What happens when a property is passed in at auction

Show notes

Jarrod McCabe is the Director of Wakelin Property Advisory, a property advisory group with a focus on asset selection. You may remember Jarrod from our recent episode on asset selection, ‘Understanding asset selection’.

In this episode, Jarrod explains exactly what happens when a property is passed in at auction. He’ll break down the basics of what it even means for a property to be passed in, and the different situations in which it may happen. Plus, Jarrod shares his best advice for securing a property that’s been passed in at auction.

Transcript

Michael 0:00
The information contained in this podcast is general in nature and is not to be taken as financial or personal advice.

Michael 0:06
It does not consider your objectives, financial situation or needs.

Michael 0:10
You should consider whether this information is suitable for you and your personal circumstances before acting on it.

Michael 0:17
Hi and welcome to the home run your guide to buying your first home in Australia on the show, I’ll walk you through the home buying process from every angle.

Michael 0:24
We cover steps to take the pitfalls to avoid and the answers to all your questions you’ve been dying to ask no matter what stage you’re at, you’ll learn everything you need to know about buying your first home.

Michael 0:35
I’m your host, Michael Nasser and I’m a mortgage broker at Lendstreet and I really love helping people buy their first home.

Michael 0:46
Today, I’m joined by Jarrod McCabe, the Director of Wakeland Property Advisory for his second appearance on the home run.

Michael 0:53
We’ve been talking a lot about auctions on the show lately, but one area we haven’t covered is what to do when a property doesn’t meet its reserve price.

Michael 1:00
What do you do when the property gets passed in. In this episode, Jarrod will break down what it means for a property to get passed in.

Michael 1:08
You’ll hear the different ways a property can be passed in and Jarrod will share a few tips and tricks that could help you come away with the property.

Michael 1:15
Let’s get into the conversation, Jarrod.

Michael 1:21
Welcome back to the show.

Michael 1:22
This is the second appearance on the show and I know you know, a lot about property in Australia.

Michael 1:26
But I wanna start out with a fun question before we dive into today’s topic.

Michael 1:30
If you could live anywhere else in the world, other than Australia, where would you live?

Jarrod 1:35
That’s a very good question, Michael.

Jarrod 1:37
I think I’d probably go to Italy and the reason I would say that is I love the food there, but I also think it’s got a really good balance of, I love snow skiing so you can get up into the Alps very easily, but you’ve also got fantastic beaches and things to get to there.

Jarrod 1:52
So, yeah, and then obviously it, it opens up all the rest of Europe as well.

Jarrod 1:56
So I’ll probably say Italy off the top of my head.

Michael 1:58
Cool.

Michael 1:59
Alright.

Michael 1:59
Well, today’s topic, we’re gonna be looking at the whole notion of properties being passed in, obviously, a property at an auction passes in and, and what that all means and I guess some strategies to adopt if that occurs.

Michael 2:09
So before we get into it, what does it mean when a property gets passed in?

Jarrod 2:14
So when a property passes in, it’s basically that the the bidding, if there has been any, has not reached the vendors expectations or their reserve price.

Jarrod 2:22
So there may have been no bids, there may have been one bid, there may have been multiple bids, but for whatever reason that bidding has not reached expectations.

Jarrod 2:31
And so the vendor reserves the right to pass the property in and continue negotiations.

Jarrod 2:36
Post auction.

Michael 2:37
Are there multiple ways a property can be passed in or how does it actually work?

Michael 2:41
So what, what are, I guess the mechanics of it?

Michael 2:42
So bidding’s occurring and then do you know it’s gonna happen?

Michael 2:46
And how does that, I guess come into play?

Michael 2:48
Like when do you know that?

Michael 2:49
Oh, hold on, this is going to be passed in.

Jarrod 2:52
There is multiple ways it can and there’s different factors that will come into play so you can pass in if there’s only a vendor bid.

Jarrod 3:00
So if there’s no genuine bids from the public and the auctioneer places a a bid on behalf of the vendor to basically set a baseline in terms of future negotiations.

