oc | Thursday 23rd January

Sold Under the Hammer. No its not, even when you think it is.

8 Davis Avenue - August 25 Auction

It’s on the market at $1,550,000, it’s sold under the hammer at auction for $1,990,000. Only it is not.

Three times this year we have bought properties for LESS than what the home either cost, was sold under the hammer or was passed-in at auction.

East: In the first instance we bought a home in Hawthorn East which was passed-in to another party at $250,000 above what our clients ended up paying for it.

: In the second instance in Kew we have just completed the purchase of a home in which the bidder above our client lost in excess of $200,000 by buying the home at auction mid 2012. Our clients are now the owner of that Kew Home.

On August 25th at 8 Davis Avenue, South Yarra, we bought a home for our clients that had originally been sold under the hammer at $1,990,000 to another party less than one hour before. Our clients purchased the home for less than the “sold under the hammer” figure.

How could this happen in Victoria? How could the ‘buyer’ at an auction pull out of the sale after being the winning bidder at an auction?

Background on Auction law in Victoria:

In Victoria, if either the buyer or seller chooses not to sign the on a knocked-down, under-the-hammer auction, there is no legally enforceable agreement. Most buyers know the auctioneer is not allowed to take bids after it has been sold to the winning bidder (a directive that comes from the Estate Agents Act), but the deal between the buyer and seller is not covered by the Estate Agents Act. Instead, it’s covered by a piece of legislation called the Instruments Act 1958. It stipulates that in Victoria, there’s no binding deal to buy real estate until it is written down and both parties sign.

The legislation’s origins lie in a law made by the English Parliament in 1677 known as the ‘Statute of Frauds.’ In those distant times most people couldn’t read or write and fraudulent behavior was commonplace. The law aimed to reduce fraud by requiring contracts for the sale of real estate to be in writing and signed, if they were to be enforceable.

The law was adopted in Victoria when it became a State and has been with us, in one form or another, ever since, applying to both auctions and private sales. So far as auctions are concerned, the law is no longer needed because

  1. Today, there’s universal education and practically everyone can read and write;
  2. The law’s been repealed in England, so far as buying real estate at auction is concerned. There, your winning bid buys the ; and
  3. As you will see all too dramatically with the South Yarra property, it causes pain and anguish when a winning bidder does a runner and gets away scot free leaving a trail of destruction behind them. There is no legal comeback.

Let me tell you what happened at 8 Davis Avenue on Saturday August 25th. It’s quite a story.

Its a good home - James Home Rating 648/1000

The week before

We had given the South Yarra home a James Home Rating of 648/1000 (see our rating at http://www.james.net.au/rating/8-Davis-Avenue-SOUTH_YARRA). We assessed this period double-fronter as being in need of a renovation, on a good street, with good , although with weakish carparking.

This home last sold in 2008 for $1,450,000. We remember it because we were interested in buying for another client at the time. That was the right money in 2008 when, you may remember, we were smack bang in the middle of the GFC.

This time around, agents Will Walton and Peter Perrignon of were initially quoting the property for the same money as it sold for in 2008, which in this market was a fair call. As interest was established during the campaign, they upped the quote and on auction day they had it on the market at the of the quote range. This was good, ethical and, as it turned out, effective quoting.

We completed full due diligence on this home, including pest and building inspections (which revealed issues), council checks (for neighbours), legal overviews and discussions with four other local agents who didn’t get the job but who knew the area well in terms of values and interest. Overall, we carried out around 80 checks on the home.

We advised our clients that, despite this being a flat market, this particular South Yarra price segment still had . We knew that from the data we collect through James Home Ratings and from on-the-ground research.

Based on land value of $3,750 per square metre and home value of around $250,000, we advised our clients in writing that we felt the property’s overall value was around the mid $1,600,000s.  All four of the agents we spoke to put its value at between $1,700,000 and $1,800,000.

Further research led us to believe there were three to four other bidders interested in this home and with the backgrounding we did we felt there may be some deepish pockets.

We had a number of meetings and discussions with our clients around the topic of how much? One of the issues we addressed was whether they might be better off just buying a renovated house for around the $2 million mark. But after discussions, sleep test, and “what if” scenarios both clients felt they loved and wanted this home.

Our advice, pre-auction, was that the property was good value at $1,660,000, that a competitive auction could see it go for $1,785,000 and that they had a 90% chance of buying at it a very strong auction if they had just over $1,900,000.

Our final advice to our clients was that they needed to understand that this was going to be a hot auction and that if they wanted to buy, it was going to be tough going.

The bidders on the fence @ 8 Davis

Auction Day

Come auction day, there was a smallish crowd (for the day) of around 40. But it had a buzz and you could smell the bidders. We recognised several potential bidders that we had seen at other auctions and OFIs. We also recognised and noted the bidder who was to “beat us under the hammer” in a few minutes time.

We opened the bidding by asking “if we bid $1,500,000 would they put in a vendor bid above us”. Peter said no, and so we bid.

