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What are dutch auctions?

What are dutch auctions?
March 30, 2017 Josh Rowe
dutch auctions real estate

What are dutch auctions?

A Dutch auction is when interested parties are required to put their best offer in writing by a certain time and date; the property will then be sold to the highest bidder.  Each offer is sealed in an envelope.  When all offers are in, the envelopes are opened and the highest bidder wins the auction.

A Dutch auction evolves when a property is listed for private sale and multiple buyers agree either to pay the advertised purchase price or a price that the vendor will accept.  This also often happens when offers are made prior to an auction date.  For a Dutch auction to proceed, the vendor has to agree that they will sell at the level of one of the offers and therefore have nothing to lose in seeking more.

My advice is to avoid Dutch auctions at all costs.  This process is fundamentally flawed from the buyer’s perspective because you could end up paying $100,000 more than you need to.

Dutch auction strategy

Again, at a Dutch auction, it is important that you control the process.  You must clarify whether the decision is to be made on the spot; for example, will the owner sign a contract immediately?  If it’s not going to be legally binding (in other words, there is no contract or contract note), then you can negotiate.  That is, offer more but without signing a binding contract.  In this way other buyers who might be interested in the property become vexed and move on, which then gives you the chance to come back and buy at a later date more cheaply.

Purchaser led

A property was listed with a ‘forthcoming auction’ sign with no date set in a popular sought-after area.  Being local residents, our clients moved quickly and inspected the property on the night the board went up.  Unfortunately, so did three other local residents.  We needed to try to buy the property before any advertisements were placed, as it was sure to create interest and a premium price would be needed to secure it.  Once the contract of sale and vendor’s statement were available, we forced an auction in the selling agents’ offices by telling the agents that if the property was not sold within 48 hours, our clients’ level of interest would cease.  This ‘auction’ was attended by one other interested buyer.  My clients were prepared to go to $990,000 and we were able to buy the property for $941,000.  If the property had been allowed to reach the open marketplace, these clients would probably not have been the successful purchasers.

In this case we created the auction by forcing a time constraint.  In theory, Dutch auctions are usually created by the vendor, but clearly can be orchestrated by the purchaser.

If you have ascertained that your offer is the best one, make sure that you are there when the envelopes are actually opened.  You need to get the other offers opened first.  How you do this is quite simple; you need to demand to see the other offers before you put yours forward in case there is no other offer at all.  This also prevents any deception on the part of the agents when they open offers from their preferred purchasers (who may have a house for sale that they might list).

Ask an intermediary to attend the opening of the offers on your behalf and ask him or her to have three or four envelopes, each with a different price, going up by $5,000 or $10,000 amounts.  When you see what the highest offer is, you can present the envelope that has the closest, but higher bid, inside.  This is better than flying blind and paying $100,000 more than necessary.

Moving the goal posts

I was negotiating to buy a very well-known Melbourne icon and had an agreement in principal to buy the property at a particular level, which was many millions of dollars.  Between the verbal agreement and the signing of the contract, however, another party emerged and made a higher offer.  We were somewhat suspicious about this, as there weren’t many buyers at this end of the market; and asked to see the supposed other offer.  Once I had seen it, I could then make a further offer.  I went to the agent’s office, where the agent showed me the contract of sale and covered the purchaser’s name and price, but forgot to hide the cheque for the deposit (believe it or not!).  It was clear my client was up against a major player, but we didn’t know how much more he had offered.  As my client wanted the property at all costs, I attended the 5pm deadline for all offers, but instead of submitting just one letter, I took five different offers, varying in price by $2 million.

I needed extra time to try and find out what the other offer was.  My strategy was to change the goal posts, and I argued the toss about light-fittings and so on, and presented the problem that my client was on a plane and I would be unable to confirm his offer for an hour or two.

The owner was naturally upset and said he would take whatever was on the table.  My reply was ‘Fine, but it might cost you a million dollars; it’s worth waiting an hour or two.’  The wife interjected and said, ‘Of course it is,’ and I was left alone with the agent and the other offer sitting on the table.  The agent was as frustrated as the owner and continually complained that he would like to be home and asked why I couldn’t make a decision on behalf of my client.  My response was quite simple: ‘You show me yours and I will show you mine!’  For a short time the agent said no, but I only had to remind him that no one could see or would know.  He had already made his commission anyway, so he showed me his.  I picked out envelope number 2 and we saved $1.85 million on what we would have paid.

Changing the game

I have also acted for clients in a Dutch auction situation where the letter of offer states that it is ‘$10,000 more than any other bona fide purchaser’.  Agents hate this device because they think it is not playing fair, but it usually appeals to the commercial side of vendors.  Agents would prefer to have a figure rather than an increase above the next highest bid.

Sometimes it is useful if you create the Dutch auction.  In other words, you and a friend of yours (independently) put in offers expiring at 6pm that evening.  The agent thinks they are winning by giving you an ultimatum, but doesn’t realise that the two parties are in fact one.

– David Morrell

 

 

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    The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of REALas.