Jarrod 3:10
And if no-one bids on top of that, then the property passes in on what’s called a vendor bid.

Jarrod 3:14
If we only get one genuine bid from the public, it could pass in on a genuine bid.

Jarrod 3:19
But as I said, if there’s multiple bidders, you could have two or three or four people bidding, but they still don’t get that, that level up to vendors expectations.

Jarrod 3:27
Then the property would be passed in and, and further negotiations occur after that.

Michael 3:31
Is the vendor bid normally the reserve price or can it be less or more?

Michael 3:35
Is there any logic to that?

Jarrod 3:36
No, it’s normally less because it’s normally to set a baseline and then to try and get up.

Jarrod 3:42
So the vendor bid is to try and encourage others to get in and where that vendor bid is placed really depends on how the campaign has gone up to that point.

Jarrod 3:51
So whether or not the auctioneer and vendor have got good levels of interest, potentially multiple parties, then they may well set a vendor bid at a slightly lower level to encourage people to participate.

Jarrod 4:04
But perhaps if they’ve only got one or even no genuine parties who are likely to bid, then they might start that vendor bid at a higher level just to show to the public that we’re starting from a higher base.

Jarrod 4:15
So it’s a smaller gap to try and bridge in terms of negotiations.

Jarrod 4:19
But if you’ve got multiple parties, you would really like to encourage the bidding to start.

Jarrod 4:24
So that, that fear of missing out kicks in and people are more likely to bid against one another.

Michael 4:29
And have you seen instances where a vendor, I guess when a vendor bid is put down or is made known, what are the likelihoods in your experience of that actually, then passing in or do they actually work?

Michael 4:38
Is it like a sign if you’re a buyer that hold on, there’s a vendor bid, good chances is gonna pass in or have you seen them work where they’re dropped?

Michael 4:44
And actually it does get it going.

Jarrod 4:46
You see many auctions in Melbourne where a auctioneer has to start with the vendor bid because so many people hold back and don’t want to be the first person to put their hand up.

Jarrod 4:55
So I would probably say it’s more common than not that the auction starts with a vendor bid in Melbourne.

Jarrod 5:02
Now that will change depending upon how active the market is at any particular time.

Jarrod 5:07
But because people are loathe to be the first person to stick up their hand for whatever reason, then the auctioneer is basically obliged or needs to represent their vendor in the best way possible to put a vendor bid in.

Jarrod 5:19
So I don’t look at it as though it’s a positive or a negative.

Jarrod 5:23
It’s quite often the way the auction will start.

Jarrod 5:25
You don’t want to read too much into it to start with unless as I said before, it is at a slightly higher level or at a lower level that starts to tell you a little bit about the interest levels that perhaps are there and you factor that in also with the conversations that you’ve had with the agents involved in the campaign prior to auction day and putting all that together starts to paint a picture as to, what you might expect for the remainder of the auction.

Michael 5:48
And you’d mentioned earlier so that it can happen naturally where there are multiple people bidding if it’s getting passed in.

Michael 5:53
So if you’re the highest bidder and a property gets passed in, what occurs at that particular moment and how does that made known?

Jarrod 6:00
So that’s really what you want.

Jarrod 6:01
If you’re going to bid at an auction and a property is likely to pass in because it hasn’t reached the reserve price, then you want it to pass into you because it gives you the exclusive right to negotiate at the vendor’s reserve price if there are multiple parties bidding and it’s likely to fall short of the vendor’s reserve, but it’s also within your capacity in terms of what you might be prepared to spend on that property, then you need to make sure it passes to you.

Jarrod 6:27
Otherwise, you can lose any opportunity to purchase the property because having a property passed in on a genuine bid to you means that you get to negotiate at that vendor’s reserve and exclusively. Now, legally, as soon as you reject the vendor’s reserve price, legally, the agent auctioneer can go and negotiate with others.

Jarrod 6:47
But I’ve seen that happen very, very few times, most of the times in good faith, they’ll continue to negotiate until it gets to a point where either you get a successful result and someone and you buy the property or there’s a breakdown where both parties just aren’t prepared to concede anymore.

