Expert Bust #9 - Knock-Out Bids

There's no data to support the theory of the knock-out bid and I have doubts about its efficacy.


Buyers Agents have told me they've seen proof of it working for them. But all they say is they won the auction with a knock-out bid. That doesn't prove it worked. A small incremental bidding approach ending in a lower final bid might also have worked.

The only way you can know that it worked is if the other bidder tells you after the auction what their highest bid was GOING TO BE. If you can believe them and if that amount was higher than your knock-out, then the other bidder would have won if they made their highest bid. But for some reason, they didn't make their highest bid. Then and only then do you know it worked. How likely do you think that is?

Contrast that with how likely you think this is: the buyers agent's knock-out bid was above the highest bid needed to win, wasting a portion of their client's money.

The full article on this topic has a lot more tips I've heard over the years for auction bidders that I'm deeply skeptical of. Some of them are just silly. It's on the Select Residential Property website's Expert Busting series.

 

I've seen knockout bids work very effectively. It's really about understanding your competition and what their limits are.

Best example I have is a first home buyer in Victoria. In Melbourne the stamp duty is $0 up to $600k purchase price. This means there's a very specific point where some people will be reluctant to go beyond.

There's a thousand examples where the opening bid was $601k. That immediately puts off all the FHBs in the crowd. Some days you can almost hear the collective groan.

A few years ago I coached a FHB client to make sure the he was the one to bid $600k. He was at an auction that started around $550k and went up in small increments of around $5k. When bidding reached $580k he decided to just bid $600k and won the auction. He actually knew the underbidder and later learned that their max price was also $600k due to the stamp duty barrier. The real competition was to be the person who made that bid.



I have also seen knockout bids used badly. A house in my street was up for sale. Nicest house in the street at the time, it attacted a lot of attention. We locals all knew what the vendor wanted. A BA showed up very loudly, parked her fully branded car right up front and stood in the middle of the street.

She put in a bid or two, then as the auction started to slow, made a large bid that was just over the reserve, but under what they really wanted (bid was $1.5M). Bidding stopped and she went in to negotiate. Emerged within a few minutes having bought for $1.7M. The increase was completely unnecessary, the BA didn't know the market well enough.

The selling agent actually picked out the neighbours after the auction and told us what a great result it was and they'd be happy to sell our properties for a great price as well. Lovely new neighbours but a few years later they've realised how much that mistake cost them.

 

....... drop the word ‘asbestos’ as you walk through the property.

 

With no data to support either stance, this is kind of a useless post IMO, and therefore the weakest of your branded adverts.

 

The only way you can know that it worked is if the other bidder tells you after the auction what their highest bid was GOING TO BE. If you can believe them and if that amount was higher than your knock-out, then the other bidder would have won if they made their highest bid. But for some reason, they didn't make their highest bid. Then and only then do you know it worked. How likely do you think that is?

 

Yes, weakest topic to date w/o any supporting data. Despite the data provided in my other topics, I still only seem to get counter-arguments that are pure opinion. Thanks for yours.

 

We know very little that is absolutely certain, but it is possible to make observations of both the data and environment to make reasonable predictions on outcomes. After brief observation individuals can be reasonably predidictable. Groups of people even moreso.

In the example I gave, the knockout bid strategy was anticipated from the observation of the environment; the property would cost the buyer significantly more if the price was more than $600,000. The winner knew the strategy worked when he observed the underbidders body language (it screamed BUGGER) and when the underbidder told him after the auction.

 

I kind of agree. One auction tactic is to get an asian friend with a nice car to turn up and you pretend to be the buyers agent. The local fhbs will leave before it starts.

 

I'm amazed at the number of examples I hear of people saying they have seen the knock-out bid work. They don't realise their example was not proof that it worked. Yours is a classic case...

If the fhbs would leave the bidding once the price exceeded $600k, then the price could be incrementally raised to $601k and have the same effect. No knock-out bid needed to win for the same price achieved.

The theory behind the knock-out bid is it forces a bidder to leave the bidding BEFORE they make their highest bid. In your case, $600k is their highest bid. $601k exceeds their highest bid and therefore is not proof the knock-out bid worked. Incremental bidding to $601k would have the same effect.

If bidding was at $550k and you made a bid of $595k and none of the fhbs countered, then you could argue the knock-out worked, but only if you knew they were prepared to go to $600k. If $590k was their max, then it didn't work and it cost you $4k more than you needed to spend.

If you turn up to an auction with more money than any of the other bidders, then you were always going to win. You didn't need the knock-out bid. You could incrementally up the price until they ran out of cash.

Again...

The only way you can know that it worked is if the other bidder tells you after the auction what their highest bid was GOING TO BE. If you can believe them and if that amount was higher than your knock-out, then the other bidder would have won if they made their highest bid. But for some reason, they didn't make their highest bid. Then and only then do you know it worked.

 

I guess the point of my example is that they had a good idea of what the other parties limit was and they used a knockout bid to reach that limit first. My client had the same limit. Had they simply used incremental bidding to get to that limit, there's a good chance the other party would have gotten there first instead.

They didn't use a knockout bid to get a cheaper price, but they did use a knockout bid to win the auction at the price they wanted.

I certainly agree that the knockout bid strategy is easily countered if it's still below someone elses limit, just bid a dollar more. I've seen plenty of examples of this too.

 

The bidder with the right sum of money will always win at auction. Some overpay. Others lack the funds. It depends what one buyer thinks about price and value v another. Overbidding by $10K may seem strange but in the scheme of things it could be irrelvant on a $1.5m property especially if the buyer has $1.7m to spend (cash). It just depends who rocks up. Hard bidders can sometimes hit their limit too early and then find another bidder jumps in with a small additional amount when they get to their absolute limit.

Money talks. Bull **** walks.

 

Firm quick bids always the best.. The novices may think "no point of bidding as he won't stop anyway", I was told by an agent that's what the underbidder said at one of my purchases a couple of years back and that they were actually happy to pay more than what I was going to. Also keeps the auctioneer on your side as keeps everything flowing

But nowadays for premium stuff you are bidding against Buyers advocates (always firm and quick until limit reached) or more experienced people so deepest pockets wins.

 

Is being the highest bidder a 'win' in any case? Better buying through other means.

 

I only stay for auctions where I'm the only bidder.