The “Private Auction” – A Haven For The Dreaded Dummy Bid
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
The dreaded “dummy bid” never really went away; it simply mutated into a more insidious form through the concept of the “Private Auction”.
Bell Real Estate private auction letter
Bell Real Estate, a prominent real estate agency operating in the Eastern Suburbs and Yarra Ranges areas of Melbourne, uses the “Private Auction” as a standard procedure, and even provides intending purchasers with a set of guidelines. (Click on the attached image for a full view of a set Bell Real Estate’s guidelines, recently handed to one of our clients.)
The indicators of the “Private Auction” include:
- A vague or otherwise undisclosed sale price;
- A call for the purchaser’s “highest”, “best” or “strongest” bid;
- An assertion that other intending purchasers are competing;
- Confirmation that there will be no negotiation (i.e. that there will no further opportunity for purchasers to increase their offer.)
The “Private Auction” has now attracted the attention of the authorities, and may well be banned in the future.
In this posting we will examine the “Private Auction” guidelines given by Bell Real Estate to intending purchasers, and demonstrate the potential of the “Private Auction” to disadvantage both the vendor and the purchaser, while delivering the to the estate agent the sought-after commission.
What follows is a critique of the guidelines issued to potential purchasers by Bell Real Estate. Portions of the Bell guidelines will be reproduced in bold type, followed by our professional legal opinion as to how each could affect a sale transaction.
“RE: YOUR OFFER”
Opinion:
The heading of the letter containing the guidelines makes it clear to the purchaser that the matter under discussion is the purchaser’s offer to the vendor, and not any offer from the vendor to the purchaser. This is the first subtle indication that the estate agent is exerting control over the purchaser and her offer.
“We confirm our verbal advice that you are not the only Purchasers who have, or will be, submitting an offer to purchase the above property.”
Opinion:
This sentence on its own could be the start of a criminal deception because the estate agent cannot know if there will be any other offers. If no other offer is submitted at all, this statement may turn out to be false. If the purchaser is allowed to proceed in the false belief that she is competing with others, then the estate agent could be well on the way to committing a criminal deception.
In our view, it is not possible for the estate agent to truthfully “confirm” that other purchasers will be submitting an offer. The estate agent can only confirm that others have or have not submitted offers as at the time the letter was written.
Will the estate agent later advise the purchaser that no other purchasers are interested in the property. We don’t think so.
“We confirm the Vendors asking price is $690,000 plus. In order that there is no confusion, we advise the following:”
Opinion:
There are two options available here. The estate agent could provide a set price in the form of an opening “vendor bid” or, as in the present case, the estate agent may nominate a figure “+”. In our view, either approach is a nonsense, unless the stated figure has been arrived at by way of an independent valuation provided by a qualified valuer.
In our experience, estate agents who use the “Private Auction” place themselves in a position of conflicting interests by acting as valuer.
“You should make your offer the highest amount you are prepared to pay for the property. Once all offers are submitted to the Owners and they decide to accept one of the offers, you will not have another opportunity to increase your offer.”
Opinion:
This sentence is inherently misleading and deceptive. The purchaser is invited to believe that there will be more than one offer, and that the vendor will accept the highest. The possibility that there may be only one purchaser is not even considered.
In effect, the purchaser is invited to compete in an auction where she may the one and only bidder. In addition, she is expected to submit her bid without knowing the competing bids (if any). In other words, the purchaser is participating in an auction where she is fitted with a blindfold and earplugs, and must put her complete faith in the estate agent.
Is the estate agent likely to confess to the purchaser that she may be the one and only bidder? We suggest that this is highly unlikely.
This takes us back to the opening sentence of the letter. If the estate agent recklessly allows the purchaser to believe that she is competing against others, when in fact she is not, we believe a criminal deception may be perpetrated.
In our opinion the statement, “Once all offers are submitted to the Owners and they decide to accept one of the offers, you will not have another opportunity to increase your offer.” carries the possibility of a deception – one perpetrated on the vendor.
If the purchaser is told, “…you will not have another opportunity to increase your offer”, then equally the vendor must also be told that he must accept the highest of the offers presented, and cannot make any further counter-offers. Clearly, this is not in the interests of the vendor, as is demonstrated by the following example:
The vendor, at the appointed time, opens three envelopes containing the offers submitted by competing purchasers. The estate agent knows what the envelopes contain, as it was the estate agent who filled them. The vendor finds that the first offer is $680K; $10K below the amount promised by the estate agent as the minimum likely offer. The next is $695K, and the third is $500 dollars higher than the last. The vendor asks the estate agent, “Can’t we tell them that we’ll take 700K?
The estate agent must:
- Lie to the vendor by stating that this is not possible; or
- Request that the vendor should act contrary to his own interests by forgoing such an opportunity; or
- Do as the vendor requests, and confirm to each purchaser that the assertion “you will not have another opportunity to increase your offer” was false.
This example demonstrates that, at the very least, the integrity of the estate agent’s “Private Auction” procedure must take precedence over the interests of the vendor. This would be improper in light of the estate agent’s duty to his client.
“Don’t be limited by the asking price. If you feel that the property is worth more to you than the price asked, then you should sign the Contract at the highest price you are prepared to pay.”
Opinion:
This is no more than an attempt to encourage the purchaser to ignore the asking price, provided that in doing so the purchaser is prepared to offer more.
What if the purchaser believes that the property is worth much less than the “asking price”, but is driven to offer more through the false belief that there are competing bidders? Isn’t this starting to sound like the dreaded “dummy bid”?
