Why auction is often a terrible way to sell property

This is currently the case in any area where demand doesn't significantly outstrip supply.

It is not a popular onion as auctions suit agents. But properties listed by auction currently get a sale on the day only about 30% of the time. The other 70%? There's a very deflated vendor.

The truth is:

• Succeeding less than 50% of the time is abysmal.

• Merely getting a bid at any level after 28 days on the market is equally dismal.

• Auction prices are set by the under-bidder as the lead bidder would have pushed higher with further competition. Because of this, the winning bidder often saves money they anticipated spending.

• Most buyers “at their price limit” in a negotiation will spend more if given time to think. This is impossible at auction, and affects all buyers, so there is a cumulative negative impact on price.

 

Therefore auctions are actually the best way to buy.

• Because the majority of buyers cannot (or will not) participate in an auction campaign, any who are present have comparatively little competition.

• As the buyers can see each other, they know they aren’t overpaying because someone else is willing to pay about the same amount.

• This makes any price achieved at auction inherently

• In any area that doesn’t have profuse intense demand this has a deleterious impact on price.

Plus, when did 30% become a credible success rate?

The true role of an agent is to utilise impactful marketing to obtain the best price possible from the entire market, on terms and conditions acceptable to the vendor, with the least amount of stress for their family, within the fastest timeframe feasible.

It is quite a balancing act. One that takes significant skill and experience.

An act that is easy to avoid – by auctioning.

By choosing to run an auction campaign all the pressure is deferred till auction day.  

If the property doesn’t meet reserve, as is the case the vast majority of the time, all that pressure suddenly transfers to the vendor to “meet the market”.

For the deflated vendor, from here it is lose-lose.

• Because the majority of buyers will pay the most they can in a blind competitive negotiation that is able to be tailored to their nature and motivation, an auction was a defective strategy from inception.

• The pressure of the auction room (and persuasive highly-skilled auctioneer) is now fixed on the vendor to accept what came along on auction day, or start from scratch with a property that is stale on the market and buyers that know the price it passed in at.

The net result? Any other method is better almost all the time.

To expand:

• An auction strategy dissuades buyers. As many can't (and plenty won't) attend, this means less competition for the property, and most likely, a lower price outcome.

• Less buyers also means you run the risk of cutting out the buyer in the market with the highest possible spend.

• The transparency now favours the remaining buyers. Not only are they competing with less of their peers, they are also able to see exactly when their competition gives up.

• The pressure then shifts to the vendor to accept where the market got to as if they don't, the alternative is that all the other conditional buyers that would have been interested (potentially at a higher level but couldn't participate due to the auction method), now know that the property passed in at a particular level. From there, they know not to pay much more or they will be paying more than what has become the "market value" for the property.

I would argue that:

• The price achieved at auction is not "the market speaking". It's a small portion of the market chiming in.

• The price achieved at auction is therefore not the "market value", it's the auction value. An entirely different price point achieved by lower competition and a method that only allows buyers to spend what they have pre-arranged. They never have the ability to get or borrow more finance due to the short negotiation timeframe.

Therefore...

• As the pressure is actually on the vendor, it makes little sense to select a method that eliminates so many buyers and stunts the amount they would pay if their competition didn't dry up - or if given time to think about it.

• Consequently almost any method is better, unless the demand for a property is so significant that it's worth risking limiting access just to ensure an unconditional bid on a particular day.

On that point:

• An auction doesn't gain you unconditional buyers. They were there anyway. Rather it excludes conditional ones.

• Conditional buyers usually want reasonable conditions and if they don’t you can decline their offer in favour of an unconditional one.

• Conditional interest is often significantly higher than unconditional interest. I have personally presented conditional offers dozens of times that are tens of thousands more, and several times hundreds of thousands higher.

My advice?

Use a method that allows you to review all the interest and make a calculated choice. Perhaps accept the highest conditional offer and back it up with the highest unconditional one - ensuring a sale either way.