A BLOCK ON THE BEST PRICE

BRILLIANT SHOW, PITY ABOUT THE PRICES

Article originally published on AUGUST 9, 2003 – Reviewed and approved.

By Neil Jenman

It was a simple concept – buy a block of four apartments and find four charming couples to renovate them. End with the climax, sell each apartment by auction. The most popular attributes of the lifestyle programs rolled into one show. Simple, but brilliant.

Channel Nine’s, The Block, became the best-rating series in the history of Australian television. It was seen by an average 2.34 million viewers each week. The final show, the climax, on Sunday August 17, attracted an audience peak of 3.3 million. A phenomenal result for a first-time production.

The creators of The Block, David Barbour, and Julian Cress, are the golden boys of TV shows. Their creativity, innovation and skill were, well, in a word, brilliant. Good on you.

And the product promotions – from power tools to cars – sure, they were ‘in-your-face’. But so what? The viewers didn’t care. They loved following the four couples, all of whom became stars. The biggest winners, of the many winners on this winning show, were surely the hugely popular Warren and Gavin. And then, of course, there were the ‘official winners’, Fiona and Adam.

Brilliance, stars, and winners. With one exception – the agents and their selling method.

The skill and brilliance of the crew, indeed the show itself, failed to rub off on the real estate agents. They were as incompetent as ever.

Why?

Because of the method of sale – auction.

There is a fact about auctions that most people never know: AUCTIONS GET LOWER PRICES.

Here’s how it happened on The Block.

As Warren and Gavin hugged the winning buyer for their apartment, we were all caught up in the emotion. The buyer, in a Crazy John suit (more promotion, but again who cares), had just paid $670,000. With the reserve price set for all the apartments at $595,000 and each couple getting to keep any extra above the reserve, Warren and Gavin pocketed $75,000. Good on them.

But there was one thing Warren and Gavin (and most of the 3 million viewers) missed. The buyer had another $330,000 in his pocket.

Crazy John was willing to pay a million dollars.

But because auctions get lower prices, Warren and Gavin missed out on another $330,000.

Please read that again. Dwell on it for a few moments. On national television a property was undersold at auction by $330,000.

But this is what happens at most auctions. Properties are under-sold. Constantly. Massively.

At any auction, there are three prices. Only two become public.

First, there is the reserve price, which is the lowest the seller is prepared to accept. In The Block each apartment had a reserve of $595,000. Very public in this case as it was known before the auction. A good idea and fair to intending buyers.

Second, there is the selling price. Warren and Gavin’s apartment sold for $670,000. Can’t get any more public than 3 million witnesses.

And third, there is THE PRICE THE BUYER WAS PREPARED TO PAY. The nature of auctions is such that this third price – the buyer’s highest price – is rarely made public.

As for the official winners, Fiona and Adam, whose apartment sold for the highest of the four at $751,000, the same thing happened.

Their buyer was prepared to pay $800,000. An another “undersold” auction. By $49,000.

Okay, how do you get the highest price when you have two or more buyers?

Number one rule is: Never let each buyer know what other buyers are offering.

When each bidder can see what the other bidders are offering, they hold their bids below what they are prepared to pay. An economics professor explained it perfectly, “This means they are paying less to the sellers.”

In the United States it is well known that open auctions get lower prices.

So, what do they do?

Sealed bids.

Each buyer writes down, in private, the highest they are prepared to buy. The bids are opened in public and, just like an auction, the winner is the highest bidder. The only difference is that the highest sealed bid is also the highest price the property could have sold for.

But auctions are great theatre and, of course, great television. Would The Block have been such good television if the bids had been sealed? Certainly.

The paddles (or the numbers) of each bidder could still have been displayed. Imagine the excitement as the viewers watched each envelope being opened. Imagine the gasp from Warren and Gavin if the Crazy Joe bid had been opened at a million bucks. And imagine the audience seeing that the second highest bidder was more than $300,000 below Crazy Joe. What a show. It would be like adding Who Wants to Be A Millionaire? to The Block.

This is something few agents have grasped in Australia. But most agents aren’t too smart. Not like the brilliant creators of The Block.

Smart guys, all right.

Pity about the agents. Pity about the prices.

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