by Neil Jenman
Reading time: Apx 7 minutes
It’s sad and tragic.
Home-owners who have worked decades to own their homes are throwing away tens, even hundreds of thousands of dollars by selling by public auction. Especially in a boom.
Home-sellers who are selling by auction have fallen victim to a massive trick that is collectively costing sellers hundreds of millions of dollars a week.
Individually, auction losses can cost home-sellers tens of thousands of dollars each – often hundreds of thousands of dollars. It depends on a home’s value. If you have a home worth millions of dollars, selling by auction can cost you millions of dollars. It happens often.
On the surface it is easy to believe the lie that auctions get the best prices. The seemingly compelling evidence is there, each weekend. All those crowds – as many as 50 buyers for one home according to current reports – all shouting out ever-increasing amounts.
UP, UP, UP!!
UP past the amount the agents estimated.
UP past the amount being bid by other buyers.
And then, the [seemingly] best news of all for the sellers – up past the ‘reserve price’ (the lowest the sellers will accept).
According to reports, the average auction sale is now exceeding its reserve price by TWO HUNDRED THOUSAND DOLLARS.
Of course, the sellers are delighted. Why wouldn’t they be? They just got $200,000 above their reserve.
Smiles light up their faces.
The auctioneer commands the crowd to applaud. They obey. And, once again, everyone falls for one of the greatest tricks in the real estate world: “Auctions get the best price.”
But wait.
Like all good con tricks, victims (in this case, the sellers) never realise they have been conned.
At auctions, the entire focus – of everyone – is on the lowest price the sellers want, specifically the ‘reserve price’.
But the focus should be on the highest price the buyers will pay. It’s so obvious.
The stupidity, nay the madness of auctions, is that no one, other than the buyers, knows the most important figure in the equation – namely, the highest price the buyers will pay.
The truth is the exact opposite to what sellers are tricked into believing: Auction sellers today may get prices above their reserve, but most are not getting the highest price. Far from it.
It’s a well-known financial maxim that great losses occur during times of great profits. People get so caught up in the hype they seldom ask: Am I getting the best deal possible?
Auctions are like a magic trick.
All magicians have the same method of fooling the audience – they cause them to focus on the wrong item. The table instead of the hat. The hand instead of the pocket.
The same as real estate auctions. Everyone is focused on the sellers’ lowest price instead of the buyers’ highest price.
When a home sells for two hundred thousand dollars above the reserve price, everyone gasps in amazement.
The sellers might be smiling because they got two hundred thousand dollars above their lowest price. But they don’t realise could have easily got maybe another two hundred thousand dollars. If their reserve was $1 million and the property sold for $1.2 million but the buyer was prepared to pay $1.4 million – as happens at about every auction to a greater or lesser extent – then, they also got $200,000 below the price they should have got.
When you are selling your home, you should never reveal your lowest price. If you do, that becomes the entire focus of everyone.
From agents to buyers, everyone wants to know information sellers should never disclose:
“What will they take?”
“What price will buy it?”
“What’s the reserve price?”
But let’s think about it: If the agent is really interested in getting the highest price – as they all claim to be doing – why aren’t they asking the buyers for their highest price?
Why do agents allow buyers to turn up at the auctions without knowing the highest price they are prepared to pay?
Incompetence.
It doesn’t matter how many buyers are interested in your home, it doesn’t matter if the market is booming, the worst way to sell a home is by public auction.
Here’s the mathematical proof that auctions rarely get the highest price: If there are five buyers and four have a highest price of, say, $1.5 million and the other one has a highest price of, say, $2 million, when the bidding stops at $1.5 million and the four bidders can’t afford to pay any more, how much does the fifth buyer bid?
At best, the buyer will offer $100,000 more, bringing the bidding to $1.6 million.
And then it stops.
How can you get the buyer who wants to pay $2 million to pay that sum? If that buyer is the highest bidder at $1.6 million, there is no mechanism to obtain the highest price. That’s because, with auctions, the focus is on the wrong figure, the sellers’ lowest instead of the buyers’ highest.
If the reserve is $1.4 million, the property is sold. For two hundred thousand dollars above the reserve BUT, also, for four hundred thousand dollars BELOW the buyer’s highest price.
Imagine if, instead of publicising how much properties sold above the reserve price, the focus was placed where it should be – on the buyers’ highest price. Instead of listing how much properties sold above their reserve, how about listing how much they sold below the highest price the buyers were quite willing to pay.
Suddenly, the truth would be revealed for all to see. Auctions cause most sellers to lose money.
Misinformation is the name of the real estate game and nowhere is the misinformation more common than with auctions.
