Sale by Tender – As a buyer, doesn’t that word make you cringe? Do you have the irresistible urge to tell the agent that you hate tenders? Do you avoid visiting the homes that are selling by tender? Do you put a big red line through the advertising in the Property Press that mentions the word?
I have just got off the phone from a potential home buyer who is considering putting a tender in on a property tomorrow with another agency. She rang for my advice on what price to put on the document.
“How do I win in a tender situation?” is a question that I have had asked of me on more than one occasion.
Auctions and Tenders slow the pace down and allow time for the house in question to be well exposed to the market before the selling decision is made by the owner. They are used most effectively in times when demand outstrips supply or for unique properties where it is hard to gauge true market value.
Buyers generally hate Tenders and Auctions because money has to be spent before the Auction or Tender date carrying out due diligence ( LIM reports, building inspections, and title searches ) and as a buyer you have no powers of negotiation and no real clue as to how much the owner wants for the house.
The question remains, what can you do as a buyer to give yourself the best fighting chance of beating the rest to the house you have fallen in love with?
1) Do your homework first.
Going into an Auction situation, any bids made will be cash unconditional with a deposit to be paid at the fall of the hammer. Tenders don’t have to be cash unconditional, however, the closer you are to a cash unconditional offer, the better your chances of winning the Tender with all other things equal.
If you have to have conditions in your tender because you have run out of time or don’t want to fork out a small wad of cash before knowing if you have the chance to buy the place, then try to trim as much excess time and conditions off as possible (eg. if you can do a builders report in 2 days, don’t stick 3 in the contract! ).
In general terms, my experience is that a cash unconditional offer usually beats a conditional offer by at least $5000. In other words, if the home owner has two offers sitting in front of them. One offer is for $405k but is subject to conditions of say five working days for builders report and approval of finance. The other offer is for $400k but is cash unconditional. In my experience, most home owners will take the cash offer in this scenario. The greater the conditional period or the more complicated the conditions, the greater the difference in price will have to be to persuade the homeowner to take a chance on the conditional vs the unconditional offer. I once ran a Tender in which the highest offer ($23k higher than the next best) had a 10 working day general due diligence clause. The owners only took 20 minutes to decide to take the next best offer which was unconditional. That buyer saved themselves $23,000 by paying out $800 to get a builders report and title search completed before offering!
Talking about conditions, here is a hard call - If you are considering putting in a Tender but you want it to be conditional on the sale of your current home, don’t bother putting a Tender in!
There is no way your Tender will be taken above any other Tender with conditions of less than 5 working days. It would be better for you to wait and see what happens with the Tender and if it doesn’t sell at the Tender date, come in with your offer to buy based on the sale of your home at this point.
Try to get around sticking this condition in your contract. Ring your bank and see whether they will extend bridging finance to you in case there is a timing difference between buying and selling. Or sell first, then buy. Another option which many people forget is to treat your current home as an investment property and plan to rent it out when you move into the home you have bought. Your last option would be to extend the settlement date out on your Tender and then attempt to sell after you have been successful in the Tender. This is a gutsy move and can put undue pressure on you if you don’t get it right so you need to be aware of the potential downsides to this if you can’t sell your place before you have to settle on the one you have bought, but success is for the bold right??
2) Get a rational feel for value.
Without any other information available, the Rating Valuation often becomes the fixation point. No matter how unrelated to actual market value this historical figure is, it has now come into play for the house in question.
As a homeowner considering selling your home by Tender or Auction, you want to make sure this figure is as high as possible. Get it tweaked if you have renovated or have done anything to your home that you consider will change the price you will get in the marketplace.
As a buyer, forget the Rating Valuation in terms of assessing actual market value for the house in question, but be aware that other buyers may be more naive and will, therefore, probably be placing their bids at the Tender casino with the RV figure in mind. To get a rational feel for value, ask the real estate agent for a copy of the recent sales in the area for the last three months. You can also use online resources such as zoodle.co.nz to help guide your feel for value. I call it a feel for value because that is all it is. It is impossible prior to sale to put an actual market price on a house down to the exact dollar. You can also pay for a registered valuation, but again, this is only someones informed opinion of value. Valuers can get the potential sale price wrong and regularly do!
3) Decide how much you want the house.
Once you have ascertained the rational value of the house in question. Let that go for a bit and have the conversation as to how much you want the house emotionally. Will you buy it only if you get it for a bargain? Can you take it or leave it? Would it be nice to own? Do you want to have it? Do you HAVE to have it??
Rate your feelings toward the house on a scale of 1 to 10. One being – I have no emotional stake in this house and, therefore, I am being guided by the rational thoughts only when putting my price in.
Ten being – I am in love with this house and have to have this house at any cost because it won’t be worth living if I don’t get it.
If you are a one then simply put in the value that the recent comparable sales consider is fair value for the house or a bit below. For every number up the scale you go, add 1% to your tender value eg. if fair value is $400k and you see yourself as a 5 on the scale, add $20k to your offer.
If you are a ten on the scale, don’t muck around, add 20% to what you the rationally feel is the fair market price for the house. Yep, pay way too much for the house and not by a little bit, do it by a long shot!
4) Home sellers are people too!
Take the time to write a little note to accompany your Tender. Tell the home sellers about yourself and your family, and how much you love their home and want to purchase it. Sound barmy????! I have seen this strategy work numerous times when everything else about the Tenders are the same. Home buying and selling is naturally adversarial, so take the time to put a face to the name for the sellers and plead your case!
One example of this sticks out to me and won the buyers the house even though they were a close fourth in terms of tender price. The young daughter of the buyer’s family had drawn a picture of her family smiling outside the home sellers house. Underneath the picture was the note, “Thank you very much. My family is so happy that you are selling your house to us”. Talk about closing the deal! This 6 yr old had already assumed that the seller was going to sign her family’s tender even before it was submitted! And it worked!
5) Let the agent see your keenness to purchase.
The agent who takes your offer may be the only one in the room with the sellers when the decision between tenders is made. Make the agent your advocate! Though the ultimate decision is the home sellers, often the agent is asked their opinion. Within the bounds of professionalism, the agent can communicate to the home seller information about the prospective buyers that may aid in the decision. Let the agent know that you are flexible in terms of settlement date. Also it may pay to let the agent know that if no offers are deemed acceptable by the owner, you would like the opportunity to revisit your offer to them.
With all of these strategies, you are trying to eliminate the chance that the house sells within reaching distance of your offer but to someone else! Once you complete these steps and have launched your Tender into the hands of the gods, go home and pray like crazy that they smile on you!
