AUCTIONS DESCEND INTO TOTAL FARCE

by Neil Jenman

Even with the usual fake auction clearance rates, there was no way the industry could hide the auction disasters on the weekend. Clearance rates were halved – from a fake 60 per cent to a fake 30 per cent – compared with last week.

Why?

Well, something was missing from the weekend’s auctions – high-pressure bullies, those boys (and they are mostly boys) who “crunch” sellers and buyers.

With auctions moving on-line instead of on-site or in-rooms due to social distance requirements, – the farce of auctions is now clear. Finally, everyone can – or should – be able to see that auctions are the worst way to sell a property.

The biggest point about public auctions is they short-sell properties. It’s simple mathematics.

Watch this:

Let’s say there are three bidders. Bidder 1 has a maximum price of $1.8 million, Bidder 2 has a maximum price of $1.9 million and Bidder 3’s maximum price is $2.4 million.

The bidding starts at, say, $1.5 million and rises to $1.8 million. The auctioneer yells, “It’s on the market.” That’s because $1.8 million is the reserve, the lowest the seller will accept.

At this point, Bidder 1 whose maximum is $1.8 million can’t go higher. The bidding is now between Bidder 2 whose maximum is $1.9 million and Bidder 3 whose maximum is $2.4 million.

The bidding goes up in ten thousand dollar lots and stops at $1,890,000. Bidder 2 now bids ten thousand dollars more and the bidding is now at $1.9 million.

How much does Bidder 3 now bid?

Probably ten thousand dollars more.

So, the bidding is now at $1,910,000.

Bidder 1 and Bidder 2 have stopped bidding as the price has exceeded their maximum.

So, of course, the property is now sold to Bidder 3 for $1,910,000.

That’s $490,000 below what Bidder 3 was willing to pay.

The property is short-sold by $490,000.

Collectively, sellers lose billions of dollars each year by short-selling their homes due to the dishonesty and incompetency of auction-pushing agents. There are examples galore every week.

Last week, a property in Randwick sold for $2.5 million. It was short-sold by $300,000 because the buyer was prepared to pay $2.8 million.

So, if auctions do not get the highest price, why do agents push them?

The answer is simple: To get properties sold. In the real estate auction world, nothing is more sacrosanct than agents’ commission.

Almost every agent has the same challenge: home sellers want too much. The agents must convince sellers to lower their prices. Agents do this through a process they call “conditioning” which means bombarding sellers with negative news and using the market as their alibi. Their favourite conditioning line is, “This is what the market is telling us.”

Eventually, of course, sellers ‘crack’ under pressure, lower their prices and, bang, their properties get sold. Short-sold.

Here is a written quote from one of the Real Estate Institute of Australia’s early training manuals: “Auction is the fastest and best conditioning method.”

What makes auctions so successful for agents is the high amount of pressure that can be applied to sellers at the auction. The bullying.

Before an auction, sellers are told their homes can’t be sold too low because “the reserve price will protect you”.

But the minute the sellers sign-up for auction, the agents start “conditioning” them to lower their reserve.

As the auction day draws nearer the conditioning increases, usually with a meeting the day before the auction to “discuss our strategy” which, translated means, “persuade you to lower your reserve”.

This high-pressure conditioning builds to a crescendo at the auction. You’ve seen it, the bidding slows down, the auctioneer yells, “Going once, going twice,” and then stops. A swarm of dark-suited oily agents, often with sunglasses on their heads, descend on the sellers telling them to “put it on the market”.

Oh, the lines they use, the manipulation, the bullying, the harassment. If you don’t believe it, attend any of the big networks’ in-room auctions. Or watch at any on-site auction as agents disappear into a home for several minutes. What do you think goes on in that home? The sellers are being virtually tortured into lowering their reserve.

To quote from another real estate training course, “Move quickly. They are usually numb. Don’t give them time to dwell on the price.”

Yes, the whole aim is to get the sellers to drop their reserve and put the property on the market – at any price. Then it gets sold. Then the agent gets paid. It’s all over.

When it’s over auctioneers ask the crowd to clap. Like stunned lemmings, they obey.

But what was missing yesterday?

What happened the first-time auctions went on-line instead of being where agents could become the “space invaders” they have been for years? Yesterday they could not get up-close-and-personal and urge sellers to lower their reserves. They could not milk buyers for another thousand dollars or more.

Without the in-your-face bullying, clearance rates dropped by half. Sure, the numbers of auctions were down – but that should not have affected the percentage sold.

Alone in their homes, sellers were free from harassment. Many made the right decision: they refused to sell.

And there was nothing agents could do about it.

Let’s hope the pandemic stops killing people. It’s a world tragedy.

But let’s also hope that one benefit from the pandemic is that it leads to the end of public auctions. When that happens, home sellers will be as much as hundreds of thousands of dollars better off when they sell their homes.

Public auctions are the worst way to sell a home if you want the best price. That’s why property developers almost never sell by auction, they want the best price. That’s why Australia and New Zealand are the only places in the world where agents push auctions – and ask sellers to pay for advertising costs on top of massive commissions.

Sellers across Australia. Please realise the truth: Public auctions are a dead duck, always have been, always will be.

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FOOTNOTE: If you are spending time at home right now and you’d like to read Neil Jenman’s best book on real estate, ‘Don’t Sign Anything’ please call 1800 1800 18 or email us on support@jenman.com.au. We’ll mail it to you with our compliments. Please include your phone number so we can verify that you are not an agent. Thank you.

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