“Your offer should be as simple and as strong as possible…To make your offer even stronger, you may wish to seek your Solicitor’s advice prior to signing the Contract Note. This would allow you to waive your ‘cooling off’ rights as provided for under the Sale of Land Act.”
Opinion:
It makes little difference to the situation if the purchaser seeks legal advice before submitting an offer, and so the estate agent can afford to advise the purchaser to obtain legal advice for the purposes of eliminating the “cooling off” period.
The estate agent has total control over the transaction, as any suggestion the purchaser’s lawyer may make in order to protect the purchaser will, to use the language of the estate agent, affect the “strength” of the offer. For example, if the purchaser’s lawyer advises that a finance condition is important, the estate agent can easily counter this by advising the purchaser that this has “weakened” her offer.
The purchaser has very little room to manoeuvre.
“We appreciate that this is a very tense and stressful time, however, we want you to have every opportunity to put in your best offer.”
Opinion:
The tension and stress associated with the “Private Auction” are created by the procedure itself. The purchaser has been told that she cannot know who she is competing with (if indeed she is competing with anyone), what the competing bids are (if indeed there are any), and she cannot protect herself by following her lawyer’s advice through fear of affecting the “strength” of her offer as compared to those of her competitors (if any).
Of course, the purchaser is not the only party placed under stress. The vendor is stuck with the offers submitted, cannot negotiate with any party, and is effectively forced to maintain the integrity of the estate agent’s “Private Auction“.
Being forced to commit to a tiny market made up of a few sealed envelopes, with no opportunity to negotiate, must be very stressful for the vendor too!
“We assure you that should you decide to submit a written offer, it will be submitted to the Owners and the price and terms of your offer will be fully explained to them.”
Opinion:
This is a very interesting claim. Unless the vendor’s lawyer is to explain the contract to the vendor, it would appear that the estate agent is assuming the role of the vendor’s lawyer. If the estate agent is to “fully explain” “the price and terms of your offer” to the vendor, he will probably be committing a criminal offence.
If the estate agent has the vendor’s lawyer explain the purchaser’s offer, the lawyer would probably be duty-bound to advise the vendor not to participate in the nonsense that is the “Private Auction“. The lawyer may even go so far as to advise the vendor that by participating in the “Private Auction” he may be assisting the estate agent to commit a criminal deception, as well as engaging in misleading and deceptive conduct.
We do not believe that the estate agent would be keen to have the vendor’s lawyer too closely involved.
We also see a problem with the “advice” the estate agent would be giving to the vendor. What if a lower offer is of interest to the vendor because of a short settlement period, while a higher offer carries a very long settlement date? If the purchasers have been told “you will not have another opportunity to increase your offer” the estate agent will can hardly re-open negotiations. Or perhaps the estate agent will advise the purchaser that she can change some details of her offer, but not the price. The whole situation becomes quite absurd!
“We confirm that we will treat your offer confidentially and agree not to disclose your offer to any other person than the Owner.”
Opinion:
Why not? A purchaser at an auction knows what other bids have been made. Even the vendor’s own bids have to be disclosed.
Is the purchaser supposed to believe that she has some sort of advantage if others don’t know how much she’s offering? What’s the problem if she knows what they’re bidding, and they know what she’s bidding? Oh yes – there is the possibility that no-one else is bidding at all, and the estate agent may not want the purchaser to know this.
“Until the Owners have signed the Contract Note the property is not yours.”
Opinion:
This statement is not entirely correct. The vendor of the property can accept the purchaser’s offer verbally, resulting in a sale to the purchaser. In the event of a dispute between vendor and purchaser, the purchaser will not be able to enforce the contract against the vendor if the vendor has not signed it, but such behaviour this would be quite unfair.
We believe that this sentence is included as a defence for the estate agent, to fend of dissatisfied purchasers. Purchasers often invest time and effort in building inspections, pest inspections and the like. If the estate agent has led a purchaser to believe that she has a good chance of buying the property, she may be very disappointed if she misses out. It looks like just another way to blame the owners. (We note that the likelihood of disappointment particularly high where a keen purchaser misses out by a couple of hundred dollars with no opportunity to make a further offer.)
“Verbal offers from yourselves or acceptance by the Owner are not binding on either party.”
Opinion:
This is another false statement. The truth is that a verbal acceptance from the vendor may not be enforceable against the vendor, but it is certainly enforceable by the vendor against the purchaser where the purchaser has submitted a written, signed offer.
“A Contract signed by both the Purchasers and Owners is the only legally binding Contract.”
Opinion:
Again, this is simply false. We note that estate agents are very adept at sounding convincing, while being completely wrong. In our view, no estate agent should ever advise consumers as to when a contract comes into existence or whether a contract is a “legally binding contract”.
“Ultimately, the Owners will make the final decision and we will be following their instructions absolutely.”
Opinion:
Given the degree of estate agent manipulation and control demonstrated in the guidelines, it would appear that any decision made by the vendor would be simply a confirmation of what the estate agent has already decided.
Perhaps this is just another way of saying, “And if any purchasers are upset about the outcome of the process, blame the vendor”.
“Best of luck!”
Opinion:
This appears to be something of a Freudian slip on the part of the estate agent. Luck should not play a part in a real estate sale transaction. The procedure should be one where the parties know exactly who they are dealing with, and what they are buying. It should also be fair and transparent, without manipulation by a self-interested third party.
Conclusion
The “Private Auction” has become quite common in Victoria, and takes many forms. It can vary from a simple statement from an estate agent, telling a purchaser to make a higher offer, to an elaborate scheme involving written rules and secret envelopes.
We believe that the secrecy surrounding the “Private Auction” means that it is never transparent, and is inherently unfair.
The sooner the authorities outlaw this insidious practice the better.
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