The Elephant in the Room Property Podcast | Australian real estate
The Elephant In The Room Property Podcast with Veronica Morgan & Chris Bates

Episodes

Episode 8 | How do skilled auctioneers get your last dollar? | David Scholes, AuctionWORKS

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Bidding on-site, in-rooms or online: which way makes buyers pay more?

David Scholes has conducted some 40,000 auctions over his career and candidly shares with us many examples of buyers pushing themselves beyond their limits, the auctioneer’s role in getting them to do this and the extreme times when he actually stops mid-auction because a bidder is over extended!

Other insights include:

  • The seven stages of an auction and which one is the most important.

  • His frustrations with sales agents.

  • How smart agents will handle a situation when only one bidder is registered.

  • The impact of momentum on the sales price.

  • How a pedantic auctioneer could cost the vendor money.

  • Why the reserve price isn’t important.

  • The different ways buyers can respond to the pressure of an auction and which ones annoy auctioneers.

  • How he lures reluctant bidders.

  • What experienced bidders do to control an auction.

  • The real reason auction clearance rates drop in a transitional market.

  • The psychology of online property auctions and whether they will replace on-site/in-rooms auctions.

  • Are there differences auctioning in Brisbane, Melbourne, Canberra & Sydney?

Experience counts: David’s observations on the past 5 Sydney property cycles will enlighten you.

Links:

AuctionWORKS videos
Auctionworks Tutorial - Contracts
AuctionworksONLINE - The Process

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on 17th April 2018

Veronica Morgan: You're listening to The Elephant In The Room Property Podcast, where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent and co-host of Foxtel’s Location Location Location Australia.

Chris Bates: I'm Chris Bates, financial planner, mortgage broker and wealth coach.

Veronica Morgan: And together, we're going to uncover who's really making the decisions when you buy a property. 

Chris Bates: Veronica will introduce our guest in a moment and I can tell you, you'll want to listen on to hear what he has to say about how the auction reserve price is not that important. 

David Scholes: Most agents think it's all about price and it's not all about price at all. I have never met anybody that wakes up one morning and says, "I'm going to sell my house because it should be worth $2 million." 

They're going to wake up and think, "I'm going to sell my house because it's too big or it's too small or I hate my wife." 

Chris Bates: Please stick around for this week's Elephant Rider Bootcamp and we have a cracking Dumbo of the Week coming up. 

Before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. 

Now, let's get cracking. 

Veronica Morgan: This week, we're picking the brains of auctioneer, David Scholes. Now, David commenced work in rural Australia conducting stock and station agency auctions. He moved to Sydney in the early '90s to concentrate on auctioning residential and commercial real estate and now conducts some thousand auctions annually... Only a thousand?

David Scholes: No, I've retired. Semi-retired. 

Veronica Morgan: Right, okay.

... in Sydney, Brisbane and Melbourne. His regular clients include major financial institutions as well as some of the largest and most respected names in the Australian corporate and property sectors. In recognition of David's continued support to the real estate industry, he was awarded the highest and most coveted award in real estate, the prestigious Woodrow Weight Award. 

And when was that David?

David Scholes: I can't remember.

Veronica Morgan: Okay, I didn't write it down-

David Scholes: Three years ago.

Veronica Morgan: ... so three years ago?

David Scholes: I think three or four years ago.

Veronica Morgan: Out of curiosity before I continue introducing you and I'm sorry to cut in like this but, do you submit an application for that award that is a true award? Oh congratulations on that.

David Scholes: Thank you. No, it's granted by the President of the Real Estate Institute, yeah.

Veronica Morgan: As opposed to all the other awards in the real estate arena where people submit their own application for the award. I just want to make that distinction because it is a big distinction. Much of David's success is attributed to working closely with real estate sales teams which is actually how I got to know him back in my selling days in the early 2000s.

Welcome David.

David Scholes: Thank you Veronica. Thank you Chris.

Chris Bates: Thank you David. Thank you for being here. 

I'm going to get stuck right into it. I was reading on your websites and it says that, "Auctioneering is far more than describing a property. It is timing, an ability to build immediate rapport with the buyers, a relaxed, friendly attitude that makes bidders comfortable, an intimate knowledge of the product being offered, and of the current market conditions, and a thorough understanding of the real estate law, and above all else, a hungry to extract the last dollar from the buying public." 

David Scholes: Nice short sentence.

Veronica Morgan: Well we're really keen to understand how you extract the last dollar?

David Scholes: Getting back to what you were saying Chris, I think I've always said, the seven steps to an auction, as far as an auctioneer is concerned. And it's basically your introduction. It's your terms and conditions. It's the contract. It's the property description. It's getting that opening bid, the bidding duel, and then the finish. 

We train a lot of auctioneers and I always ask young auctioneers what they think is the most important step. I would be surprised if anybody says, the step that I think is the most important. Most people think it is the property description or the getting the first bid, or, very few of them think it's legals. Really it all boils back to the introduction. You've got to be able to grab an audience's attention within no more than 10 or 15 seconds. 

The whole point of that is, it doesn't really matter what you say, people aren't listening to that particular segment of the auction. But if you can get them switched on, watching you, listening to you, perhaps a little half joke just to get them smiling, then when it becomes important for them to be taking in what you're saying, they're actually engaged.

I think to get the last cent from the buying public is a combination of two things: reading body language and having the respect of the audience. You can't laud over an audience, you can't demand them to do something for you, you've got to convince them to work with you.

Chris Bates: I guess it's in the early stages, kind of winning them over I guess? 

David Scholes: Yeah.

Chris Bates: How would you actually do that?

David Scholes: Well I profess that body language is probably the most critical thing for the first 30 seconds. So for an auctioneer to attend an auction and step out in front of an audience, and to be shuffling notes, and to be flip-flopping from one foot to the other, and sort of distracted, immediately you'll lose the confidence of the buyers. 

So you've got to be able to literally take key position, stand still, you have an erect bearing to stand straight, shoulders back, big smile on your face, and literally move into projecting your voice to the last set of ears in that audience. 

You can't yell. You can't yell, that's a very important feature of being a quality auctioneer, but you've got to project your voice so that the people right in front of you aren't being deafened but your voice is being projected to the people who refuse to come onto this side of the street.

So I think body language is probably the most important thing for an auctioneer to have as a bearing for the first short period of time. Then very quickly after that, once you've asserted your bearing, I hate that word but you know what I mean?

Veronica Morgan: Authority. Is that it? 

David Scholes: Authority. 

Veronica Morgan: Or your right to be there in a way.

David Scholes: Well in a bit of a way. As soon as you start to get the respect of the audience then you can start to talk to them about what they need to know. Now it is important because we're auctioneers to understand the legal side of the transaction because if we don't say the right things and we sell a property to a person, they could potentially have the opportunity of reneging, of actually getting out of the contract, if we haven't made sure that they understand that they're bidding on a contract. 

Quite honestly that's what we're doing, we're not selling a property, we're selling a contract for the right for them to move into that property in 42 days time. Once you get through those things, and that's the boring part of the auction, so you've got to skip through that fairly smartly, but you've got to cover on of that. 

Chris Bates: Do you find that a lot of young agents or new agents, or new auctioneers really struggle with that open?

David Scholes: Oh it's shocking. It's shocking. There is not a day in my auctioneering life, and I mean this, that I don't have to confront some problem with the contract where the agent hasn't understood the contract, or there's been late amendments to the contract from the vendor and the agent has forgotten to send them out to the people who have requested contracts. 

