Sellers lose heavily at weekend auctions

by Neil Jenman

READING TIME: 2.5 MINUTES

Home sellers lost millions of dollars in last weekend’s auctions. Most never realised it. On the contrary, many sellers thought they got a great result because their homes sold above their lowest price – known as the “reserve”.

As happens every weekend – but more when the market is “hot” – agents trick sellers and the media into thinking that auctions get great results for sellers. The truth, however, is the opposite: not only do sellers not get the great results the agents claim (and the media reports), they lose heavily because their homes are short sold.

In the worst cases, sellers lost hundreds of thousands of dollars in last weekend’s auctions. Just as they do every weekend.

The key to understanding the truth with real estate auctions – that sellers are losing when they believe they are winning – can be found by realising one fact: Sale prices at auctions focus on the lowest the sellers will accept and not the highest the buyers will pay.

The entire focus at real estate auctions is on sellers’ lowest prices. As any basic negotiation course teaches: If you want the highest price, you must discover the highest price buyers will pay. The best advice for home sellers who want the highest price is: AVOID AUCTIONS!

In most auctions, no one – other than the buyers – knows the highest price the buyers are willing to pay. The entire focus of an auction is on the sellers’ lowest price, known as “the reserve”. So, when a home sells for, say, half a million dollars above its reserve price, few people even consider how much more the buyers would have gladly paid. Especially the sellers. With agents patting them on the back, or hugging them, sellers are swept up in the contrived hyperbole of auctions. Seeing an extra five hundred thousand dollars coming in the front door, sellers fail to notice several hundred thousand dollars escaping out the back door.

A typical example of how sellers lose hundreds of thousands of dollars at auctions was reported in one of yesterday’s Sydney newspapers. The headline screamed: “$500k bid shuts down auction”! The report said that a home sold for a massive $320,000 above its reserve price. As with thousands of “fake real estate news” reports, it appeared as if the sellers did remarkably well because they got $320,000 above their lowest price.

Those who understand auctions soon realised that instead of “winning an extra $320,000” as the report suggested, the sellers “LOST $300,000” because the buyers paid $2.9 million when their highest price was at least $3.2 million.

So, there you have it – for anyone who does their research, it’s obvious: The sellers’ lowest price was $2.58 million. The buyers’ highest price was $3.2 million. The property sold for $2.9 million. By selling at public auction, these unfortunate sellers LOST $300,000.

And consider another point rarely considered with the massive seller losses at auctions: How long will it take the average home seller to save $300,000? Ten years? At least.

So, in ten minutes, these sellers lost what it would take them ten years to save.

As word spreads that public auctions are the worst way for homeowners to sell, many are now rejecting auctions. This month, a Melbourne homeowner cancelled the auction of her Malvern home when she realised that she risked being short-sold and losing tens of thousands of dollars. She is now seeking a better agent, one who knows how to negotiate skilfully on her behalf.

In Sydney last week, a homeowner who says he was pressured into selling his Newtown home at auction for hundreds of thousands of dollars below what he feels he should have received, has complained to the Office of Fair Trading. In an 11-page letter setting out a multitude of ways he believes he was coerced and deceived, the seller, who is incandescent with rage, is trying to cancel the sale. He feels his home was effectively “stolen” by a system that allows buyers to pay below their highest price. At worst, he plans to pay the agent what he feels they deserve for having short-sold his home by hundreds of thousands of dollars – nothing.

This seller not only feels that he should be paying no commission, he also feels the agent should also compensate him for the amount by which they short sold his home.

Imagine if agents who pushed auctions were forced to repay home sellers the amounts by which homes were short sold. Auctions would cease overnight.

And more homeowners would then get the best price when selling their homes.

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