an auction is fluid, ebbing back and forth between the vendor and the buyers. The more buyers there are bidding the more power to the vendor and vice versa.

If buying at auction is daunting to you, outsource the bidding or make your best offer prior to auction. Just because the agent wants the vendor to auction, it does not mean you have to buy that way.

Even if you are fiercely determined to avoid being caught up in an auction when buying, you still may find yourself having to bid at one to secure your dream home

At an auction, the property sells to the buyer who submits the final bid above the vendor’s reserve price. Most people attend auctions without a bidding strategy. The good news is you may win an auction without having reached your predetermined maximum price. The bad news is you may be the under bidder at a few auctions before you win one.

But there are bidding strategies that you can adopt give yourself every chance of winning an auction.

While you may have watched many auctions, there is a different element at play when you are bidding. Patrick Bright is one of the original buyer’s agents in the Sydney property market. Bright has bid at more auctions than most people have attended. He is also a former selling agent and licensed auctioneer. His experience is invaluable in understanding the undercurrent at play and how best to manage the auction, the auctioneer and the competing bidders.

Bright reports that there has been a noticeable increase in the number of buyers that now employ someone to bid on their behalf at auction. A vendor will readily employ a selling agent to maximise their price. Therefore ‘it makes sense that more people are hiring someone of equal knowledge and skill to save them money when buying’ he says.

Bright encourages those that think ‘registered bidding’ has killed off the ‘dreaded dummy bidder’ to think again. From experience, he is convinced that dummy bidders are still very much apart of many  auctions. It is conceivable dummy bidders could be placed by either the vendor or the agent however Bright believes few sales agents would take such a risk

Auctions need competitive bidding to perform. As a vendor, it is so simple to ask a friend to register and bid up to the reserve price creating the illusion that the property is in demand.

How do you have an auction with one buyer? If you are an agent, you under quote the price to attract more bidders. According to Bright and others in the industry, you may also be bidding against a dummy bidder, placed by the owner or agent!!

Each auction is a fluid and unpredictable event. The simple advice for buyers is to avoid bidding unless the property has met or exceeded reserve. In the past, less skilled auctioneers would call the property on the market as soon as it hit reserve.

Skilled auctioneers won’t immediately advise the crowd when the auction has been met. Bright says the auctioneer doesn’t want to give bidders a sense the auction has just reached the vendors walk away price if the auction is doing well.

A good aggressive bidder will have no qualms in asking the auctioneer if the property is ‘on the market yet?’. You may or may not get an answer to that question, but it is worth asking and continuing to ask during the auction.

For simplicity sake, there are two types of auctions.

Auctions where the pressure is on the buyers, due to buyer competition.

Auctions where the pressure is on the vendor due to insufficient competition above the reserve price.

To adopt the right strategy, you want to get a handle on which category the auction you are bidding at falls into.

 

Out bidding the competition

If there are more than 5 or 6 genuine bidders at the auction, it is either a really desireable property or the agent has under quoted the price. Remain calm in the face of multiple bidders. Many are there looking for a bargain, because that’s what the agent’s price guide suggested was on offer.

To flush out the serious buyers, Bright suggests  that one strategy you could deploy is to bid early and relatively close to fair value. He recounts the story how his first bid on a property with a price guide of $850,000 was $1 million.

‘Many of the underbidders were misled into being there on the day and I just wanted to knock them out early’ recounts Bright and send a message to those that were left. The selling agent told Bright that he made him ‘look bad in front of the underbidders’ because Bright’s opening bid was so strong.

When you know that fair value is $1 million and beyond, why waste time bidding at $800,000 in any event? You are in a far stronger position by bidding decisively early as a means of dictating terms.

If you are in an auction with intense buyer competition, Bright says bid assertively, quickly and confidently. By starting strongly, you rob the seller’s agent and the auctioneer of the spectacle. While Bright may only win 20 to 30% of the auctions he bids at on behalf of clients, he bids confidently on everyone one up to the agreed maximum price. You need to be equally confident in your last bid as you were with your first.

The reality is inexperienced bidders can become easily perturbed in the auction environment. It is almost a cliché that under bidders will remark, ‘we knew the other guy was going to keep bidding, so we just stopped’. If you can bluff the competition from bidding against you, the amount you save becomes a saving for you and a loss for the vendor. It happens all the time at auctions.

‘Project confidence down to your last bid and never look as though you are near your limit’ counsels Bright. ‘Spook underbidders with the ferocity of your bidding, people don’t want to bid against a crazy.’

Stand in a position where you can see the entire field of bidders and look for signs of distress amongst your competition. If this sounds savage and unnecessarily confrontational, welcome to the auction system. Remember, as a buyer, you are only responding to the vendors selected process of sale.

