AUCTIONS Strategy or science?

How does the theory of supply and demand apply to auctions?

Almost everyone has an opinion on auctions. Love them or loathe them, auctions have been around for years and they are here to stay.

As of June this year, 61.5% of homes are sold at auctions. And with housing affordability reported to be the best it has been since 20162, this number may very well rise.

Auction strategies

If you have ever been involved in an auction campaign you would no doubt have had a planned strategy. Whether you stuck to it in the (sometimes) frenzy of the auction is another thing.

When attending an auction would you:

• be the first bidder and open with a strong first bid?

• stay silent then come in with a killer bid right at the end?

• make a quick counter bid as soon as someone bids against you? or

• recruit a professional to bid for you?

According to auction streaming service Gavl, the most common knockout bid is a $10,000 increase. Some auctioneers suggest that avoiding round numbers can work well for buyers and changes the pace of the bidding.

For example if you open the bidding at say $595,000 instead of $600,000, the bidding will likely continue in smaller increments of $5,000 instead of $10,000.

Perhaps the biggest (and subconscious)
psychological barrier to success during auctions is our body language.

Real estate site Domain suggests that projecting assertive body language and knowing your limits are critical. Bidding confidently, loud and proud, can impact the final result. Understanding how other bidders behave at an auction can help reveal when a buyer is reaching their limit.

But enough about strategies, back to the science

We opened this article with the theory of supply and demand. How does this work in the case of auctions?

New research from the University of Sydney and the University of Technology Sydney shows that people participate (bid) LESS at auctions that have MORE bidders.

Findings from this research are consistent with the ‘loss aversion’ theory – people tend to prefer avoiding losses as opposed to acquiring equivalent gains. We are more upset about losing $10 than we are happy in finding $10.

So the theory suggests when there is more supply (bidders) = we tend to bid less.

Contrary to our belief of ‘bigger crowds and more bidders at an auction create more money for the vendor’, that isn’t always the case!

Regardless of the strategy you adopt (or if science takes over), it is important to take these steps BEFORE you attend an auction.

1. First and foremost, secure finance pre-approval so you know your true borrowing power.

2. Do your research – inspect as many comparable properties as possible to know the market.

3. Attend other auctions to understand how they work and experience different auctioneer styles.

4. Inspect the property thoroughly, take measurements if you need to and invest in a building inspection – you don’t want any nasty surprises after the gavel strikes and you have to sign the papers!

As your finance specialist we work with our clients to ensure you have your finance pre-approved prior to auction AND prior to making an offer for a private sale.

Remember, due to the range of lenders we have available and the maze of interest rates between them all, we have extensive knowledge across a variety of lenders to help you find the right finance to suit your situation.

Contact our office today if you have any questions regarding finance and pre-approvals for auctions or private sales.

The top 9 things you should know before applying for a home loan

Whether this is your first home purchase or eleventh property investment, there are always 9 essential steps to take before applying for your loan.

We all need to be smart when carrying out research for our next loan. Understanding how to position your loan application to ensure you obtain the outcome you are looking for is critical to your successful application. We often find that those who come to us after they have tried applying for a loan themselves have done more damage than good to their application. So here are some great tips – and remember to call us first before applying for your next loan.

1. GET YOUR FINANCES IN ORDER

Clean up any bad debt

There is good debt and there is bad debt. Good debt helps you get ahead financially (like buying a home or investment property). Bad debt hinders your loan application (like credit cards, store cards and after pay bills). We need to present your best financial case when applying for a loan.

Pay ALL your bills ON TIME for at least 3 months

Close down any unused or unnecessary credit cards Did you know that every $10,000 limit you have available on your credit card lowers your borrowing capacity by about $50,000 or more on your loan?

2. MAKE SURE YOU HAVE A GOOD SAVINGS/ PAYMENT HISTORY

You will need at least 3 months of savings history to convince a bank to lend you money. You will require evidence that it is real savings and not just money gifted to you from your parents.

If you rent, then your rental payments can be used to show a history of regular payments, so make sure you are a good tenant and pay your rent on time.

3. BE AWARE OF HOW YOUR SPENDING HABITS WILL AFFECT YOUR APPLICATION

Lenders now have clear visibility and technology to track, categorise, evaluate and predict your spending habits. So it is important to reduce your unnecessary spending at least 3 months prior to applying for a loan. This will give you greater capacity to borrow.

In our experience, unfortunately most people underestimate their expenses. A good way to keep track of your spending is by establishing a budget backed up with tracking and reconciling your expenditure regularly. There are some great mobile apps to help you with this.

4. CHECK YOUR CREDIT RATING

There are 2 types of credit checks that can be performed.

Soft check – done by yourself and will not affect your rating. ASIC recommends individuals should do this annually to ensure important personal details are kept up to date. It will also allow you to identify any information that is incorrect (eg faulty debt listings) and even identity fraud.

Hard check – is when you have given permission for lenders to perform a credit check when applying for or enquiring about a loan. This WILL affect your credit score and will be recorded on your file. Lenders can decide on the credit score to use during their loan assessment. Each lender has its own criteria for credit report calculations.

5. ATTEND TO CREDIT REPAIR

If you have defaulted on consumer repayments they may have been reported on your credit file. As your finance specialist we can assist in the process to help you remove and improve your credit listings in regards to payment defaults or judgements.