Contracts are the most important part about a property transaction, it really is. This is the stupid thing I find about so many real estate agents, they don't think the contract is important enough to concentrate on it properly. The fact is, if they don't get the contract right they'll work as hard as they work for six weeks, sell the property and then have the contract fall over and they get not a single cent for their hard efforts. So contracts are very, very, very important.

Veronica Morgan: Yeah, we heard a very good example of that, a couple of episodes back Damien Cooley was in talking about a situation in Newcastle where the property was sold without the proper certification regarding the pool. The buyer wanted to rescind, wanted to back out of the contract and was able to because there was not a certificate in there. So, yeah I mean the agents do need to pay more attention to that obviously.

David Scholes: But it's a funny thing too. On this, we do a whole training segment to agents about this. If you think about it, if you're an agent and you're meeting people coming through a property, you're at an open home, and somebody asks for a contract, so this is what happens...

They ask for a contract, the agent hands a contract over. That person then takes that contract to their legal representative, could be a conveyancer or a solicitor and because they're looking at a number of properties in that time of them trying to buy their instructions to their solicitor is, "Just quickly flick through the contract. I don't want you to spend a lot of time on it because I don't want to be paying you a lot of money."

Chris Bates: Does that mean you shouldn't use a $990 all-inclusive conveyancer?

David Scholes: Look, I think it is pretty important to get good quality legal representation, but look, when I bought my last ... oh no, not my last place, but the place before that, we probably were looking at six or seven properties at that same time.

So the six or seven contracts, well I've got a pretty good idea of contracts so I didn't really waste my solicitor's time, but if you're not good at looking at contracts you give it to your solicitor.

The solicitor, the first thing they look at is the Certificate of Title. Because that is the document that will tell you of every encumbrance that's on the property. Mortgages, convenance, caveats, everything that is marked against that property, easements, is going to be a potential problem.

Now, if an agent hands out a contract and there is a problem on that Certificate of Title the agent hasn't bothered to clarify, straight away it goes to the solicitor, the solicitor says, "Look, I've got a problem with this contract, are you looking at any other properties?" 

They go, "Oh yeah." "Well give this one a miss because I don't know what that 3.9 metre easement to drain water could be. I'll do the work if you want me to look at it but that's going to cost some ..." "No, no, that's okay we're looking at other properties." So they move from that property to another one purely because the agent hasn't been bothered to have an explanation...

Chris Bates: Explain.

David Scholes: ... for them when they hand a contract out. So contracts are really important. They really, really are.

Chris Bates: I mean you bought a property a few years ago you mentioned there, did you buy that at auction or did you...

David Scholes: I did. I bought my last two properties at auction actually. The second one I quite enjoyed because I knew we were the only people there, so I had control.

Chris Bates: How did you know that?

David Scholes: It was pretty obvious. It was done in another auction room in the city, who shall remain nameless. I walked from my auction room to that auction room at 10:30, we were the third property up in the order of sale. Between 10:30 and a quarter to 11 when we got there I had five missed phone calls from the agent. So I sort of had a pretty good idea that if we hadn't turned up they were in a lot of trouble.

Veronica Morgan: Right, and that is interesting, there are certain signs that are given away. We were having this discussion in our office only this morning because Dean, one of my team and I we went to an auction for a client on Thursday night. Now this agent, we have profiles of agents in our office, and this particular agent was one that liked smoke and mirrors, right? It's a bit like going to Luna Park into the mirror room, you know? What we do, have the special glasses on that go, "No that mirror is actually ... this is what really is in the reflection.”

Anyway, so this guy was trying to get us thinking that ... First of all he was trying  to get the client thinking there were other buyers, and it was going to be sold before option. The client rings us on Monday, the auction was going to be the Thursday.

He says, "Right can I engage you please? I'm out of my depth. This agent has got me to put forward an offer and I haven't even really worked out how much I think it's worth or what I want to pay for it." But he's realized the minute he's given that verbal offer that he's out of depth so he's gone and got help. 

So we just heard his story and went, "Oh you know what? I don't think there are any other buyers, I think he's manufacturing an offer out of you because he doesn't want to get to auction because that's when all bets are off. It would be really obvious to you that there will no other buyers."

Now we got to auction. So we dragged it out, we got to auction and we knew there were no other buyers in the room. You can't have dummy bidders these days, but you can have people there that you can talk to.

So it was in-rooms. There were four on that night. This was the first one, so the room was full. Our clients was going, "Oh God, there's all these people here. There's all these ..." I said, "Don't worry, there is no one here to buy that other than you. I can tell you."

And so, sure enough we were the only people that made the opening bid. We went upstairs, he even went to the extent of taking some of these plants in the room, taking them upstairs and putting them in another room trying to pretend that he's negotiating with them as well. So he went through this whole charade.

Now a “deal-doer” agent. So in our view that's the name we have for really good switched on agents, would have had a conversation with us in advance to say...

David Scholes: Absolutely.

Veronica Morgan: "You are the only one here. I've had other interests, however they're not ready, you are. You're in the box seat. You're here. We've got a vendor who's prepared to sell, let's do a deal." 

David Scholes: On that too, it's important even if you're not being represented as a buyer that you don't get worried that you are the only buyer.

Veronica Morgan: Yes.

David Scholes: I think some people, they panic. They think, "God why am I the only person that loves this house? There's got to be something wrong with the house."

Veronica Morgan: Exactly.

David Scholes: Nothing wrong with the house, it's just all sorts of circumstances. What you said is exactly right, if you have a good agent, and they built a relationship with all of the people who have shown interest in property they should be able to approach you and say, "Look, this is your lucky day. You're the only person here ...

Not the only person that likes it, but you're the only person here registered and able to do something tonight. Work with us and we'll see if we can't get a deal struck, our owner wants to sell it."

Rather than doing exactly what your agent tried to do and the agent that we bought our farm from tried to do. They knew I was in the business and still tried to pull the wool over my eyes.

Veronica Morgan: It's bizarre isn't it?

David Scholes: It is bizarre.

Veronica Morgan: Some of them just can't see beyond...

David Scholes: Yeah, I know.

Veronica Morgan: There funnily enough from a buyer's perspective they're the sort of agents that buyers fear. But in reality they're the ones that buyer don't need to fear. They need to fear the clearer agent, the smart agent, the professional agent. They're the ones they need to fear...

David Scholes: Yeah, yeah, that's right.

Veronica Morgan: ... not the snakey ones that will lie and cheat and all that sort of stuff because they make their...

David Scholes: They do.

Veronica Morgan: ... because you really ...

David Scholes: I certainly know, I think we're probably lucky in the business that I previously owned, auctionWORKS, that we do deal with the upper echelon of agents. We've been quite keen to cull the ones that we don't think are up to scratch. So I don't see that happening nearly as much as we used to see. So I think there is a better group of agents about now too.

Chris Bates: When you say, "Upper echelon of agents" what in your mind are good agents doing that the other ones aren't?

David Scholes: Well I think our industry probably suffers because it is a commission based industry. Therefore, an agent has to win the right to sell that property at any costs. That's the first part where this smoke and mirrors starts to take place.

I mean a lot of agents will promise the world. In the market that we've had over the last five, six years they've got away with it. I mean they promise the world, they come in with a ridiculous price and they end up getting it. So you can't really criticize them in a lot of ways.

Veronica Morgan: No.

David Scholes: So if they've gone in a little high that then leads on to them, particularly with the new laws, them then having to work in a different way than being completely upfront and straightforward with their buyers to try and find that one person who isn't knowledgeable on the current market trends and hope to goodness that they can get a ridiculously good offer generally before auction.