Jarrod 7:03
And as a result, they’ll say, ok, well, if you’re not prepared to exceed it increase, you’re not going to increase anymore.

Jarrod 7:09
No, we’re not.

Jarrod 7:09
Are you happy with me to go and speak to other people?

Jarrod 7:12
Yes, go for it.And so then they’ll go and speak to other parties.

Michael 7:13
by way of example, or maybe with some experience because I find that this can help and, and it maybe just as a generalization because I know there are obviously individual circumstances that change what the situation may be.

Michael 7:25
But if you’ve been in a situation where you’ve been the highest bidder and you go on to negotiate, what in your experience is the likelihood that you do come out purchasing the property?

Michael 7:33
Or do you find more often than not?

Michael 7:34
Well, from what you’ve been seeing, it probably may not come to an agreement on price.

Jarrod 7:40
More often than not, you’ll be able to put a deal together. It doesn’t mean you’ll put it together on the day.

Jarrod 7:42
And again, that depends on really how the property’s passed to you.

Jarrod 7:47
Has it passed in where you’re the only person and no-one else has bid.

Jarrod 7:50
And there’s a big gap between what you’ve been prepared to bid and where the vendor’s expectations are.

Jarrod 7:56
And I’ll quite often say to my clients that we’re not going to get this done today.

Jarrod 7:59
We’re gonna have to drag this out because they need to see that their property is not worth what they think it is.

Jarrod 8:03
And we’re going to have to be prepared to stretch this out to make sure that we get it at the right price.

Jarrod 8:09
Other times, if you’ve, if there might only be a gap of 10 or $20,000 between where you’ve passed it in and where the vendor’s reserve is.

Jarrod 8:16
And that’s generally pretty straightforward.

Jarrod 8:18
Most people will concede a little bit either way and, and then you’ll come to an agreement.

Jarrod 8:21
So whether or not a deal is put together more often than not it is.

Jarrod 8:26
But how quickly that happens and how likely that is to occur really depends on how the property’s passed to you in the first instance.

Michael 8:34
What if you’re not the highest bidder?

Michael 8:35
Like, what are your chances of securing the property if you’re not the highest bidder?

Michael 8:38
Let’s say you’re the second or the third highest bidder, what will happen?

Jarrod 8:41
You run at a significant risk of missing out.

Jarrod 8:44
If it’s going to pass in within your budget, you need to bid because otherwise you will lose any opportunity and you basically then rely on the other party and the auctioneer not being able to come to an agreement on price.

Jarrod 8:58
And if they can, you just get locked out of it.

Jarrod 9:01
So it’s really important.

Michael 9:02
And there’s no set time frame as to if you said the second highest bidder as to when you can expect to hear if you are gonna get a chance, I guess it’s just basically then just, you know, going with the motions.

Jarrod 9:12
No, they wouldn’t let it go on that long.

Jarrod 9:14
They’d speak to you before that.

Jarrod 9:15
So basically, if the negotiation breaks down on the day of the auction, so they can’t come to an agreement on the day of the auction, then they will open it up.

Jarrod 9:24
I’ve seen some auctioneers where they’ll specifically stipulate a time.

Jarrod 9:28
Now, you don’t have to do that, but they’ll say we will be negotiating exclusively with this person who we’ve just passed the property in for the next 10 minutes.

Jarrod 9:36
And if we can’t come to an agreement, then we’ll open up from there.

Jarrod 9:39
So there’s no specific time frame in terms of legislation.

Jarrod 9:43
But there’s a, I guess an understanding that if we get to a point where we’ve been going backwards and forwards and we can’t come to an agreement and we’re going to go and speak to others.

Jarrod 9:51
I would say most negotiations on the day of an auction will take anywhere between five minutes and an hour.

Jarrod 9:58
And if it gets outside an hour, you’re probably going to struggle to get something done on the day.

Michael 10:03
And I guess a good agent was gonna be able to pick up on that.

