by Neil Jenman
READING TIME: 2.5 MINUTES.
Agents who claim that auctions get the best price are either dishonest or incompetent.
Gee, that’s insulting to many agents. Won’t they sue? Of course not, because it’s true.
Yet still, dodgy agents persist in telling sellers: “You’ll get the highest price with auction.” This lie catches thousands of sellers, most of whom never think about why auctions are a dead duck when it comes to the highest price.
Let me prove it to you. In two minutes.
Let’s say that you and I are both interested in the same home at auction. Each of us knows the maximum we can each afford.
Let’s say your maximum is $970,000 and my maximum is $910,000.
And let’s say that the lowest the sellers will accept (the “reserve price”) is $850,000.
Once the bidding starts, we both bid based on what we see each other bidding.
Let’s say you start at $800,000.
I then bid $810,000.
You then bid $820,000.
On it goes, bids rising by ten thousand dollars. Once the bidding reaches $850,000, the auctioneer may yell, “It’s on the market, going to be sold.”
You and I keep bidding. We are both still below our limits.
But, when you bid $900,000, how much will my next bid be?
$910,000, right. I have now hit my limit.
Still, you don’t know my limit, but you know you’ve got plenty ‘left in your tank’.
You then bid $920,000.
The auctioneer turns to me, but I have reached my maximum. I can’t bid more.
As there are no other bidders and as the reserve price is exceeded by seventy thousand dollars, the auctioneer will soon yell, “Going once, going twice, SOLD!!”
He will then ask everyone to applaud. The crowd will obey. Auctioneers love power.
What a successful auction – or so it seemed. Spirited bidding and the sellers received $70,000 more than their lowest price. But not for those who focus on a rarely asked question: How much more was the highest bidder willing to pay? In this case, $50,000!
Yes, you bought a home for a massive fifty thousand dollars below your maximum price!
This is the cruellest con with auctions: Hapless sellers think they get a high price, but they do not get the highest price. It rarely happens.
In the above example, the sellers missed out on getting an EXTRA $50,000!
All over Australia, sellers are collectively losing hundreds of millions of dollars a year by being duped into auctions.
Here’s some good advice: Reject any agent who suggests you sell by public auction. Call us and we will help you find an agent who’s skilled in the art of negotiating, one who knows how to get you highest price – which is what you want when you sell, surely?
Here is a fact: Auctions are a dead duck if you want the highest price.
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PLEASE NOTE: Our focus is upon helping consumers. Abuse from agents on our web site or Facebook page will be deleted or ignored or well publicised – it depends on our mood.
But one thing will never vary: No matter how much we are abused or threatened we will never stop doing what we love most – helping honest consumers to get the best deal possible in real estate. And, of course, if any agents are serious about taking care of consumers, we’d love to help you too. But, remember, the consumers come first. Thank you.
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Richard Kellaway says:
I remember sitting in a very controversial seminar of yours in Melbourne back in the early 90s – in a packed room full of melbournes “best” agents as you spruiked your anti-auction sermon to a crowd that was equal parts appalled and disgusted. ( I remember Greg Hocking standing up the back spitting venom at you!) but as an impressionable early 20 something – what you said about the auction not producing the best result hit me like a bolt out of the blue.. but it made perfect sense. Of course – you only get the least amount the top bidder has to pay! I’ve been a supporter in the background since that day – loved you fight against fish oil salesman and your swimming upstream against the Melbourne Auction establishment. Keep fighting for the little guy.
Greg Bell says:
I follow the logic and the maths, but in a free and open market (ie. information is available), it has to work that way, right? The winning bidder bids just a smidge higher than the 2nd highest bidder.
Are you suggesting a closed bid auction, or other information limiting system? If so, why would buyers agree to that?
Sandor says:
Neil, you are absolutely right! You were even generous with your example because I’ve been to actions where the bids dwindled down to just $500 increments, so the final price paid was the second best top offer + $500.
Also, sometimes a lot of people turn up to actions, say 50, but there may just be 2 or 3 serious bidders. The rest are family and friends coming along on both the seller’s and buyer’s side, people from the street, other sellers who just want to get a sense of the market, the agent’s affiliates, bargain hunters who only bid if there are no serious bids and people who are just curious about auctions. The large crowd makes the agent sound VERY convincing when he/she tells the seller: “Look, there are obviously a lot of interested parties but they don’t bid because the market dictates a lower price at the moment. You must reduce your reserve…” I’ve also seen several staff members from the agent ganging up and taking turns working the poor, hapless seller. 🙁
I’ve turned agents down altogether in the past because they were pushing the action option. I’m sure that they would’ve reluctantly agreed to drop the auction just to get the contract to sell but by that time they’ve lost my trust.
ron jackson says:
I think it is only an advantage to have an auction in a rising market, because if a bidder has missed out on other sales, chances are they might go above their original maximum price so that they won’t miss out.
Paul says:
Neil,
I totally agree with what you say.
Here is my real life example:
Right at this minute I am sitting in my (newish) home that I bought at auction in competition with initially 5 bidders (4 dropped out as they reached their limit), then 1 other bidder until the hammer close.
But, this is what what the agent and the sellers don’t know and will never know: I was willing to pay up to $30,000.00 more than I actually paid!
Why would I have paid more?
Here’s why: Over the space of 12 months I’d missed out on a number of properties in a rising market and was getting really fed up with missing out (10 times) and living in a less than ideal temporary accommodation.
Also, I’d done my research on the home and the area and calculated that my top price would still be doable financially and would still represent a decent investment medium to long term.
At auction close, I was happy, as I think I paid a fair and reasonable price.
The sellers were happy – they received a price well over their reserve. But they didn’t know I had an extra $30k up my sleeve!
Auctions? Not so bad if you are a buyer, but it wouldn’t be my preferred method to sell.
cheers
Paul
John E says:
The logic is unarguable – that at auction you get just a bit over the second highest bidder’s top bid.
But if you don’t go to auction, you need a very skilled agent to work out for you what the second highest bid would be, and what the top bidder’s real top limit is. There is no guarantee that the agent will be able to do this. And agents will often be prepared to pressure you to accept a particular price even if a more skilled agent would get you more. Sure, the agent gets additional reward if he gets you the higher price, but most agents will see that it is better for them to have a quick sure sale at a slightly lower price than take the risk of no sale or lengthy delay.
Also, people sometimes “crack” at auction and go beyond their previously “firm” top limits.
Not an easy process whichever way you go!
Joe Blow says:
It’s a fact that on eBay the underbidder effectively sets the price. Sotherby’s and Christie’s the same. That’s how auctions have worked for hundreds of years.
A Dutch auction works differently but again doesn’t nesessarily get the highest bid every time.