Chris Bates: I mean when you talk about the initial number that the vendor is thinking, "I could sell this place for $2 million because an agent's over inflated it to get the listing." Then the person selling it went with the agent that was going to offer them a ... or said they would get the most for it, because human nature is you go with that agent because they're the most confident.

David Scholes: That's exactly right.

Chris Bates: I mean from your point of view though, that's what I guess an anchoring bias for the vendor. They think, "I can get $2 million for this." That's, they're just thinking two million. The agent set a limit at two million, they have to get two million because they said two million, which is a random number. As an auctioneer though, how do you use anchoring to actually drag up the price as a technique to get people thinking I guess a higher figure when the auction hasn't even started?

David Scholes: How do you meaning, anchoring?

Chris Bates: So people generally when they hear a number that they start to associate other things to that number. So if you said, "Look, we're expecting to sell this at $2 million today" people are already starting to think of $2 million, and the bidding hasn't started. I mean have you used that as an auctioneer before?

David Scholes: No, no, no. No, I haven't. I generally ask a lot of questions of my agents before the auction starts, and I think most auctioneers do. So you want to know what the reserve is. You've got to see it in writing. Reserves are irrelevant. So the three things I want to find out is, A, what is the reserve? Secondly, what it's worth? Then thirdly, what level your buyers are at? 

Now, a good auction really means that A, you've got numerous people who want to bid, that's the first thing. If you do have multiple bidders at your auction it is actually pretty important to allow everybody to have the chance of competing on that property.

In fact, one thing that I really do get distressed at is when somebody goes in for that killer blow and literally wipes out a good auction because the momentum never gets built.

Sometime it's a good ploy, and you'd know that, if you've got the budget to do it, to take the risk and when the auctioneer first opens them out for an opening bid they go, "$2 million." They go, "Whoops, I didn't expect that to happen."

All of sudden the people who were there at maybe two, but hoping to get it for 1.95, they don't even put their hand in the air. But if they got a chance to open the bidding at 1.75 and then get the confidence of bidding and bidding, and bidding, and they've been battling against another person or another couple of people all the way up, they will probably go over $2 million just to try and secure it, you know? They often break their limits once they've got into the momentum of bidding.

Veronica Morgan: Yes, it's really interesting you say that because that's something that certainly we try to do as buyer's agents to disrupt that momentum and not allow it to build. There's many techniques that we use, one of them is that killer bid, the killer opening bid. But as for a bias, or a behavioral bias that buyers engage in or fall for, if you like, is that sense of consistency. The consistency bias and the idea of being that if you've bid once you're likely to bid again because it's showing that you're interested and that's the whole value of this momentum, isn't it? Is tapping into that consistency bias.

David Scholes: Yeah.

Veronica Morgan: So yeah, there's a really interesting example of it.

David Scholes: One thing we try and train our up and coming auctioneers to do is to not argue with people in the audience, not to argue with bidders. You've certainly got to be firm. You do have to be firm, but if at a level, even if it's below the reserve price, somebody's trying to make $1,000 bids and you want to be in a minimum of $10,000  bids, what's the point of having an argument? You might as well take the $1,000 with a smile on your face, turn to the under bidder and ask for an extra nine so that you get your 10 in two bids, not one bid.

Then that person feels happy with you, that person feels happy with you, and you start to get this momentum. Look, a lot of people come up to me after certain auctions and say, "Why do you let them go in $1,000 bids?" I go, "Well to prove why they're so successful because that thing just made 250 grand over the reserve price."

Sometimes a $1,000 doesn't hurt a person and if an auctioneer doesn't keep repeating the $2 million, but it's the 2,000,321, so it's the 321, 322, 323, 324. They continue to bid because it's only a $1,000. But if you're being pedantic and an auctioneer who stands there on his digs saying, "I'm not taking anything under $10,000 bids" you probably won't get a bid. And so, it can actually cruel a whole auction process. 

But getting back to the listing process. When I played agent for a little while, as Veronica knows, and Veronica would know this very well, it is really important for an agent to know why an owner is selling the property. 

You know, the funny thing is, most agent's think it's all about price, and it's not all about price at all. I've never met anybody that wakes up one morning and says, "I'm going to sell my house because it should be worth $2 million."

They're going to wake up and think, "I'm going to sell my house because it's too big or it's too small or I hate my wife." There's always a main primary reason. If you're really comfortable in a house you're not going to sell it, unless you got debts that you can't service.

So the $2 million is irrelevant because it's the second thing in the owner's mind when they go to speak to agents. I think agents are very smart if they can have a conversation with the owner and at least ascertain their reason for selling, and then price becomes somewhat less in that discussion.

Chris Bates: So you're saying the good agents out there are not pitching on price, they're trying to understand what the seller really wants from seller's point of view...

David Scholes: Absolutely.

Chris Bates: ... or why they're even trying to help facilitate that, rather than...

David Scholes: Absolutely.

Chris Bates: ... just decide on price.

David Scholes: You know, I think also a lot of agents if they get the opportunity of offering a mortgagee in possession or a deceased estate property, they get so excited because they really think the campaign's in the taker of itself, because there is an absolute need to sell.

It's the other funny thing that all these buyers queue up because they think they're going to get a bargain, but in reality that creates the perfect auction scenario...

Veronica Morgan: Definitely.

David Scholes: ... because of having two bidders, you have 17 bidders and it will always make a premium price.

Chris Bates: Yeah, I remember seeing some crazy thing on TV, it was Today Tonight or something, "This property is selling with no reserve." It was all over the news, like it was a big thing, "This property's not going to sell with no reserve." I mean fundamentally it was a hot market and it was always going to sell...

David Scholes: Yeah, yeah. Yeah, of course.

Chris Bates: ... and then all of a sudden it's like, "We're going to get a bargain because there's no reserve."

Veronica Morgan: We used to joke that the best thing you can put on an ad is, "Deceased Estate."

David Scholes: Yes, exactly. That's right.

Veronica Morgan: And the reality is not quite the case because quite often you've got five beneficiaries all wanting too much money for it.

David Scholes: That's right.

Veronica Morgan: It is about that, that it's opening up and making people feel that they've got the opportunity to buy this, isn't it?

David Scholes: Then step back a little bit because the auction process was never designed for real estate. It was designed for products that had a shelf life, so livestock, dairy, fish, anything that is harvested and it's brought into a central area and the farmer can't bring it back home, he's got to sell it.

Veronica Morgan: Wow, yeah.

David Scholes: What he hopes for is a good market where there is a lot of buyers that want his products, and demand will force a premium price. Houses aren't necessarily like that because they don't have a shelf life. They've been there for 40 years, they'll be there for another 240 years

I think people have got to understand that you've got to drill down and work out firstly why the owners is going to sell. I think it's ... not playing agent, but I think I generally at my auction the last thing I want a buyer to hear as I'm asking for that opening bid is that, "Ladies and gentlemen the owners are here to sell this property. It's surplus to their wishes and they've given to us a good price." That then gives the confidence of the buyers to go, "Oh happy days. I can have a crack at this thing."

Veronica Morgan: I love the, "Surplus to their wishes."

David Scholes: Yeah, you've heard that once or twice, haven't you?

Veronica Morgan: I've heard it few times. Auctioneers do tend to come up with interesting vernacular, don't they? There are lots of strange things that auctioneers say. They use strange language. I mean you don't necessarily, you're pretty down to earth language, but why do you think some auctioneers speak in this sort of language that is not really common parlance? It's not the way you normally talk.