Michael 10:05
And if it is taking the hour, they’re gonna then approach the second highest bidder or the third highest bidder and see where, where they’re at.

Jarrod 10:10
From a buyer’s perspective.

Jarrod 10:12
And if it is passed to you at the highest level, you don’t want to ever have a preconceived idea of what’s going to happen, but everyone’s had an opportunity to bid.

Jarrod 10:22
So you don’t have to follow the auctioneer’s advice and, oh, I’m gonna go speak to other people.

Jarrod 10:26
They might increase.

Jarrod 10:27
Well, they’ve had an opportunity to increase their bidding too.

Jarrod 10:30
So, and they haven’t done so.

Jarrod 10:32
So you’re in a, a reasonably strong position, particularly if you do increase a little bit up from what your last bid was.

Jarrod 10:39
Then you, you’re again a step ahead of what your competition was prepared to do in a public forum and they haven’t done that.

Jarrod 10:45
So you should be in a strong position, but you don’t ever want to be too confident.

Jarrod 10:50
I’ve seen plenty of people be a little bit cocky in negotiations after auctions and they’ve missed out on properties because they thought that they would have exclusive rights and that the auctioneer wasn’t necessarily giving them the full picture.

Michael 11:01
Yeah, a lot, a lot of things happening, I guess.

Michael 11:03
So, you’ve kind of got to be really diligent at that particular point in time and make sure you’re bringing your a game to the table.

Michael 11:10
Are there any advantages of buying a pass in property as opposed to just winning it at the auction?

Jarrod 11:14
Well, traditionally, I mean, if you’re able to get a property passed into you, you, there’s a greater chance that you’re going to pick it up at a better price.

Jarrod 11:21
So it can be a little unnerving and it can be, people can be quite concerned and, and because it can be overwhelming if you get an auctioneer and two or three other real estate agents, all of a sudden come clambering over to you and the property passes in and, and almost swarm around you to try and start negotiations.

Jarrod 11:38
It can be a bit overwhelming.

Jarrod 11:39
So people do get a little bit put off by it, but you need to look at it as an opportunity to potentially purchase a property for below what might be considered market value.

Jarrod 11:49
So that’s how we view it.

Jarrod 11:50
A passing is not a bad thing at all and it can give you really good options.

Michael 11:54
Let’s just say you’ve been to an auction and the property has been passed in, but you’re still keen to try and buy it.

Michael 12:00
How would you go about trying to secure the property?

Michael 12:02
Like what strategies would you put in play to?

Michael 12:06
I think you’ve mentioned a few, I guess going in with an open mindset, we’re assuming here that you are the highest bidder.

Michael 12:11
So you are gonna have that first option to negotiate.

Michael 12:14
What’s that mindset?

Michael 12:15
And what are your thoughts going into that particular type of setting?

Michael 12:18
And what sort of tips would you have there?

Jarrod 12:20
In Victoria.

Jarrod 12:21
Most auctions are carried out in front of the property or inside the property if it’s a typical Melbourne miserable day and it’s pouring with rain.

Jarrod 12:27
But if the auction’s being conducted at the front, the first thing that the auctioneer will typically do will be invite you to come inside and sit down in the back living room.

Jarrod 12:34
Now, our response to that normally is to say no, thanks very much.

Jarrod 12:37
We’ll stay at the front.

Jarrod 12:38
Now, the reason we do that is because quite common tactic is, well, we’ve got the under-bidder standing.

Jarrod 12:43
If you’re inside, you can’t see who’s hanging around and we’ve got the under-bidder out the front who’s prepared to put in another bid.

Jarrod 12:49
You need to increase your offer.

Jarrod 12:50
Well, if you’re standing at the front, you can watch most of the other people who’ve been in attendance at the auction go into their neighboring homes because they’ve just been there to observe and anyone else jumps in their car and disappears.

Jarrod 13:00
And so you can be standing at the front with no one else around.

Jarrod 13:03
And so that tactic can’t be used against you.

Jarrod 13:05
So that’s the first thing that I would typically do and then you want to get the vendor’s reserve price.