Bright insists that every client provides him with a written maximum prior to the auction. He refuses to speak with the client during the auction and does not allow a client to increase their maximum price once the auction has started. We have the tough conversation about price before the auction begins. A buyer cannot get caught up in the drama of the auction. The property’s value has been researched and the buyers finance has been approved.

The question that bidders ultimately need to ask themselves prior to the auction is ‘what is our walk away price for this property?’ No matter how special a property may be, every buyer has a walk away price. The price may be governed by common sense, good judgement or finance restrictions. Regardless of the reason, you need to establish your walkaway price prior to the auction.

You need to enter every auction knowing you may not win it. You need to win an auction on the right price and terms.

Bright says that in his experience, even in a strong market, about 33% of sales are above market value. About 33% are at market value and the balance are sales where the vendor drops their price on the day to get a sale.

Given that about 1 in 3 auctions will sell above market price, you need to be clear on your predetermined limit going into the auction. Just because you set a predetermined limit above fair market price, it does not mean you will necessarily be called upon to pay that amount.

Bright says that in 20 years, he has never reached his authorised maximum on the auctions he has won. “The only time I reach the client’s maximum price is at the auctions I lose. So I inform clients upfront ‘you will likely kiss a few frogs before you win one’ when it comes to auctions. The auction you win will  be won below your maximum bid though, because the only people that reach their maximum at an auction are the underbidders.”

Gavin Norris as the CEO of Chinese real estate website Juwai was interviewed about Chinese bidding tactics at auctions in August 2016. Norris was quoted as saying ‘Chinese buyers are the most sophisticated at auctions. It’s not because they overpay, it’s because like every smart buyer, they fight for every dollar.’

‘If a Chinese buyer doesn’t feel comfortable at an auction, they will ask a friend to bid on their behalf. That tends to produce individuals who are very cool and comfortable under pressure.’

In the same article, auctioneer James Pratt offered buyers advice. ‘Don’t be afraid to slow the auction down or to bid in uneven increments. At auctions, buyers used to be too nervous to challenge the pace or the increments that bids are going in, but not anymore.’

Bidding and buying at a slow auction

Fortunately, not every auction that you bid at will be vigouros. Even though the vendor has been told an auction will put pressure on the buyers, the pressure often rests with the vendor.

A slow auction is an excruciating and agonising event to witness. The vendor has gone to auction with visions of 5 bidders trying to knock each other out with a big cheque. The buyer’s belief and resolve that the owner wants too much is hardened when they see a lack of buyer competition.

A slow auction with only one or two registered bidders is more like watching a negotiation than a competitive auction.

When an auction is struggling to get started, Bright’s preference is to place a bid as opposed to seeing the auction pass in. If the auction passes in, the owner’s resolve around their reserve price tends to firm up. While ever the auction is still alive, the owners are more likely to make a price concession under pressure to gain a sale.

Once the auction has finished and the crowd has left, the pent up pressure the owners have been feeling diseppates.

If you make a bid, even if it is below the owners reserve, you are likely to elicit a counter bid from the auctioneer and/or the vendor. This counter bid is usually in the form of a ‘vendor’s bid’. A vendor’s bid will give a good insight into the vendor’s price expectations.

Depending on where the vendor’s bid is in relation to your bid will govern whether you strike a deal or walk away.

A lot of buyers actually reduce their predetermined limit mid auction in a slow market and/or a slow auction.

They go to the auction prepared to pay $1 million but watch the competition drop out at $930,000. Suddenly, $950,000 seems like a fair offer in the buyer’s mind. Why would we pay $1 million when everyone else has dropped out at $930,000 they reason?

In a slow auction, the agent has a lot of work to do to get the sale together. The agent will aim to bring the seller down in price and the buyer up in price. At a strong auction with multiple bidders above the reserve, the agent can afford to simply watch proceedings. They don’t need to have any heavy conversations with their vendor. This luxury does not exist if all the bidding is below the reserve price.

If the auction is struggling and you are the highest bidder, ask the agent to disclose the reserve price to you, so that you can make a decision on it. By doing so, you will gain a specific number that will buy the property at that moment in time.

If the bidding stalls below the reserve and the owner won’t drop their reserve to ‘meet the market’, it may be best to move onto another opportunity in the market. The good news is you won’t have to pressure the owner to drop their price. The agent is likely to be employing every conditioning and crunching tactic they know to get the vendor down in price.

Remember, the objective is to buy a good property at a fair price. If you attempt to steal the property for a bargain price, the vendor will likely relist on the market as a private treaty.

In summary, it is reasonable if you aim to work the vendor down from an above market price reserve to a market based reserve. If you attempt to work the price down from a reserve price to a bargain level, another buyer is highly likely to come in over the top of you.

The auctioneer James Pratt and buyer’s agent Patrick Bright agree on one thing. If the property is going to be passed in, be sure to make the last highest bid. This ensures that you have the first right to negotiate with the seller once the auction has failed.