David Scholes: Yeah, look there is a little of a fine line between sounding like you know what you're doing and sounding like you don't know what you're doing because it is really is important too that ... and this is about body presence and everything, but I think if an auctioneer doesn't look and sound the part they're not going to get the respect they need to get the job done. But you're right, some auctioneers tend to bring in these words and sayings and things which really confuses everybody and does really no good for the process whatsoever.

You see I've always said, "You've got to connect with the audience. You've got to build a rapport with the audience immediately." That takes empathy, which is a word I use a lot when I'm training people. Empathy and humor I think, as long as it's not overboard is something that breaks the ice a lot. 

I think most auctioneers have got their funny little one-liners that they know when to drag them out because it will get a good response. It'll get a little giggle and it'll make people feel good about the process.

Veronica Morgan: And relax. 

Chris Bates: When you say, "Empathy" I mean are you referring to different types of buyers?

David Scholes: Mm-hmm (affirmative).

Chris Bates: Are you showing that if it's a person trying to buy a home versus an investor, do you ever think that that ever plays into an auctioneer's mind when they're actually helping?

David Scholes: No. Look, one of the questions I ask is, "You're expecting five registered bidders. You've got five registered bidders, what are they? Investors or owner-occupiers or mainly owner-occupiers?"

More than anything I don't necessarily need that information because I'm wondering what sort of psychology I should use on individual people, because I won't even know who they are. That's not as if they wear a hat saying, "I'm an investor."

But it's more because then I know to bring in words like, "high yielding opportunity." Or “the agents tells me that this property should return approximately 750 to 800 dollars per week.”

Whereas, if it's all owner occupiers, that doesn't even into my spiel. I think the word, empathy for me is more just understanding that ... and this is what a lot of people don't realize, we're asking people to bid in a public auditorium for no more than three or four minutes for a product that could potentially be worth $10 million. So we're getting them to spend a lot of money in a very, very short period of time.

So logically I'm going to put myself in their shoes and live a little bit of the stress that they're going through. It's not easy for buyers to front up, particularly first-time buyers, and to stay in control. I think I've done pretty close to 40,000 auctions now in my career, and when I go and bid on a property myself I do not like the experience.

Veronica Morgan: No. 

David Scholes: I really don't. I don't know how you go, Veronica?

Veronica Morgan: I don't bid for myself.

David Scholes: No. Oh don't you?

Veronica Morgan: No.

David Scholes: Oh don't you?

Veronica Morgan: Because I hate it. I feel the elephant, so this podcast is called The Elephant In The Room. The elephant is the metaphor for our emotions, and I'm the little rider on top of the elephant. If that elephant wants to go left and I want to go right, guess where we're going folks? We're going left.

I know during an auction that under stress I can be as victim to all of that same stuff that's going on, as a buyer that's unrepresented. So I want to do what I do with my clients, which is pressure test their resolve before we get to the auction, so we don't have any of that stuff going on during the auction when FOMO or fear of missing out is at its height. But it is interesting...

David Scholes: Is that what FOMO stands for?

Veronica Morgan: Funnily enough, I've used it so many times I've been asked to explain it, so therefore I do it now, so FOMO, fear of missing out.

Psychologists will say that a good decision ... it's difficult to make a good decision under pressure. It's difficult to make a good decision in a short timeframe. Now obviously that's what you as an auctioneer is going to play on, the fact that they're under pressure to make a decision in a short time. Do you think there are some people ... Tell me your observation I guess of the different ways people respond under pressure during an auction?

David Scholes: Oh it's a vast difference. I mean we get the smart arse who turns up with the dark glasses and leans against the wall, you know doesn't listen and talks during your opening spiel and all those sorts of things.

Chris Bates: Do you like them as an auctioneer?

David Scholes: No, I want to chuck a brick at them, but generally speaking I just ignore them. They're the character who hates to be ignored. So if you ignore them you're going to end up getting a bid from them because they get frustrated, and you just don't even look at them, and they're finally going to wave at you.

Veronica Morgan: "Look at me. Look at me."

David Scholes: Yeah, but I would never ask them for the first bid, ever. It's just no point because again when you look at somebody in the crowd and you ask them to make a bid you've only got one or two things is going to happen. You're either going to get a positive or a negative, and negatives don't necessarily help. They can become a little contagious and a lot of people will then sit back.

So I mean I use a little catch cry, which I use quite regularly that I look at somebody and I say, "Come on sir, you don't look like you're scared of a bit of competition. You've got your sleeves rolled up. You start the bidding and you're going to get my favoritism. That's really important, isn't it?"

Look, I won't say nine times out of 10, but seven times out of 10 I will get a positive response. Often it is too low, in which case then I have my own little jokes about, "What bit of the house do you want to buy?" All of those sorts of things.

But I think it's really important for us to get a response of some description which is positive. It might not be at the level you want, but it is at least somebody coming to you with an offer. If it's too low you can very politely knock it back, but at least the audience has heard something.

So looking at those individuals, their body language, the way their response ... it's so good, you know you're doing a good job when you look out and the people are nodding with you as you're talking about the property or the contract. You know you've got the audience engaged. 

Then as soon as I'm in that position I know for a fact that we're going to have a result. It might not be a sale, but we're going to get it to a high point where we've got somebody to talk to at the end of the auction.

That's the other thing, an auctioneer, their job is, it sounds a little silly, it's not so much to sell a property, it's to find somebody who has got more money than anybody else for that particular property or product on that particular day. 

We, Veronica, you know this when you were playing agent, we often know prior to the auction that there is one group that has more money than anybody else, you know. They've they made all the right overtures, and a good agent will pick the fact that they are the ones that are ultimately going to own the property. The problem is we don't have the competition to push that person to their highest potential price.

So we then as agents and auctioneers need to make sure that we protect our owner's best interests by not necessarily taking their best offer at auction, we might pass a property in and negotiate afterwards and try and get them up a little, or do it while the auction is still running, which is much a better system. 

It's as simple as the agent going across and saying, "You're nearly there. Your bid is 1.2 million. The reserve is, look there it is, it's one 1.3. If you can pay the 1.3 it's yours." They'll sometimes meet you in the middle, won't they?

Chris Bates: Mm-hmm (affirmative).

Veronica Morgan: It’s interesting you say it's better to buy under the hammer under those circumstances, better for the vendor or better for the buyer?

David Scholes: I think it's better for everybody. I think it's really important for the vendor obviously, but I think it's really important for buyers to buy, let the hammer fall, because you know then, like the owner does, that you've got a contract that's in play then and it's an enforceable contract.

You can sue an owner who decides to try and get out of the contract as well, as long as that hammer falls. Then there is no backroom dealing. There is no gazumping. There is nothing else that can literally go wrong, as long as you sign the contract and pay the deposit it's your property, you can go out there and get on the squirt and enjoy yourself.

Chris Bates: Interested to know when you're actually running an auction, what are some of the things that some of the bidders do that you think, "This guy knows what he's he's doing"? Or, "This girl knows what she's doing." The techniques that they use where you think, "This is really slowing down my momentum. It's not great." Can you kind of pick a few out that maybe you think that, "I know this person's really controlling the crowd better than me"?

David Scholes: Yeah. Yeah. I think the ones that probably do control the crowd the best are funnily enough the people who don't have the emotional attachment to the property. So investors, generally I use this analogy that, competitive investors and home owners, home buyers who are going to occupy the property, one is an emotional buyer, the other one is really concentrating on bricks and mortar and dollars and cents.