Jarrod 13:10
Now, it’s not uncommon again, for that reserve price to be slightly inflated when they first come out to you.

Jarrod 13:16
So you want to ensure and make sure you mention to the auctioneer that you don’t want an inflated reserve, make sure you come back to me with a realistic feet-on-the-ground assessment.

Jarrod 13:24
And then I’ll decide what I would like to do from there.

Jarrod 13:26
And then you move from that point.

Michael 13:32
They’re both great points, especially staying outside because you would normally think that it does.You can see the agents moving the high speed of journey to another area.

Michael 13:36
And obviously, that’s all part of a strategy and a plan.

Michael 13:38
So to combat that in a way that allows you to at least have a little bit of more control as to how that situation unfold, I think is relatively powerful.

Michael 13:45
And I can totally see how that could work if you’re a first-home buyer.

Michael 13:48
Obviously, all of this is gonna be first time.

Michael 13:50
So, and we’re speaking to first home buyers more often than not through this podcast.

Michael 13:54
So what tips would you give to them particularly, you know, if a property is passed in and they’re negotiating on that particular property, what, what sort of other factors should they be considering at that point?

Jarrod 14:03
We spoke about before Michael.

Jarrod 14:05
One of the important things is to consider how the property is passed in.

Jarrod 14:09
So, have you had competition at the auction?

Jarrod 14:11
Has there been multiple other parties that have been interested up to a point and perhaps haven’t been any further or has it passed in with you being the only bidder?

Jarrod 14:19
Those are really important considerations because that will impact on how you put your strategy in place for your, your next steps in terms of the negotiation.

Jarrod 14:28
So, should I be prepared to increase my offer?

Jarrod 14:32
Or am I feeling pretty confident that the vendor needs to start being a bit more realistic with their expectations and lowering their reserve price before I’m prepared to increase mine?

Jarrod 14:42
So I would say that that’s a really important.

Jarrod 14:45
First step is to understand what sort of a position you’re in.

Jarrod 14:48
If you’re in a, if you’re the only bidder, you’re in a pretty strong position, particularly if none of the other parties hang around and everyone else disappears, then you’re in a pretty strong position to negotiate fairly hard and hold the ground.

Jarrod 14:59
But if there’s been two or three other people who are more bidding against you, and there’s not a big gap between your last bid and the vendor’s reserve, then it might be a case of conceding to ensure that you do secure the property and move on and get to move into your potential dream home.

Michael 15:14
And you’ve got to do all of that and all the consider all those things in and amongst the emotion of the auction itself and all that, the sort of things that you’ve got to contend with as well.

Jarrod 15:22
Which is why it’s really important to do a lot of prep work and understand your sales and understand your market before you turn up on auction day so that you’re armed with a lot of information and knowledge that you can then put in place.

Jarrod 15:34
And so you can say, well, these are the sales that I’ve been considering.

Jarrod 15:37
This is why I think I shouldn’t need to increase anymore.

Jarrod 15:39
These are the works that I need to do.

Jarrod 15:41
I’ve had a building inspection done.

Jarrod 15:42
I’m going to have to do A B and C to this property which is going to cost me this sort of money.

Jarrod 15:46
I don’t have that and use all of that information to your advantage.

Jarrod 15:50
So preparation work prior to an auction is absolutely key because it can really set you up in terms of your negotiation on the day.

Michael 15:56
Yeah.

Michael 15:56
And I feel like this might be the answer to the next question.

Michael 15:58
But what are some of the mistakes that you see first-home buyers make when a property gets passed in?

Jarrod 16:05
Believing the agent and the auctioneer and when they say this is the reserve price, you’ve got to pay this and then they pay it.

Jarrod 16:10
I’ve seen far too many people pay a reserve price because they feel as though it’s their obligation to do that.

Jarrod 16:15
And you’ve got every right to negotiate.

Jarrod 16:17
But then not necessarily, as I said, not knowing how to negotiate or where to push where not to and having the depth of knowledge to be able to back yourself in and really push back on a, an auctioneer.