Like auction “clearance rates” which are always fake.
For instance, last Saturday (April 17), 577 properties were auctioned in Sydney and 356 sold – that’s 61 percent. The official clearance rate was listed as 85 percent.
But it would likely be that 85 percent of properties sold at auction are short-sold.
Buyers do not buy homes because homes are auctioned, they buy homes because they like the homes. Buyers do not pay more money because a home is auctioned, they pay more money because they love the home and want to buy it.
So, why do agents push auctions?
Well, as written in one of the Real Estate Institute of Australia publications: “Auction is the fastest and best conditioning method.”
Agents can quote you a high price to convince you to sign-up for auction; and then, later, when you are being told to accept a lower price, the agents blame that old culprit – the market.
Oh yes, the market.
The market is saying this. The market is saying that. You need to listen to the market. Pressure, pressure, pressure. Lies, lies and more lies.
For agents, auctions mean almost sure sales.
When you’re selling a home, please remember this: You and the agent have different goals.
Your goal is selling your home for the highest price. The agent’s goal is to sell your home – at any price. You see, whether the agent sells your home for a high price or a low price, the agent always gets a high commission.
Most agents are lazy. It’s easier to focus on the sellers’ lowest price than to discover the highest price of many different buyers.
So, what do you do if you have signed-up for auction and you now realise you are almost certain to sell your home hundreds of thousands of dollars under the best market price?
Simple. Cancel the auction.
If your agent doesn’t know how to get you the highest price, change agents.
Remember the effort and the years it took you to buy your home?
Spend a few days, weeks at the most, to make sure you sell well. If it takes you ten weeks (at most) to get an extra hundred thousand dollars (which should easily be possible), that’s ten thousand dollars a week you’ve earned by doing what all home-sellers should do: Say no to selling by auction.
Yes, it’s worth it to discover the best way to sell your home.
********************
Several years ago (in 2015) I wrote a course for real estate agents on how to negotiate the best price for home-sellers. I wrote a booklet called, the 42 Rules of Modern Real Estate Negotiation, any of which can help sellers get a better price. If you’d like a soft-copy with our compliments, please contact us on support@jenman.com.au or just call 1800 1800 18.
Please note: If you ever contact us and do not get a prompt reply, something is wrong. Please contact us again. You are important to us and we will never deliberately not respond to honest and decent consumers who need real estate help.
Paul Lucas says:
Hi Neil
One way to overcome the problem you described above is to use the Dutch Auction method as used in flower sales in The Netherlands.
Using this method the auctioneer would start of with a high price and then successively lower the price until a buyer bids his/her highest price.
Auctions would be a lot quicker and and the seller would know that he/she obtained the buyer’s highest price.
Regards
Paul
Rolf Nichols says:
Very true Neil. As an example take an Ebay auction. You put in your highest bid but if the current bid is well under it and you are the highest bidder at auction end you will buy it at that price-even if your initial bid is way higher. The same with wine auctions. I have bought many wines online way under what I thought was realistic -saving me hundreds over the years. With houses it is the same. But compare with what happens in Tasmania-no auctions at all! Just a price quoted as “offers from”. This way you can offer the property at the highest price sought in the beginning -and you may get even more. This is as you say, dutch option (auction) however it brings out many more buyers. Naturally the agent selling will have had to establish the highest and best possible price first. That is the hard thing since most agents are lazy and auctions are so much more expedient. Keep up the good work.
shireen phillips says:
Well worth reading!!!
Jason Smith says:
This would be hilarious if it wasn’t so serious. I took my family to an auction on the Sunshine Coast a couple of weeks ago. At the start, the auctioneer explained that when bidding reaches the reserve he will call it ‘on the market’ and then actually said ‘the reserve price is the lowest price the owners will sell for’. Wow! Bidding started slowly and crawled along at $5,000 increments until the auction was paused at $1.6M. The agents then scrambled to crowd around the vendors and I said to my wife, ‘watch this’. We could hear the conversation from where we were standing. Their reserve was $1.8M. They had paid $1.55M off the plan two years ago. The thumbscrews were being turned. Agents told the reluctant vendors to lower the reserve to $1.6 as this would motivate the bidders and lead to a bidding war. They said they were confident of reaching $1.8M but only if they lowered the reserve immediately. We could see the vendors’ reluctance. But they agreed. The auction was back on. The property was called ‘on the market’. Everybody waited for bidding to resume. But nothing. Not a cent. In less than a minute the hammer went down. Sold for $1.6M. High fives. Everybody applauded. Everyone except the vendors who hurried themselves into a different room. I have seen this time and time again. I would never sell my home at auction.