Really they know that their best return is at that price, and once it goes a $1,000 over that price, "I'm not interested. I'll go and find something else." Particularly investors that have a portfolio and they're building that portfolio. They don't have to just buy the next property that's up for grabs. They tend to be the ones that control that auction environment the best because they are confident, they have a limit in mind, and they work to that limit. They don't back off, they go hard to the limit and then they just stop dead. They literally stop dead. 

Veronica Morgan: Running to the cliff.

David Scholes: Yeah, pretty much, isn't it?

Veronica Morgan: Yeah.

David Scholes: The ones that I worry about, and it's not really a worry because it's not my property, it's not my vested interest, but I do get concerned about first home buyers who don't bring an experienced head with them to an auction, and they just get lost, you know?

Veronica Morgan: Mm-hmm (affirmative).

David Scholes: And I've seen it so many different ways, but I see it where they overspend, and ridiculously overspend, and I see it where...

Chris Bates: How do you know they're overspending?

David Scholes: You can just see the panic on their face, but they won't stop. In fact, I've stopped an auction more than once and said to the young couple who were there, "I just suspect you're over your limit, and I want you to think about this." After the auction the owner actually came up to me and said, "Thank you for saying that because I was really getting concerned about them too."

Veronica Morgan: Wow, I think that's pretty good.

David Scholes: But, I've seen them too where they just won't bid, they just...

Veronica Morgan: They freeze.

David Scholes: ... they freeze. They literally just freeze and they lose the opportunity of buying a reasonably well priced property.

Chris Bates: In that scenario have you found ways where you can get their confidence up to actually make a bid?

David Scholes: Yeah. Look, I have. There's lots of ways that an old, mature head like mine can to get people to operate. It's not calling, counting and threatening, and carrying on. Generally speaking I'm now very upfront with things so that if we've got limited amount of interest on it is inexperience, I'm more inclined to do what Veronica was sort of saying, is to have a chat to them. 

Not literally talk to them but in a public gathering to say to them, "Look, if you start the bidding at $700,000 I promise you that's not going to own it. I promise you that. So you've got nothing much to lose and if nobody else beats your bid I'm going to pass the property aside, we're going to ask everybody to leave and you're going to have the first chance to negotiate after the auction. Would you say 700 for me?" They go, "650?" I go, "No, no, no, it's got to be 700." "Oh okay, 700."

What that does is to take a little bit of the pressure away. This does sound a little bit hard, but as soon as we get that opening bid of 700 I can then turn around to the next person who was refusing to bid and say, "Look, guys you can't sit there doing nothing anymore, if you want to buy this property and you have got 700,000 or more, you're going to have to compete with that person there, otherwise they're going to win the first right to negotiate." "Okay 705." As soon as you've broken the ice generally it'll get a wriggle on. 

Veronica Morgan: Broken the seal. I mean it has to be, the first bid has to be the hardest to get right?

David Scholes: Yeah. Not always. Again, this is a transitioning market. I mean I don't know that for a fact, but this is what I'm seeing.

Veronica Morgan: Well we're all experiencing that, yeah.

David Scholes: Yeah. It's a transitioning market and this is now where you need to pull every trick out of your auctioneer's bag to get a reasonable result. As I keep saying, a result doesn't necessarily mean a sale, but it means that you've found somebody who you can talk to immediately after the auction is finished.

That's really an important thing for auctioneers too. If we've got registered bidders there we can't walk away without having a bid recorded so that the agents have got somebody to talk to.

Veronica Morgan: It is really interesting isn't it, because you've got social proof which can be a real problem in a hot market in that buyers will look around and go, "Well it must be worth it because all those people over there are bidding." 

Then you've got social proof which is a problem in a slowing market because buyers looking around, they want reassurance from other buyers. They don't want to be the only mug to like the property, and it's very much about those conversations. 

You're talking about how the agent talks to them, how the auctioneer talks to them. I guess, how many wasted opportunities would you see currently, in a slower market, wasted opportunity in the sense of buyers getting in their own way, stopping themselves just because of this pure fear?

David Scholes: Look, I see it a little bit, but I'm still seeing more on the owner's side of the equation. This is the problem with this market at the moment, it's as if owners don't read the same newspapers as buyers, and owners are still expecting a premium and buyers are expecting a discount. 

So the difference between those two prices is getting wider and... that gap is widening, and it's getting very difficult to put together. So today actually, and I suppose because of my age and maturity I can get away with this a little bit more and because we do control the commercial auction market in Sydney to a fair degree, in fact we do the bulk of it. So my face and Jesse's face is quite well-known. 

I said today on a property that was worth in the agent's estimate 6 to 6.5. The reserve was 7.8 and the bid was at $7 million, and the owner was saying, “no”. The buyer got up and said, "This is ridiculous." He didn't use that word, he actually used a different word, and started to leave the auction room.

I said, "Wait, just wait" and he stopped, and I turned to ... I didn't know who the owner was, but I said to my owner, "There goes your deal walking straight towards the lift. Now this is a cash offer on the table, for goodness sakes consider it. You've owned this property for 35 years." They finally came and said, "Okay, we'll take it."

That was, you see these deals going missing because of this expectation or this greed that owners are currently experiencing. The stupid thing is, the market actually in my opinion, residential market, hasn't really dropped in real terms, I don't think. It's just taking a lot more time and effort to get to the same figure that we were getting in the middle of last year. But owners have got to realize that if they're selling now their timing is actually pretty good.

They've gone through four of five years of incredible growth. Their properties have basically doubled in value, and now they're quibbling for a premium on top of it all. It's just, if they want to sell their properties, sell it. Now is the time to do it. It can really only get worse, in my opinion.

Veronica Morgan: It is really interesting because my theory is behind or underneath the auction clearance rates is this mismatch between expectation and delivery. There are buyers around. I mean a clearance rate in the mid 60s basically means you've got a buyer for every house, that's fundamentally, effectively what it means.

This is the definition effectively of a transitional market in Sydney anyway. Is that expectations of owners are always in excess of the market, always.

It's just in a rising market by the time they get their property on the market and to auction day the market has actually risen to meet the owner's expectations.

And so, what happens when the market slows is that you've got expectations for the vendor are still high, not rising in terms of the general market, so therefore there's a mismatch. So if the vendors, like you said, read the same papers the buyers were reading, then potentially we could still have high clearance rates.

David Scholes: Yeah. This whole myth about clearance rates does my head in. It's like it's the number one...

Chris Bates: Indicator.

David Scholes: ... statistic, indicator of the property's health, and it's not a fair indicator at all. It's just nonsense that you know, when the clearance rate is at 70, 72% everybody thinks the market's on fire, it only has to drop to 60% and all of a sudden the market is dead. It's just, it is a silly ... I wrote an article actually about how the media should rely upon every indicator, not just clearance rates, but they still do it. 

Chris Bates: You mentioned ... I mean I'm fascinated by technology and technology is revolutionizing many industries. Real estate is one that's changing. I know you're doing some work around auctions and technology, can you explain a bit more about what you're doing there?

David Scholes: Yeah. Look, I think we've probably been at the forefront of technology across the board. I've always been conscious even though I'm absolutely inept at technology, but I'm very conscious to ... It's a bit like the empathy of a buyer, we have got to make it as easy as possible for a buyer to compete at an auction.

