Every vendor’s worst nightmare: What should you do if your home passes in at auction?

When a property fails to sell at auction, it’s every vendor’s worst nightmare.

After spending months preparing a home for sale and weeks of open homes, it can be heart-wrenching when bidding on a property doesn’t reach the reserve.

Passing in is becoming more common, with Sydney and Melbourne auction clearance rates down from their highs at the peak of the property boom, and a third of properties failing to sell under the hammer.

But understanding why properties pass in can help avoid this unwanted situation and increase the chances of a sale on auction day, or immediately afterwards.

Why do properties pass in at auction?

Bidding can fail to reach the reserve if there isn’t enough buyer interest due to poor marketing or a lack of follow-up by the agent, according to director of Village Real Estate Huss Saad.

But he said the main reason a property passes in was because the reserve was higher than market expectations.

“People got used to the growth that we’ve seen over the last three years and they were expecting that this year and that hasn’t happened,” he said.

Mr Saad said a realistic reserve was the key to a successful auction. “If [vendors] do get themselves into a competitive price range, that’s where it could get interesting, that’s where there could be some opportunity for competition [among buyers].”

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• Related: What to do when you get an offer before auction

What happens when a property passes in?

If bidding for your home fails to meet the reserve, it doesn’t mean you won’t find a buyer, according to Mr Saad.

“If the owners are somewhat reasonable, you should be able to make a sale within the next week or two following,” he said.

When a property passes in, the highest bidder has the first right to negotiate a price, with the agent negotiating on the vendor’s behalf. If a price can’t be agreed upon, the agent may open up negotiations with other buyers.

Passing in a property can actually be a strategy to achieve the best price, according to director of Century 21 Clayton Con Katos. 

He said if interest in a property was strong, lowering the reserve mid-auction to put a property on the market might result in a lower price than if the property was passed in and a deal negotiated with an interested buyer.

“If you’re in touch with the buyers that have been through, and you think you’ve got a stand-out strong buyer, you should be passing that property in and negotiating after the auction,” he said.

He cited an example when this strategy created a better result for the vendor. “We had a very strong client who came though the property three or four times, and we could have put it on the market, but we decided to pass the property in and ended up getting about $23,000 more from the purchaser.”

What if you can’t reach a deal on the day?

If no bidders will meet the vendor’s expectations immediately after the auction, the property can be put on the market as a private sale.

In this case, Mr Saad said the agent needs to review the campaign to determine what went wrong. “In most scenarios, it is the price,” he said.

Mr Katos said agents should revitalise the campaign if a property fails to sell at auction.

“Launch it like a new property and always keep the pressure on. Don’t stop doing opens, don’t stop contacting your database.”

Mr Saad said all interested buyers should be told the property is now for sale. ​”The best way to negotiate is to just be honest with buyers, and let them know what it’s passed in for, and let them know they can buy it if they like,” Mr Saad said.

How to set a realistic reserve

Mr Saad said vendors need to be aware of broad market factors – including tightening lending regulations – that can affect how many buyers are interested in a property and what they are prepared to pay.

“The real estate market can change within 24 hours,” he said. “If your property is on the market right now, make sure you’re aware of what’s happening with lending.”

Mr Katos said auctions are a three-stage process, and agents and vendors could gauge buyer expectations throughout the campaign.

“You can sell it prior to, or on the auction day, and you can sell it after the auction in a private sale.” he said. “Take everything you learn from stage one and two, and apply that to the private sale.”

He said unrealistic vendor expectations could be problematic throughout the campaign and lead to a poor result, because underquoting laws mean properties can’t be advertised for lower than the vendor’s asking price.

“You end up getting people through the property, but those people coming through are at a higher price, they want something better,” he said.

Mr Saad said agents needed to be upfront with vendors, and tell them early on if their expectations are out of line with the market. 

“The quicker you are with your honesty, the quicker the owner can make a decision.”