On the Market

After our opening bid, we are immediately countered by the bidding couple on the fence. After a spate of bids going up in $10,000s, the property is announced on the market at $1,550,000. Things are steaming along as we hit station $1,600,000, and then $1,700,000 in quick time.

Looking around as I am bidding, I look for other snipers who may take us down. Couples are talking, but this is going too quick for them. They want to bid, but they can’t get on. I’m thinking: keep it going Mal with strength – this home has interest. There’s another buyers’ advocate, Jenni Wright across from me. She is just staring, she is saying nothing until bidding hits the $1,700,000s, and then she turns to her clients. It flashes through my mind, that may have been her lot, which is fair enough.

We approach bidding station $1,800,000 in rapid time, still with the original and only bidding couple on the fence and they haven’t winced. In fact, they are smiling at each other. Mmmm – I think. I’ll up the ante with an up-bid. They bid straight back, and now we are over $1,800,000. Ah ha, at $1,830,000 there is a hesitation from them. They look at each other. There is some stress. I think, let’s slow it a tad, and see if they can stress themselves some more. Nope, they still keep going, and in fact he is now looking pretty dogged and determined.

We are now past $1,870,000 and this is getting hairy. I’m thinking, you have your instructions Mal, keep bidding strongly, make a statement to the bidder and keep others from entering. It’s now over station $1,900,000 and it’s time to stop to allow this other party to think “what the hell they are doing?”

Uh oh – he ain’t stopping. Ok, it’s time to take our bat and ball and go home. Geez, I think, our clients have been incredibly unlucky on this one, but sometimes you have to accept good medicine tastes bad and move on – no matter how much you don’t want to.

When the property is knocked down at $1,990,000, a hush comes over the crowd. This has been a momentous battle. I walk over and shake the hand of the winning bidder. Well done sir – too good. Then me and my Scottish suit pirouette about-face and I’m off to my next engagement.

Guy, from our office, stays at the auction and we both briefly talk on the phone to our client about disappointment:  You gave it your best shot, we say, and you will have no regrets come Monday – that was enough.

Then, ten minutes into my journey I get a call on my mobile.

Mal, Guy here – they’ve done a runner. The winning bidders have left.

I ask Guy to take our clients away from the auction scene and to put the agent, Will, on the phone. Will gives it to me straight up.

They’ve come inside, and had an argument. They said they will take any legal consequences and they’ve walked out – what do you want to do?

I say, I’m turning around Will – see you in 10 minutes

I make four phone calls.

The first is a conference call to fellow co-workers Architect Adam and Gina for their opinions and to tell Adam he may have to cover for me at an auction I have in two hours.

The second is a call to Phil de Fegely, we think the best auction trainer in this state, who also trains our advocates to compete against auctioneers.

Then I ring Michael Pharr, a pre-eminent property lawyer who knows the ins and outs of all things property.

And then finally, I ring our clients.

Back at the scene of the ‘crime’, I am briefed in detail by Guy and then we speak to Jenni Wright, a competing advocate from Domain, who has also remained behind. She is with her client. We asked her if she wants another auction, she smiles and says, Why Mal? So your client can beat my clients a second time? No I want to buy this home Mal and that’s what I’m trying to do.

Will Walton comes over and calls Guy and myself in. He asks, Mal, what’s your position?

He gives me nothing – as you would expect. I say: I hope you are not expecting $1,980,000, and tell him that we need to consult our client.

Our clients tell us they still want to buy. We lay out a couple of facts to them:

  1. There were only two bidders, which means we really won’t know if we are $40,000 or $400,000 above the next potential bidder – an invidious position those “runners” have put our clients in.
  2. Across the road stands another buyer, with advocate, ready to buy. We have to place a number on where we feel they are at, and then we have to beat that.

To their great credit, our clients give us clear instructions under immense pressure and while still on an incredible adrenaline-filled rollercoaster. This was a real risk v reward situation – almost a ‘let’s play chicken’ scenario for all parties.

We return inside and after some pretty tough argy-bargy, we strike a contract, but it’s a different number to the auction result. This time both parties carry though on their commitments and sign the contract. We feel sorry for the vendor, who ended up ‘losing’ money on the original unfulfilled contract.

This is one of hundreds of auction stories we could write every year – they are interesting events.

We’d like to acknowledge the selling agents Will Walton and Peter Perrignon of Hocking Stuart, who at all times in this matter acted professionally and represented their client well under pressure. We also acknowledge Jenni Wright, a competing buyer advocate from Domain, who was a strong representative for her client, as she always is, and while she was a tough cookie in this situation acted appropriately and professionally in trying to secure this home for her client.

Thanks to Guy Angwin in our office, who kept his head post auction, saw something was wrong and quickly called me back to the auction. Also thanks to Phil de Fegely, Michael Pharr and the legal adviser at the Peter Lowenstern for their timely counsel.

Thanks to our clients, who wish to remain anonymous, for giving us permission to run this article in the public interest.

And finally we urge the Victorian government to review the 1958 Instruments Act based on antiquated 17th Century English law with regards to under the hammer auction contracts and the lack of accountability should a vendor or winning buyer renege prior to signing.

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