So we have to make it accessible to them, and make it as comfortable an experiences as we can. So six, seven years ago I developed the first online auction platform in Australia for real estate where there is no interface with an auctioneer, it's purely online bidding on a keyboard or a smartphone. We run our auctions over days, not minutes. We can have a five day auction, which actually straddles the last open for inspection and-

Chris Bates: Like a test match?

David Scholes: It nearly is. It nearly is. It's probably more exciting though than a test match. As auctioneers, we are allowed to have a starting bid, which is not a vendor bid because that's the bid that we wouldn't allow it to start under because we don't think it's in the best interests of the vendor.

The vendors can still have one vendor bid made through the auctioneers and everything is still completely transparent, but people can bid from the comfort of their own home or office, basically 24 hours a day, seven days a week.

When it comes into the last five minutes of the auction, everything's up, you can see. We even tell people when the property's on the market, when it's reached reserve. So every time a bid is made people can see that they're holding the highest bid, but the reserve is not yet reached and there's still 15 minutes to go in the auction.

We have SMSs going out. It's a very smart, simple way of conducting auctions. The results we've had are quite outstanding. I mean the  government, New South Wales Government uses our system reasonably regularly. They did a portfolio of property across New South Wales for residential property that they didn't have any need for any longer, certain departments, I'm not which departments.

Veronica Morgan: Surplus to their needs.

David Scholes: Surplus to their needs. Thank you. Even in Broken Hill, now Broken Hill, lovely place, but you wouldn't expect to have anybody turn up to a residential auction if you did it on a Saturday morning. We had five registered bidders and it made 30 something thousand over the reserve price, and not one of those bidders came from Burke.

So it's just a new format. It's well proven, it's not new new, but it's just a way that I think gives another avenue for our owners and agents to do maybe look at a different selling technique.

Chris Bates: I mean there’s quite good foresight to disrupt yourself almost. You're basically building a tool that no longer needs auctioneers.

David Scholes: No. Look, I'd have to say because people say, "You're cutting your nose off to spite your face" but I don't think it'll ever take away from the on-site, inner city auctions or the in-rooms campaigns.

I think there is still definitely a big need for a quality auctioneer to engage the emotions of people. This is more for commoditized goods, so units. The unit market is absolutely perfect for this platform because you know what the value is. You know that there's 32 units in that building. They're all two bedrooms and the mean average price has been $768,000. So you start the auction at 740, which is a bargain, and you ended up selling it online for 770, you know what I mean?

Veronica Morgan: So it's a way to ... Well A, it's opening up new opportunities or new markets for auctioning property, as opposed to the traditional private treaty market...

David Scholes: Exactly our main market.

Veronica Morgan: ... so you're sort of extending into a different marketplace rather than ... I mean the reality is if Nokia had got into smartphones you know that, they wouldn't be ... They're out of business aren't they?

David Scholes: Yeah.

Veronica Morgan: Or Kodak, there you go. So yeah it is disrupting yourself is always interesting from that point of view. So this is opening up the idea of property auctions into markets that wouldn't typically go to auction, but you're putting a deadline or a timer on it, a sense of urgency. 

This is the idea behind it, right? So it's actually getting a result. What you're saying is that quite often it actually gets a surprising result, it actually gets more than you would have expected say if you put a price, an asking price on it.

David Scholes: Yeah, exactly. I think too the psychology behind it, and there is a definite psychology on online bidding, it's quite amazing. But in the last ... like if the reserve hasn't been reached, probably the best thing that we built into this thing, is that if the reserve's not reached the highest bidder when the clock counts down the end minute, immediately gets to see the reserve price on their screen with a button to say, "Yes, I'll take that. I can increase the offer and buy the thing without any further competition."

Veronica Morgan: Right.

David Scholes: Now, that creates competition, but it is...

Veronica Morgan: Or creates urgency, do you mean?

David Scholes: No it creates competition because if I'm bidding against you and my limit is 700 and yours is 700, the bid is and the reserve is 700, for the sake of the argument, and the current bid is 670 and it's stating that the reserve is not reached...

Veronica Morgan: Right.

David Scholes: ... it's not my bid, I know full well that if I stop now you're going to get to see the reserve, and that reserve could be 675. I don't know what the reserve is. So I've really got to really bid to my limit to make this thing ... to give it the best chance.

Veronica Morgan: Interesting.

David Scholes: So it's still not a silver bullet, it's not. If you've got no registered bidders it's not going to work. But the other thing too I think gives owners ... because auctions are an incredibly emotional time for owners too. You don't see it anymore probably very often, but most owners don't want to attend the auction. They just want to be in the coffee shop, but we need them there. I mean you've got to have them and they hate it. They really hate that experience. So this is...

Veronica Morgan: There're hiding somewhere in the house-

David Scholes: Exactly.

Veronica Morgan: ... with the curtains drawn.

Chris Bates: And eventually it goes $200,000 over reserve.

David Scholes: Well then they're quite happy, yes.

Veronica Morgan: Jumping up and down, yeah.

David Scholes: But this is a much lower impact for people. It just takes the stress out of the auction process. So look, I think you've hit the nail on the head, it's not really going to take away from the style of auction, it's going to be an adjunct to private treaty transactions, particularly EOIs, which I've never quite understood.

Veronica Morgan: Expression of interest, that is, yes. 

David Scholes: I know. Yeah, that's an expression of interest, yeah.

Chris Bates: I mean I don't know if it will, I'm quite confident that there's been these type of apps have come out in the U.S. especially in hot rental markets to push up rents, because if you're renting a property out, the agents so much can't really say, "Who's going to give us the most rent for this?"

But generally speaking, someone offers $50 a week more and they happen to get it. I mean and gamifying the whole bidding process online, human behavior, it probably works quite well. Have you noticed all that?

David Scholes: Yeah, I have. It's quite funny, I was saying I think in the last five minutes if a bid is made the clock extends to a full five minutes, so you know?

Chris Bates: Yeah. Nice.

David Scholes: You don't get into snipe. So you might say the auction's going to end at 2:00, it might not end until...

Veronica Morgan: To 3:00.

David Scholes: ... 2:30 or...

Veronica Morgan: Oh keep going, right?

David Scholes: Well we've had one and the longest one, it ran for two and three-quarter hours after the official end time.

Veronica Morgan: Wow.

David Scholes: But it made 3.1 million over the reserve price.

Veronica Morgan: So this is the equivalent of being in-rooms or on-site at auction when it's over the reserve and they're just fighting for the death to own this property.

David Scholes: Yeah, exactly.

Veronica Morgan: Right. They're actually doing it online in their own dark little room.

Chris Bates: You don't get five minutes in a real auction, you get five seconds.

David Scholes: No, no, no, exactly.

Chris Bates: And so, five minutes is enough to think about things. You start getting your emotions. You get this loss aversion. The opportunity cost of, "What happens if we don't get it? I'm going to feel regret."

David Scholes: Yeah, that's right.

Chris Bates: I guess it's the lane that is longest.

Veronica Morgan: Taps into all that. 

David Scholes: That's at auction too. It might be a property that you need to renovate. So you've got a quote from your builder. You've factored that all in and you know that you can only bid to this level. On an online auction, as it's going, and you're going, "It looks like I'm going to run out of money."

You ring your builder up and say, "What can we do to bring your cost down a little so I can buy the property, because if I don't buy it you're not going to get the job?" They go, "Well how about of you put off doing that floor finish for the time being or doing this or doing that?" So it sort of gives people time. 

Look, the frustration I have at the moment is that agents haven't embraced it properly yet. I don't know that they're scared of it because I'd say it's not a disruption because it's a tool for the agents. We're not going directly to owners, but I wonder why more agents haven't tried it out in the rural market, in those areas that people don't travel to auctions as a rule?

