This article appeared in The Weekly Review.

Hello, my name is Mal James and I am a buyer agent. This week I’m with prospective homebuyers Helen and Lyndon at Mario’s in Brunswick Street.

Mal: So, did 106 Chrystobel Crescent past the sleep test with both of you?

Helen: I really want it.

Lyndon: Yes, with flying colours, and we want to put in a pre-auction offer.

Mal: Wow! So why a pre-auction offer?

Lyndon: We think we will get blown out of the water at auction.

Mal: Maybe. But there has been a market turn and you may be the only bidders at your level.

Helen: Do you think we should make a pre-auction offer?

Mal: I think you should understand the risk v reward issues in making such an offer and then make an informed decision.

Helen: Risk v reward?

Mal: Buying before auction can be the most expensive and, conversely, the least expensive way – if your pre-auction offer is successful, you will never know. Let’s say we make an offer of $1.8 million.If it’s accepted, who’s to say you couldn’t have bought it at a pass-in for $1.68 million? But, of course, you may have strong bidding and miss it at $1.92 million, which is past your budget.

Helen: $240,000 is a big variance. But I see what you mean. Each of our actions has a risk of not achieving what we want and a possible reward of securing the home and/or savings.

Mal: Well done, Helen.

Lyndon: Told you she was a smart girl

Helen: I married you though

Mal: All your home buying actions have a risk and a reward attached. The pre-auction offer is one case in point. With knowledge, you can minimise but never eliminate risk, and, with that same knowledge, when well applied, you can maximise the chance of, but never guarantee, a reward.

Helen: On the other side, the vendor has a risk and reward scenario to face when they receive our offer. The reward is a sale and possibly more money. The risk of a knockback is less money at auction or, in fact, not selling the home in a timely manner.

Lyndon: I don’t want to pay over the odds?

Mal: I’m not saying you have to pay over the odds. But experience has shown me that if you take the attitude of cheap, cheap, and me, me into a pre-auction offer situation for a quality inner-city Melbourne home with an experienced selling agent, then your risks of no success are high and rewards extremely rare. In buying homes, as in life, if it’s all about you….

Helen: Yes, but what is wrong with making a low offer?

Mal: Nothing. Can I ask why you are making the offer – to buy the home or see how low you can go?

Helen: Buy first – go low, second.

Mal: Well, you cannot buy the home if the seller has dismissed you. What would you say if someone offered you $900,000 for your current home? How would you feel?

Helen: I’d be annoyed and I wouldn’t even want to talk to them. Point taken.

Mal: I’m not saying let’s not deal hard. Well, actually, I am if your main goal is to buy. What I am saying is deal smart. If you want to buy this cheaply then I’m your man but let’s go to auction, hope for a pass-in and push on from that point. Of course in doing that, it may also cost you the chance to buy this particular home if a left-field buyer blows past your limit.

Helen: But that left-field buyer could blow past us now on a pre-auction offer.

Mal: Yes, that’s true – if they have made themselves known to the selling agent. Some don’t – fingers crossed!

Lyndon: If they don’t accept our offer, we have shown our cards.

Mal: Yes, that is also true and a negative for us in making a pre-auction offer. If it is not accepted, then the agent will correctly use our offer to educate other buyers as to our level of interest, thus establishing a solid price floor to work up from and also removing the element of surprise for us at auction. It may also strengthen the vendor’s view as to price, resulting in them lifting their reserve. On auction day, you have put a big target on your forehead.

Lyndon: Yeah, but on auction day I won’t bid that. This is a once-off offer

Helen: Darling, you may say that, but under the gun on auction day, you know I want this house, and we will be bidding at this auction under emotional pressure.

Mal: Let’s have a break and talk again next week. The auction is a few weeks away and there is no paperwork, so they cannot sign a binding contract with anybody else.

Helen: OK, see you next week. We can talk about how we actually structure a pre-auction offer.