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How Auctions Kill the Highest Price

Reading Time:

8 minutes

Published:

13 June 2016

How auctions kill the highest price

And how buyers save tens of thousands of dollars!

by Neil Jenman

What you are about to read contains information that should be read by every homeseller contemplating selling by
the public auction method. It contains simple and logical mathematical proof that selling by public auction is, by far, the worst way to sell a family home.

Never mind what agents may tell you – that, “auctions are the best way to get the highest price”, this article will show you that not only do auctions not get the highest price, but the very nature of the public auction system – combined with the attitude and ignorance of many agents – all but guarantees that public auctions cannot get you the highest price.

That’s right, as you are about to see, the very nature of the public auction system prevents buyers from paying the highest price they are often quite willing to pay. Holding a typical real estate auction almost guarantees that you will kill your chances of getting the highest price for your home.

Here’s a fact that most sellers don’t know: Thousands of people who sell their homes by auctions are collectively missing out on tens of millions of dollars – and most of them never know what happened to them. Like all good ‘cons’, the best cons are when victims never realise they have been conned. This is exactly what happens with most sellers who choose to sell by the typical public auction method.

Now, let’s agree on one point: Yes, homes that are sold at auction often sell for a HIGH price and, yes, they often sell for a HIGHER price than the home-sellers expected to receive. But here’s the fact that most sellers never realise. While auctions may seem to get a high price – even a higher price – they do not get the HIGHEST price.

And, as you will see, there can be an enormous difference between a high price and the highest price that buyers are willing to pay. That difference is often tens of thousands of dollars.

The best way to show how auctions cannot get the highest price is to tell you a true and very typical story. And it’s a story that’s repeated thousands of times every year as thousands of home-sellers lose tens of millions of dollars, all because they made the terrible mistake of selling by auction.

Ning is a Chinese lady who was born and raised in Indonesia. She migrated to Australia and, just like thousands of immigrants, one of her first goals was to buy her own home.

Ning saw an apartment advertised in the Eastern Sydney suburb of Kensington. Although it was in an old building, it seemed to suit Ning perfectly. As a single woman, this little apartment was all she needed.

But there was no mention of the price. That’s because the apartment was being auctioned (by one of Australia’s biggest real estate networks, a network that constantly encourages sellers to sell using the auction method. A network where salespeople often tell sellers one of the worst of all the real estate lies: that “auctions get the highest price”).

Being from Indonesia, Ning did not understand this strange “auction system”. So she rang the agent and asked how it all worked.

“It’s easy” said the agent, “All you have to do is come along to the auction and start bidding and then, if you are the highest bidder, the apartment will be sold to you.”

“And what happens then?” asked Ning.

“You’ll have to give us a cheque for ten percent of the purchase price as a deposit and you’ll have to sign the contract to buy the property at the amount you bid,” said the agent.

“But there is one problem,” said Ning. “I don’t have a cheque account so I don’t have a cheque book. I can’t bring a cheque.”

The agent replied, “Oh, that’s no problem. Just go to your bank and get a bank cheque for ten percent of the amount that you want to pay for the property.”

Ning then told the agent that she was willing to pay $750,000. That was her highest price.

“Then just go and get a bank cheque for $75,000 and bring it to the auction,” said the agent.

Sure enough, that’s exactly what Ning did. She went to her bank and organised a bank cheque drawn in favour of the agent’s trust account for the amount of $75,000.

On the day of the auction, Ning approached the agent and showed him her cheque for $75,000 and asked if everything was in order. The agent assured her that everything was fine. Ning then registered to bid and waited, nervously, for the auction to begin.

The auctioneer waffled for what seemed like half an hour – as auctioneers often do – and he then asked the crowd of people gathered in front of him for an opening bid.

Someone called out, “$650,000.”

Then someone else bid $660,000.

For two more bids, the bidding went up by amounts of ten thousand dollars until it reached $680,000, at which point the auctioneer yelled out, “It’s on the market, it’s going to be sold!”

Clearly, the reserve price was $680,000.

The bid slowed to $5,000 amounts and then, when it hit $700,000, it stopped. Silence.

For a few minutes nothing happened. Ning was frozen in fear. She didn’t know what to do.

And then the auctioneer said, “Can I see another thousand dollars anywhere?”

Ning raised her hand. The auctioneer pointed at her and yelled out, “Seven hundred and one thousand dollars. Thank you madam.”

A few seconds later someone else bid $702,000.

The auctioneer turned to Ning and asked her if she wanted to bid again. Yes, she nodded and the auctioneer then yelled out, “The bid is with you at seven hundred and three thousand dollars. Any more bids anywhere? For the first time. For the second time. Are there are any more bids? For the third and final time, are you all silent, are you all done, it’s going to be sold.

He then pointed at Ning and yelled, “Sold to you at $703,000!” And then, as most auctioneers do (in order to make auctions look “successful”) the auctioneer started clapping. The compliant crowd followed suit. Everyone was now clapping as they looked at Ning.

Ning was in shock. She had told the agent that she wanted to buy the apartment for $750,000. She had shown him her bank cheque for $75,000. And yet, the agent had sold her the apartment for $703,000, a whopping $47,000 below the highest price that Ning wanted to pay.

Looking around, Ning noticed the owners of the apartment. They were all smiles; after all, they had sold for $23,000 above their ‘reserve price’ of $680,000.

“I felt sorry for them,” Ning said, “They did not realise that my highest price, which I was quite prepared to pay, was $750,000. They missed out on getting $43,000.”

But the agent knew. And all agents know that, at auctions, properties are constantly selling for well below the highest prices that the buyers are willing to pay. That’s because the entire focus of an auction is on the sellers’ lowest price, the reserve price. Once the bidding reaches the reserve price, the agents are going to get what they want most of all – a sale. And that’s why agents like auctions so much: If they play the system right, they can get a sure sale. And that means a guaranteed commission. So what if their clients miss out on tens of thousands of dollars! Most agents, especially those who recommend auction, don’t care about the sellers getting the highest possible price; if they did, they wouldn’t recommend auction.

As you have just seen, the very nature of the auction system, the way it operates, prevents the buyers from paying their highest price. Even if, as in this case, the buyer was eager to pay $750,000, the auction system wouldn’t allow it. Yes, it’s incredible.
When the bidding had slowed at $700,000 and the auctioneer had asked for bids of “one thousand dollars”, all Ning did was what the auctioneer and the auction system told her to do.

Effectively, Ning was prevented from offering her highest price.

And this is how the typical auction system kills the sellers’ chances of getting the highest price for their home. Oh sure, they got a HIGHER price than they expected (as happens at many auctions) but they did not get the HIGHEST PRICE. Their property was undersold by $47,000!

What has been described in this article is exactly what happens at thousands of real estate auctions in Australia every year. If you want the HIGHEST price for your home (which, in the above example, meant an extra $47,000) be sure that you say NO to auctions.

It’s a simple, logical, mathematical fact: Public auctions kill your chances of getting the highest price for your property.

FOOTNOTE: Today Ning has a new career. She works as a real estate salesperson on Sydney’s North Shore. She specialises in showing sellers how to get the highest possible price for their homes. Ning can be contacted via this website.

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