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Auctions in Australia - Be Prepared for the next Commercial Property Opportunity

The big four banks in Australia. Westpac, Commonwealth, ANZ, NAB.

Consumer confidence, the lowest-ever interest rates, and the APRA loosening the imposition of stricter lending regulations leading banks to write more loans are all contributing factors to the maelstrom that is driving up property markets. Across Australia, nowhere is buyer enthusiasm more prevalent than at property auctions, as demonstrated by “remarkable results compared to last year, with clearance rates sharply higher and increases in sale volumes, sale turnover and auction prices,” so reports Michael Yardney in his Property Update post of 14, December 2019

For the week ending 15 December 2019, only Western Australia and Queensland did not break the 50% mark for auction clearance rates. NSW was the top performer with 82% clearance, followed by Victoria at 79% and Tasmania at 75%. South Australia was only lukewarm with a clearance rate of 62%. And the number of offerings - both commercial and residential - is on the rise, too. Domain reports that Melbourne had the most properties up for grabs with 1226 up from 927 for the same time last year, and Sydney had 757 up from 539 in 2018.

So, What’s all the Fuss?

Australians are responding to the media’s positive outlook, low-interest rates, and the fact that prices appear to be at their lowest with expected rises on the near horizon. Many see this as the time to take the plunge into the lucrative world of commercial property investing. If you want to get in on the excitement, there are a few things you should know before you go, and Acumen Finance is here to help you prepare for the fast-talking, heart-pumping scene of the auction.

The first thing you should know is that commercial property auctions can be very action-packed and fast-paced - especially if the property up for bid is host to a big-name tenant, such as 7-Eleven, Bunnings or Coles. Why? Because the lease-holder is a strong factor in determining the property’s value and ensuring a steady income. If you’re unable to compete with these deep-pockets, don’t fret; there are plenty of opportunities - if you’re prepared. 

That said, it’s a good idea to visit a few auctions before you actually commence bidding to get the lay of the land and develop an understanding of what to expect and what to look for. Experience will put you in a better position when the time comes to flash that number. 

Why Go To Auction?

Unlike a private sale, everything about an auction is public. The stakes are high, the action is fast, and the whole scene might be a little overwhelming. Have no fear, there are many benefits of bidding and buying at auction - and it can be fun as well.

Reconnaissance: When bidding at auction, you know who and what you’re up against. You’ll know how many others are interested and bidding against you, and you’ll know the price being offered by each. In this way, you will immediately know where your bid stands. Also, there’ll be no worrying if you overpaid by a couple of hundred-grand, or if you were out of the running from the start. Also, if you see a high-demand for the property, it reassures you that it’s likely a desirable investment. Just don’t let your emotions get the best of you. 

Likewise, if you’re already in business and want to know what asset classes (property types) are most coveted, auctions results will give you an idea of the sentiment and demand for the commercial property segment. Since there is no set formula for determining the worth of commercial property, you can measure your investment value by comparing it to similar (comparable) auction properties. You’ll be able to determine the buyer demand, the number of interested investors and who (or what) is the competition. 

Immediate results: There will be no waiting around to see if the seller likes the numbers. Literally, if you’re the high bid when the hammer falls and the reserve has been met, you’ve bought it. This keeps your money free from the lock-up of negotiations, so you can move on to other options if the first doesn’t work out for you. 

Keep in mind that this works both ways. Other bidders know immediately what the current high bid is and can raise the ante - usually by a predetermined amount set by the auctioneer. You can offer something different than the prescribed increase amount, but you’ll be at the mercy of the auctioneer who decides whether or not to accept it

Proxy bidding: Proxy bidding is a great way to remove yourself from the stress of the action and to ensure your emotions don’t take over and bid you into financial oblivion. While the rules are different for every state (and we’ll cover those in an upcoming post), generally speaking, you can bid from anywhere, provided you have a representative present and wielding a letter of authority. The letter must contain your name, address and the identifying number for the proof of his/her identity. The letter of authority is not necessary if your representative has a Power of Attorney. If a buying agent is working on behalf of a company, she will also need the ABN and a letter of authorisation on company letterhead.

Preparing for Commercial Property Auction

As with any significant purchase, you’ll want to do some research before you make any decisions. In the auction scenario, you must be ready before the auction commences - you need to have all your questions answered to your satisfaction before the auction begins as there is no time after the fall of the hammer to negotiate terms. 

  • At a minimum, you’ll want to check for any outstanding land taxes and liens. Also, you should check out the neighbourhood for light, noise, traffic, congestion and make sure the building is located in an environment that is conducive to your goals. 
  • Schedule your own building and pest inspections if possible. This can be a costly endeavour, especially if you inspect more than one property, but the money and frustration this step can save you is well worth the extra expense. While not deductible like repairs, maintenance or management costs of investment properties, the expenses associated with any purchase can be added to the cost basis, thereby offsetting capital gains (if any) when you sell. 
  • Next, get a copy of the contract and review it with the proper professional (lawyer or a qualified agent) to identify possible risks. If you encounter any significant problems, you may be able to request some flexibility in the terms, such as longer settlements or reduced deposits. This is the only point where you may have some room for negotiations, and it is not, by any means, guaranteed. 

The Big Day 

On auction day, obtain and review the auction rules and Buyers Guide. This will tell you how to register to bid and what kind of identification you need to register. Once registered, you will receive a bidder’s number. Then sit back and take a deep breath.

Most properties will have a reserve price - a minimum acceptable price - that is set by the seller. Once the reserve has been met, the auctioneer will announce that the property is “on the market”, meaning that if you are the highest bidder when the hammer falls, you will need to sign the contract, right then and there - there is no “cooling off period” such as you will find in a private sale. 

If you win the round, you will be expected to pay the deposit - typically about 10% of the sale price. Failure to do so could cost you in fees, and you may even be liable for damages suffered by the seller. So you better be sure that it’s a property you want, at a price you can afford.

Speaking of money - making sure the property is something you can afford is the most important step. In preparation for the big day, you should visit your financial planner, tax accountant, or another qualified financial advisor to ensure that you have the borrowing capacity to purchase and repay. You will need a written pre-approval statement, in addition to the 10% deposit, to take with you to the auction. When evaluating your borrowing capacity, you should note that some lending institutions will often use higher rates than the current interest rate to stress-test your ability to repay.

Does the pre-approval process have you stressed? Acumen Finance is an excellent partner for this phase of the process. To assess your situation, Acumen uses sophisticated mortgage calculators and financial modelling analysis, formulated by CPA and financial experts with years of investment funding experience. In addition, our expert staff can review the sales contract, identifying any pitfalls of which you need to be aware.

But why stop there? We have access to an array of private lenders - both high-net-worth individuals as well as companies - that are interested in underwriting commercial mortgages or development financing contracts. As experts in investment lending, we can assess your indicative borrowing capacity based on personal information, industry trends, and inside knowledge into financing structures that will put a positive spin on your creds. Acumen Finance is, in fact, the best possible partner for your auction endeavours. What are you waiting for? Contact us today.