Should I auction my home?
Why failing to sell at auction is bad for your wealth.
As a property seller, it is extremely disappointing when the price interest in your home falls short of your hopes & expectations at auction. Failing to achieve your price target will happen in one of two ways – private failure or public failure. Failing privately means the agent submits the current buyer’s price interest/offers on your property to you and you decline the offers. You then decide to continue looking for another buyer or you withdraw from the market. Either way, your business remains your business.
When this happens at a public auction, whilst you may be disappointed, the failed campaign has more than likely damaged the value of your property. Your business is now the neighbour’s business and when the result is picked up by the newspapers, it basically becomes everyone’s business. It becomes common knowledge that you tried to sell at auction and failed. Even more damaging, the price that you declined to sell for becomes the published price in a multitude of publications and media outlets.
When faced with this logic, most agree that failing to sell at auction is not a good look for the seller. But what is often overlooked is that no one has ever paid upfront advertised fees, booked an auctioneer for 5 Saturdays time and expected the auction to fail.
Everyone who has ever embarked on an auction campaign has done so because they expected their property to sell.
So you have a scenario where 100% of people who have signed up to sell by auction, do so in the knowledge a failure to sell will reflect poorly on the property.
The auction clearance rate across Sydney was around 50% in February.
Therefore, 50% of all properties that went under the auction hammer failed in front of the interested buyers & the neighbours. As if the auction was not traumatic enough, the homeowners could read about it their failed auction in the Sunday paper.
Where does the auction stop?
It is shaping up as a market reality that there is not going to be a boom to begin 2011. The market finished 2010 in a sluggish mode and has opened up as such in 2011, besides the odd sale that exceeds all expectations.
A wonderful question to ask yourself in a cooling market is – how do you have an auction with 1 buyer? The answer is you can’t. That is a fairly simple question to answer though.
The second question that many people don’t ask is what happens if a cashed up emotional home buyer and a bargain hunter are the two bidders for your home? The answer is the emotional home buyer will stop one bid above the bargain hunters last bid. Due to the fact the bargain hunters last bid is likely to be well below the seller’s reserve price, the property will then be passed in to the emotional home buyers.
The auction has stopped.
The emotional homebuyers have just been alerted to the fact that they were about to pay more for the property than anyone else in the open market is prepared to pay. In this situation, if the emotional home buyer was prepared to pay $50,000 more than the bargain hunter, the seller stands to unwittingly lose up to $49,000, as a lack of competition stalls the auction. This is the practical reality of public auctions – they require multiple bidders all prepared to pay above the seller’s reserve price to work. The romantic notion that 10 bidders will turn up to bid at every auction is more fiction than fact.
Lets say the seller hangs tough though. The auctioneer will sometimes disclose the sellers reserve to the market/crowd, usually in the form of a vendor bid.
The emotional home buyer cannot believe their luck – the reserve price is lower than they were originally going to pay for the home.
Sold.
And the sellers are then told by their agent what a great result and how lucky they were to sell on the day in “this climate”.
Only the emotional buyer knows that the public failure of the auction drove the final selling price down. The seller will never know and the agent does not want to know.
Market Conditions
In a buoyant environment where multiple emotional home buyers are turning up to outbid each other at auction, the risk of public failure does not loom as large. The question of whether you sell for the highest price or a high price then comes into play.
It can be an achievement finding one good buyer for your property at present, so why choose a strategy that requires at least 2 good buyers?
If the public auctions continue to flounder, sellers are putting the sale of major assets through the most risky sale process available. The advertising money is at risk, the highest bidder’s confidence in the property is at risk, achieving the best price is at risk and the public deadline (that was meant to pressure the dozens of buyers to act) now hangs over the sellers, pressuring the one party it wasn’t meant too.
During the GFC which was one of the most challenging periods to sell real estate, many sellers gave agents simple instructions – “if you can sell our home to a buyer for a price that we are satisfied with, we are happy to pay your commission. If you cannot do that, we don’t want to you anything”
Why wait for a crisis to issue those simple instructions to an agent?
– Peter O’Malley