6. MANAGE YOUR EMPLOYMENT STATUS

If you are considering a change of career we recommend that you attend to your finances first. Some lenders will make you wait out a probationary period (now often up to six months) before considering your loan application.

7. THERE’S MORE THAN JUST YOUR DEPOSIT

You are probably aware there is more than the deposit required to complete a property settlement. We can help you estimate the total amount of funds required for your purchase. These expenses will include upfront costs, fees, taxes, stamp duty and legal fees, and will be a help for you to know before applying for a loan.

8. GATHER ALL YOUR DOCUMENTS REQUIRED FOR LOAN APPROVAL

These will include:

• Proof of ID (100 point checking system: passport, birth certificate, driver licence)

• Proof of employment and income via pay slips and/or tax returns

• Proof of savings (bank statements)

• Proof of debt (bank credit card and store card statements)

• Proof of assets (eg council rates)

• rental statements (if a landlord), payments (if renting)

• all other bank and credit card statements Start collecting this information now to make your application process faster and more efficient.

9. UNDERSTANDING THE TYPE OF LOAN THAT WILL SUIT YOU BEST

Do you want:

• frills or no frills?

• interest only or principal and interest payments?

• fixed or variable?

• a split of fixed and variable?

Will you take the loan out for 20, 25 or 30 years? Are you too old for a 30 year loan? Do you want a redraw facility or an offset account?

With so many things to consider, we recommend you allow us to help you select the type of loan options and facilities that you most likely need for your personal circumstances.

FINALLY…

Obtain a pre-approval before you go shopping

It is always a good idea to arrange pre-approval for a mortgage before you start the house hunting process. It will help you identify any obstacles to approval, such as having too much debt or a low credit score. Remember your pre-approval will only last for three to six months, so get cracking to find that next property. A pre-approval also does not guarantee you will secure the loan, it is simply an indication of how much you can borrow. Formal approval will be decided when we lodge your loan application for you.

Overcoming the tightened lending environment

It would be easy to listen to the media, your friends and family and worry about the future of finance and property.

So… is the tightening of credit and tough lending criteria a good thing or a bad thing?

It depends on which side of the fence you sit on doesn’t it? Let’s have a look.

SPENDING HABITS

Let’s look at the ‘against’

• Your spending habits are now under the spot light – BIG TIME!

• Now more than ever you need to make sure you pay all your bills on time

• You have to live within your means

• You need to declare your REAL living expenses not your ‘I THINK THESE ARE MY’ living expenses

• You have to reduce your bad debt (pay down those credit cards) The fact is that MOST of us need to change our spending habits NOW before we get into trouble.

When you see those ‘specials’ you really should consider if you actually NEED those items and not simply purchase them JUST because they are on sale.

And let’s also look at the ‘for’

If you do obtain a loan approval, the bank has already stress tested you so you ‘should’ be ok in a rising interest rate market.

If you are good at paying your bills on time, you will now be rewarded.

If you have lots of equity in your property, valuations should not be a problem.

If you are on interest only (IO) repayments (at a higher interest rate) and you change to P&I at a lower rate, the GREAT news is that in most instances your repayments should now be equal or lower than what you were paying before AND you are also starting to pay off that debt.

DEPOSIT

Let’s look at the ‘against’

You now need a larger deposit (with most lenders).

And let’s also look at the ‘for’ If you have your deposit – you have the power. Or if you are prepared to pay LMI, then that includes YOU as well.

LENDING

Let’s look at the ‘against’

The lending platform has changed. NOW interest only loans typically have higher interest rates than principal and interest (P&I) loans.

Ouch for investors!

It could be time to consider refinancing and/or consolidating your debt and considering P&I repayments.

And let’s also look at the ‘for’ If your finances are in good  shape, your loan application should be processed quicker.

INTEREST ONLY LOANS

Let’s look at the ‘against’ After your IO period expires it defaults to P&I repayments.

Interest only periods generally last about 5 years, after which you might have to refinance to another lender if you wish to continue making interest only repayments.

If this is you – let us look at changing lenders for you with a new IO period.

And let’s also look at the ‘for’

If you have had your investment property for more than 10 years then you are more than likely in a new stage of life.

It just might be a good time to consider changing your repayments into P&I and start paying down that debt ready for your early retirement!

TOUGHER MARKET

Let’s look at the ‘against’

The housing market is getting tougher to enter (or are our poor saving and spending habits holding us back?)

Need budgeting help? Let us know NOW!

And let’s also look at the ‘for’

A tougher buying market means that there will be more renters. Wouldn’t you prefer to be the landlord when people can’t afford their own home?

IN SUMMARY

If you have heard of Warren Buffet, the American business magnate and the third wealthiest person in the world, then you would know his secret to success.

Q: What is his secret to success?

A: Doing the opposite to everyone

Q: When no one is borrowing to purchase or invest – what do you think he is doing?

A: That’s right – the opposite.

No one can predict what is going to happen in the finance or property world. But there is one thing we know…

You won’t find out if you don’t ask these questions:

• Can I obtain better finance options?

• Are there different ways to structure my lending to my advantage?

• Am I paying too much interest?

• How do I take advantage of a buyers’ market?

• Are there quicker ways to pay down my debt?

If you want to outsmart the media reports and industry experts, let’s have a conversation. There is always a little diamond in the rough.