Pros and cons of making a pre-auction offer

Buying at auction can seem like a scary process. The idea of putting all of your cards on the table and openly competing with those around you might not be your ideal buying situation. If you’d like to avoid going to auction, but you still want to put in an offer, you could consider making a pre-auction offer.

How do you make a pre-auction offer?

Making a pre-auction offer is basically the same process as making an offer on any other property. However, sometimes owners won’t be looking to accept offers prior to auction. So, the first thing you should do before submitting your pre-auction offer is double-checking with the agent that the sellers are accepting them.

If the owner is accepting offers, you can submit a written offer either a few weeks or few days prior to auction. The idea is to make an attractive offer that the owner believes would be better than what they could get at the scheduled auction.

Depending on the market conditions, as well as the type of house you’re looking to purchase, the offer you go in with can vary. For example, if the market is ‘hot’, most real estate professionals recommend that you go in with a highly competitive offer. But if the market is ‘cooling’, you could put in a “low-ball” offer.

Making a pre-auction offer can be advantageous to avoid competing at an auction, but it’s slightly more complex than making a normal offer. This is because you might not be given a price guide, so you won’t know what ballpark the offer should be within.

At an auction, the auctioneer steers the bidding and wouldn’t start accepting offers until the ‘reserve’ (which is the minimum price the owner would accept) was met. So, if you’re going to make an offer prior to auction, it can be helpful to know what you’re doing.

What are the pros of making a pre-auction offer?

There are a few notable benefits of making an offer prior to auction. Again, it’s highly dependent on the individual situation, so you’ll need to have a think about whether the below pros are going to be applicable to you.

1. It might be less stressful for you

If high-pressure situations make you nervous, you probably won’t like going to an auction. It might seem like a very intense and nerve-wracking situation to openly compete with the people around you for the same prize (the property). If you want to avoid this altogether, a pre-auction offer can come in handy.

2. You could beat out the competition

Depending on how much you want the property, putting in a pre-auction offer can secure you the property before most of the offers roll in. This is because interested parties might be waiting for the auction date to submit their official offers. If you can submit an offer too good to refuse, the owner might not proceed with the auction.

3. You can negotiate terms of the contract

If you buy a property at auction, the contract you sign will be unconditional. This means that there’s no cooling-off period, it can’t be subject to finance, building and pest, or any other special conditions.

Submitting an offer prior to auction means that you might be able to negotiate on the terms of the contract, meaning you could have a conditional contract, which could provide you with an added layer of security. You may also feel more comfortable in this situation in case anything goes wrong.

What are the cons of making a pre-auction offer?

Of course, there are also drawbacks to going in with an offer prior to auction. While an auction situation might seem scary, you can actually have them work in your favour. Meaning, there are drawbacks to going in hot early, rather than sitting back and strategically using the auction situation to your advantage.

1. Your offer might be too high

Without the auctioneer guiding the bidding, and knowing the ballpark the people around you are offering within, going in early might actually mean paying too much for a house. For example, if you go in with a pre-auction offer of $1 million, but the highest offer that would have been received at the auction was $950,000; you’ve essentially cost yourself an additional $50,000.

2. The property might still go to auction

If you’re scared of laying all your cards on the table, submitting a pre-auction offer might be doing just that. If the owner doesn’t accept your offer prior to auction, this might actually influence their set ‘reserve’ price and fuel them to go for an even bigger result come auction day.

3. Limited bargaining power

Despite having more room to negotiate the terms of the contract, submitting a pre-auction offer might reduce your wiggle room on the price. This is because you’re essentially showing how interested you are in the property, which might leave you with little room to budge on the offer.

Tips for submitting a pre-auction offer

If you’re really keen on a property, or really not-keen on attending an auction, there are a few things you can do to make your pre-auction offer as strong and beneficial for you as possible.

Do your research

Possibly the most important thing to do before submitting an offer prior to auction is to do your research. You don’t want to go in with the wrong offer; whether it’s too low or too high.

Research similar properties that sold around the area to get a ballpark idea of what the property might be worth. Free property reports are a great resource when trying to guage the market value of a specific property. Additionally, attending a few inspections can help you scope out the competition (i.e. how many people are realistically interested in buying). This can help you make the most educated offer possible.

Be ready to go

If your offer is accepted, you should be prepared to get the ball rolling and a contract signed. That means having your deposit ready, getting your finances sorted, finding your solicitor, plus any other logistical things you’ll need sorted before buying your new home.

Talk to the agent

If you’re not sure whether or not to submit an offer prior to auction, have a chat to the real estate agent. While they might not be able to advise you on the price, they can often give you an idea of how many people are interested and whether or not putting an a pre-auction offer is worth it.

They should know their vendors, the property, and the potential parties that are interested. If anything, it can give you an idea of what your chances are in submitting a pre-auction offer, or whether it might be worth waiting for auction day.

FAQs

Can you withdraw a pre-auction offer?

Yes, you can withdraw any offer you make on a property as long as no contracts have been signed. If you’ve signed the contract and then need to back out of the deal, things can get quite a lot more complicated. So, before you sign all the paperwork, make sure you’re certain and comfortable about the conditions of the contract and your ability to fulfill them.

When should I make a pre-auction offer?

Again, this will depend on the individual situation. However, if it’s clear that the vendor is looking for a quick sale, it might be helpful to make your pre-auction offer as soon as possible. This way, your offer is more attractive, and the seller is achieving their goal of getting the property off their hands quickly.

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