Veronica Morgan: I have to look this up, there was one, someone else, I'm not sure if they're associated with you or themselves have set up a platform for online real estate auctions and they had a house in Lilyfield, and Adrian Oddi who's at BresicWhitney in Balmain, he sold it and it was an online auction for it at the time, it was a few years ago now, and it did get a ridiculous price. It got about 300 over what was expected and I think it sold for about 1.8. So we would have thought 1.5 from memory.

David Scholes: Was that on Victoria Road?

Veronica Morgan: No. No, no, no. It was in Ryan Street, I think, in Lilyfield. I'll have to look it up, so you don't know it.

David Scholes: Yeah. Look, we were the first where there's others, they've sort of come in, but I think yeah, there is another group, but I haven't seen anything in those. We do the development side

Veronica Morgan: But they haven't come back. We've seen nothing more, so it was actually the owners. So this guy had just basically dummy tested his own product on his own property.

David Scholes: Right, right.

Veronica Morgan: I mean that's faith, isn't it?

David Scholes: Yeah, yeah, yeah, it is.

Veronica Morgan: And it got an amazing result and yet nothing, there's been crickets ever since. We've never seen it come up. It hasn't got any traction, so it's quite interesting and I wonder whether that's an agent...

David Scholes: For us it's been frustrating. But luckily it's not my core business so it hasn't been a problem. So we've paid for it, it's built. It's incredibly expensive to build that sort of technology, but it is built, it probably needs to be modified and renewed fairly soon, but that's okay, we've got the technology now. But it doesn't cost very much at all to keep running. So it's not like we're not making money from it. So the more we get, the more successful it will become. 

Chris Bates: I mean one of the things that frustrate investors, buyers, home buyers the most is the transparency around the real estate market and not knowing what something is actually going to sell for.

David Scholes: Exactly.

Chris Bates: I mean I guess what this does do is brings transparency and you might time that on a Friday afternoon, so it might kick off people's wanting to get this sorted before the weekend. I mean I can imagine someone like in a realestate.com.au or Purplebricks or something would. You know, it would be a...

David Scholes: Yeah. Look, we're talking to a couple of them at the moment. In fact, we've just finished building a different platform which now takes ... this is the exciting part about technology I think, is that we can now transact from end to end without a piece of paper from campaign start, through exchange, to settlement, is all done online.

Veronica Morgan: And that's moving into electronic conveyancing?

David Scholes: Exactly. Electronic conveyancing is going to revolutionize, in my opinion, real estate across the board, because you take your investors, and this is one little frustration I have with residential property investors, for some reason the vast bulk of people who only owned one investment property or maybe two, they want to have it next door to them. They want in the same suburb...

Veronica Morgan: Yes.

David Scholes: ... which is so dangerous, in my opinion, because it's not divesting your risk. Whereas if you had these tools, so there's another tool that my old company developed, was a yield calculator. So not on the online platform, we can bring it in, but in a commercial auction room you see the bid as well as hear the auctioneer, and then right next to it says, that bid equates to a 6.8% return...

Veronica Morgan: Interesting.

David Scholes: ... net return. So an investor a ... and I'm not saying residential investors aren't true investors, now don't please get me wrong, but in a commercial investment sense they are much, much harder on the physical returns that they're going to get.

So if they see 6.8% they go, "I'm comfortable" and they have another bid. Then they start stopping at 5.5 because they're suddenly thinking, "Well at 5.5% I'm not comfortable enough to think we're going to have all that capital growth to make that a wise investment" so they actually stop bidding. So that transparency and the tools that we've now got will make, I think buying investment property in Australia and abroad, but in Australia, much easier and much more confident for people.

Veronica Morgan: Every week we hear incredible stories of the dumb things property buyers do. Dumb things that end up costing them a lot of money and/or creating a whole lot of stress. Mistakes that can be avoided. Okay David, help us out here, gives an example of a property dumbo because we can all learn what not to do from these examples.

Chris Bates: So look, the Dumbo of the Week, if that's what you're after?

Veronica Morgan: Yeah, I'm after one.

David Scholes: Is the people who don't do their homework and live to regret it. And the homework... Look, you'll have heard this a million times, but  but if you're buy at auction just understand that you've got to be organized and you've got to be financially secure. You've got to have the money to actually settle the matter.

So it is absolutely critical because there is no cooling off rights at all at an auction, that you have done your homework, your due diligence, and you are completely comfortable with the product you're buying, with the area it's in, and with your capacity to be able to actually finance that arrangement.

You know, you saw this as much as I did, and we used to giggle about it, people would come in five minutes before the auction started, register and buy a property. Now...

Veronica Morgan: Unbelievable, but true.

David Scholes: ... I cannot believe that they did that. It's beggars belief, and again, it's splashed across every media outlet you ever see regarding the current market. But it's even factoring in how it's going to impact your life if interest rates move by 0.5%, 1%, 1.5%, 2%. It's a matter of being able to have safety and a barrier for some discomfort down the track. 

Chris Bates: I mean you've been doing this job for a long time, and has it always been this way? Because a lot of people talk about the property market and they say, "Oh it's all crazy at the moment" but was it crazy 20 years ago? Were people doing these same crazy things 20 years ago?

David Scholes: Oh yeah. Yeah, yeah. Look, I think I've been through four cycles since I've been in Sydney doing this real estate, potentially five. There's been a sort of a small fifth one that I think you could sort of say was a cycle. What I say by cycles, we don't generally see much downward movement in property prices, they just of stagnate and plateau and then in another five or six years it gets another spurt. 

That spurt might be driven by government incentives, interest rate drops, whatever it might be will then spur that next wave of growth. But in that time every cycle I've been through has had an area of ridiculous heated buying activity.

Now, it hasn't lasted for nearly as long as this last one, in fact, mostly it's under 12 months or around about 12 months. This one has just gone on for a lot longer than anybody expected, but they're always the same. This one has been a little bit more intense I think.

Chris Bates: And out there in Sydney I mean I guess you see things that I guess are concerning. Is there any parts of the Sydney investing in general where you think you're worried about what people are doing?

David Scholes: Probably not so much anymore, I was worried 12, 18 months ago. I was quite concerned about how feverish the market was, and I saw mistakes. I saw a lot of mistakes. We'd walk away, everybody shaking their head saying, "How on earth will that couple ever get out of that property?" And I don't think they ever will. They just paid such a premium that it could be 15 years of growth, and they won't get their money back.

And see, we're seeing that even now, where I did one just the other night, where a person took a $100,000 less than they paid for the property 12 years ago. So 12 years ago they must have paid a ridiculous price for it, 

Chris Bates: Wow.

Veronica Morgan: Yeah, which suburb was that in David?

David Scholes: That's the eastern suburbs.

Veronica Morgan: Yeah, so this is a thing that people really feel that they can't go wrong in these inner areas and you can. You can absolutely go wrong. I mean there's less chance of it, but it does come down to what you pay, doesn't it? If you pay a stupid price. 

David Scholes: Really? Yeah.

Veronica Morgan: But interestingly enough ... I mean because you also do auction in Melbourne and in Brisbane, is there a big difference would you say between the way buyers are or the way that they behave in the Melbourne, Sydney and Brisbane markets?

David Scholes: Brisbane, we bring most of our Brisbane property now to Sydney or to Melbourne and do it in our Sydney rooms but have telephone bidding from interstate. Melbourne...