Jarrod 16:28
And agent.

Jarrod 16:29
And as you said before, the, the emotion does kick in.

Jarrod 16:32
So that’s why and I not to try and blow trumpets of buyer’s advocates and things.

Jarrod 16:37
But sometimes as long as you’ve got a, someone else representing you, I’ve bought two or three properties for myself in the past 10 years.

Jarrod 16:45
I’ve never been at the auction myself.

Jarrod 16:46
I always get someone else to do it because it just takes the emotion out of it.

Jarrod 16:50
I always get one of my business partners that’s generally who I would get to do it for me.

Jarrod 16:54
And I’ve stood at auctions next to them and because you’re so emotionally involved in the property and, and things you don’t think clearly, you might think you are, but you more often than not, you’re not.

Jarrod 17:06
So having someone else who takes the emotion out and can look at the perspective of what’s going on, who’s bidding, how, and what sort of strategy you should put in place is really important.

Jarrod 17:16
So if you’ve got a family member or a friend who’s got experience and is very confident in that situation, then that would be more often than not better than yourself doing it.

Jarrod 17:25
If you don’t really have the capacity or the, the want to get a, obviously, I think that we add our value very quickly and very easily with the way we conduct ourselves, particularly in terms of a negotiation.

Jarrod 17:37
But if you don’t have the capacity to do that.

Jarrod 17:39
If budgets are so tight, then that’s certainly the next option that you should consider.

Michael 17:43
Yeah, I mean, it, it having, you know, this discussion and speaking about all the ins and outs of just one aspect of the auction, which is a pass in, you know, it’s being passed in, like you can totally see the value of having an expert there that’s done it week in week out.

Michael 17:55
And I often say to clients that I speak to.

Michael 17:57
And people that I speak to is, you know, a real agent does this every day of the week or every weekend, and every day they’re in that, you know, they’ve got scripts, they’ve got, they train for this, they practice for this, you know, they’re executing it every Saturday and you come in and it’s the first time you’re doing it.

Michael 18:11
And so it’s not a balanced fight and hearing all of what you’re saying, it just totally leads to why you would consider using an expert in this situation.

Jarrod 18:20
It can be so imposing if you’re a first home buyer who’s in their, their mid-twenties, maybe their late twenties to 30.

Jarrod 18:28
And you’ve got a 45-50-year-old guy who’s been doing this every day for the past 2025 years.

Jarrod 18:34
And plus he’s got a couple of support staff and they come over and they initially try and make it feel as friendly as possible.

Jarrod 18:39
But all of a sudden they’re gathering around you and it’s really imposing.

Jarrod 18:42
So, having some support there is really important

Michael 18:47
And I guess a lot of that can lead in then to the research and, and some of the mistakes that I’d see as well is that, that I haven’t done that research, which puts them in a more vulnerable position at auction at that particular point in time, not knowing everything that they perhaps need to know some final thoughts before we wrap things up.

Michael 19:00
If you had one tip for a person who is about to try and secure a property that’s been passed in and it can be something that we’ve already discussed.

Michael 19:06
What would that one tip be?

Jarrod 19:08
One tip is what I mentioned before is that if a property is going to pass in within your budget, it needs to pass to you, you’ve got to make sure that if it’s within your budget, that it passes into you so that you’ve got exclusive rights.

Jarrod 19:20
Look, there’s obviously different circumstances where you might be a little bit cautious around that, but generally, that would be what I would say if it’s in your budget and it’s going to pass in, it needs to pass into you.

Michael 19:31
Where can our listeners find you if they want to learn more?

Jarrod 19:33
Our website is always a good starting point which is wakeland.com.au.

Jarrod 19:38
Our rewarding property decision is the podcast.

Michael 19:40
Wonderful.

Michael 19:41
Thank you so much for your time mate.

Michael 19:42
I really appreciate it.

Jarrod 19:43
Thanks, Michael.

Jarrod 19:44
Always enjoy it.

Michael 19:46
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