Chris Bates: Is it mainly for commercial or residential?

David Scholes: Yeah, mainly commercial, pretty much a 100% commercial actually, yeah. So that's where I go. I do a tiny, little bit of residential in Melbourne. I do a bit in Canberra, not a lot, a little bit in Canberra. Canberra is now becoming a much more auction oriented city. It wasn't, it was hopeless, it really was, but it's now getting into the groove. Melbourne is completely auction centric.

Veronica Morgan: Oh massive, yeah.

David Scholes: But Brisbane, you cannot get them to bid if it's up there.

Veronica Morgan: I've noticed that.

David Scholes: I mean they will compete so furiously at sport and everything else, and they're so parochial and proud, these Queenslanders... but they won't make a bid at an auction. It's just ridiculous. 

Veronica Morgan: So why are agents selling auction as a method under those circumstances? What's the game for them?

David Scholes: Well I think it's going to start probably where it was in a city, where the lifestyle issues made it a little bit more attractive to take properties to auction, and it's just an educational process.

I mean you'd have heard this a hundred times too, "Oh we don't auction property out here, people don't like them." Well they'll like them soon enough once it's done enough and people get used to the practice.

I'm like you, if they conduct it properly the transparency of the process makes it a better buying experience than private treaty transactions for the buyers. I mean I often say at my auctions, you'd have heard me say it, "Look, a lot of you have probably been to an auction before and probably not liked it. But the really good thing about the auction process is the transparency which you don't get at private treaties. You wouldn't know what's going on."

Veronica Morgan: That's very true. When you're negotiating on the end of a telephone you've only got the agent's word to take. Well look David, I think that the insights that you've been providing, have been absolutely amazing. The depth of  knowledge and experience that you've got and as I said, I personally learnt from you. I mean my founding years in real estate where all my auction smarts were taught by David Scholes, so I've got a lot to thank you for. 

In particular, I mean I've noticed the seven steps to an auction, well that's funnily enough I wasn't aware that it could be broken down to seven steps, I'm going to have to jot those down.

Chris Bates: Anything you can provide for our listeners on that? Do you have any documents?

David Scholes: Yeah, I've got a fair bit of information about contracts. I've got a whole ... well Jesse owns it now, so we'll have to make sure he's okay with it, but it's a PowerPoint presentation just literally on contracts. 

Chris Bates: Oh cool.

David Scholes: They're all on contracts. GST has been in this country since 2000. 18 years it's been in this country and today a commercial auction is like every other Tuesday that I've had, where not one, but two contracts had no mention of what the GST implication was going to be.

Chris Bates: Ah so that means bidders are bidding not knowing whether it's going to be the price they're bidding or add 10%.

David Scholes: Yeah, exactly right.

Chris Bates: And they're still bidding even though they don't know.

David Scholes: Well funnily enough, I sort of feel...

Chris Bates: You picked up on.

David Scholes: ... that's a pretty big indication from an agent, they float through a five week campaign and nobody queries the GST-

Veronica Morgan: And they had no conversations with their buyers.

David Scholes: ... so there's no interest I would have thought, and they wonder why nobody turns up.

Veronica Morgan: Yeah, either if you've got someone stupid who's got way too much money or you've got...

David Scholes: Yeah, yeah. 

Chris Bates: That must be your most frustrating thing, right, when you rock up and there's no bidders, no one? Some agents just try to ... You're like, "Come on mate, it's a good property." You just ...

David Scholes: I know, I know. That is frustrating, it really is. And then of course, if they don't get it right in the first week, the chance of them having competition on that final Saturday, it buckles because you can't get organized in a week or two to actually go to an auction and bid on it. 

Veronica Morgan: It is critical.

David Scholes: It is, isn't it? Yeah.

Veronica Morgan: The whole marketing campaign is ...

Chris Bates: Yeah, that's right. If you don't get it right at first then start sticking around, people have already ruled it out.

David Scholes: You remember in the Balmain market all that area...

Chris Bates: Yes.

David Scholes: ... Rozelle, Balmain, Lilyfield? I reckon you and I had an 18 month to two year period where we pretty much sold everything, didn't we at auction?

Veronica Morgan: Yes. In fact, I remember it very clearly. So I started in the beginning of 2000 and it ran till the end of ... so September 2003, and that's well documented to being the end of that boom. But what happened at the end of every year was going into spring we started passing properties in, but 2001, so if you remember, I remember, I had a 100% auction clearance rate up to September 15, 2001. Now if it hadn't been for 9/11 that could have run to like the end of the year. A 100% clearance rate and it was just phenomenal.

I mean the glory days. I'm lucky, I mean I started in my property career in a boom and I'm lucky that was able to get some good skills in that time because of what I'm looking at now are the agents that have came into the last boom and aren't necessarily enjoying the fact it's a little bit harder for them now.

David Scholes: No, no, and because this cycle has lasted as long as it has we've got a whole group of young agents that have never experienced a bad day, and they haven't been trained for it. Their knowledge of a tough market is going to make it quite difficult for them to succeed, I think, and I don't want to put them off, but it's desperately necessary for them to go out and start speaking to some old heads that can tell them what they can expect and how they can get it through.

Veronica Morgan: Well we'll have to get them listening to this podcast.

David Scholes: Exactly. That's right. Thanks guys.

Veronica Morgan: So look, thank you.

David Scholes: Pleasure.

Veronica Morgan: ... so much for coming in to visit.

David Scholes: It was a lot of fun.

Chris Bates: Thank you David. Cheers.

David Scholes: Thank you Chris. Good on you.

Chris Bates: We want to make you a better elephant rider. So this week's elephant rider training is ...

Veronica Morgan: Well I have to say the thing that I picked up the most from our conversation with David has been the importance of getting your contract checked before you go to auction. I'm actually quite astounded the amount of times he says that people do turn up to auction without having their contract checked.

The very fact is that it is 100% binding for a buyer, so they're not all the same. Contracts are not all the same. So rather than go to your conveyancer or your lawyer and say, "Look, I just want you to cast your eye over it and make sure there's nothing glaringly wrong" you need to get it reviewed properly because there's a huge amount of risk in not getting your contract reviewed properly. So it's worth a couple of hundred dollars, if that's what it's going to cost to get that contract checked before you go to auction. Don't scrimp there.

Chris Bates: So Veronica, what have we got to add to our Elephant memory bank this week?

Veronica Morgan: In the memory bank this week we're putting some resources from auctionWORKS which will really help guys when they're preparing to go to auction.

Chris Bates: Please tune in next week because we're doing a special episode. Veronica and I are going to go into a lot of detail around what drives capital growth? What's a good property? What's not a good property? What's really going to affected when the prices are falling? How not all properties fall when prices are falling and how not all properties go up when prices are going up. So I'd love for you to listen next week. Don't forget, you can ask us questions. We're here to help. We're here to discuss the ideas and your thoughts.

Veronica Morgan: All you need to do is go to our website which is theelephantintheroom.com.au and you can fill in the form. Tell us your burning question and we will answer it.

Chris Bates: The Elephant In The Room Property Podcast is recorded at the Sydney Sound Brewery. This week's podcast was recorded by John Hresc and edited by Gordie Fletcher.

Veronica Morgan: Until next week. Don't be a dumbo.

Chris Bates: Me again. We're looking forward to spending more time with you and uncovering what's really going on in the world of real estate. Please subscribe. Be sure to send us a message. Leave an iTunes review and tell your friends.

Veronica Morgan: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a Statement of Advice.

Veronica Morgan