As an auctioneer I’m often asked how the reserve price is set. A common misconception is that it’s a bit of guess work “I think we can get $720,000 for it”, or even that it’s based on what the seller wants – “ I want to get $650,000 for the house and I want an […]
When it comes to auctions one of people’s greatest fears is that their property won’t sell, but not selling under the hammer doesn’t mean the auction is a failure.
The market place tends to worry about properties being passed in, but this is really just another stage of the auction process.
An auction aims to get the best possible price in the shortest possible time and sometimes the sale occurs after the auction. For example, auctions are designed to attract buyers and encourage them to act, but not all buyers are in a position to bid on auction day.
They may be a subject to finance buyer, or a subject to sale buyer. They can be genuinely interested in the property and want to make an offer, but cannot bid under auction conditions. These buyers are actually waiting and hoping that the property will be passed in at the auction so that they can have the opportunity to buy.
There will even be auctions where there are no actual bidders, but several ‘subject to’ buyers waiting in the wings to compete for the property. In many instances, when a property is passed it, it will sell soon after the auction.
Knowing what to expect at the auction can often relieve some of the concern sellers feel.
A good agent will gather feedback during the campaign and let the seller know if any bidders are expected at the auction or if interested buyers are likely to be subject to finance or subject to sale.
Similarly a good agent will encourage all interested buyers to attend the auction. If the property is passed in on a buyer bid, the agent will negotiate with the highest bidder, but if the property is passed in on a vendor bid, all buyers can have the chance to put in an offer. If a buyer is not present, they will miss the chance to secure the property for themselves.
I also think it’s important to understand the market statistics.
We can get carried away by hearing about high clearance rates, particularly in the eastern states, and people often think clearance rates refer to those properties sold under the hammer. However they can include those properties sold before the auction, sold under the hammer and those that have been passed in and sold within 24 hours.
If possible, agents should provide sellers with a break-down of statistics, for example the weekly CoreLogic RP Data statistics list how many properties are sold prior, under the hammer, or just after the auction, They also list how many are passed in and withdrawn each week, and give details of the individual properties that have been reported to them.
Where an agency does a lot of auctions, or can access the relevant information, it is also useful to give the seller information on passed in properties and when they sell. Many properties sell within days of the auction, or generally an offer is received and accepted within a week or two of the auction.
The key is to ensure sellers are well briefed throughout the campaign so that they have realistic expectations for the auction and will not be disappointed is the property is passed in.
“Why do buyers want to see a price? So that they know what they don’t have to pay!”
Leading New Zealand auctioneer Phil McGoldrick made this statement at our recent Auction Boom seminar and it certainly had an impact.
It is a very confronting comment, but it’s very true
Think about it, as a buyer, what do you do when you see the advertised price for a property – you start thinking about how much lower your offer will be. We’ve all done it – knocking tens of thousands off the asking price.
Selling with a pricing strategy, which is the most common method of sale in Perth, puts buyers in competition with the seller, and if the property remains on the market for month after month, eventually there is conflict between the seller and their agent.
However when you use a no price marketing strategy like auctions, buyers compete against other buyers, which gets a better result for the seller. You also have a call to action – like the auction date – that encourages buyers to act, you have multiple chances to sell, and your property generally sells in a faster time than the traditional private treaty method.
The latest REIWA figures show that the average number of days on market for a private treaty sale is 71 days, compared with 40 days for properties sold using the auction process. In the last five years the quickest average time for private treaty was 50 days in the 2013 December quarter, still outclassed by auctions with an average of 33 days in the same quarter.
Statistics also show that as well as selling in a shorter time frame, because of the competitive environment, auction properties usually sell for a higher price than those sold without a price.
It was great to see so many agents at our seminar and we hope they’ll be able to grow the use of auctions in WA – we certainly have plenty of room for improvement!
Phil told us that in his home town of Christchurch they sold over 2,000 properties via the auction process last year. They have a population of about 350,000. In 2014 1662 properties went through the auction process in Perth and we have a population of over 2 million!
The latest data from CoreLogic RP data also shows how much the Perth market differs from Sydney and Melbourne where auctions are much more common. 39 percent of properties were sold via the auction process in Melbourne in 2014/15. Sydney recorded 38 percent, while Perth saw 3 percent of properties sell though auctions.
We need to boost that number.
One of the questions at our recent Auction Boom seminar was “what if there is only one bidder?”
I believe this isn’t an issue and can still work in the favour of both the seller and the buyer.
At an auction you often have two competitive environments. The first occurs with bidders who have the first opportunity to buy, and the second includes those buyers who aren’t in a position to bid, such as subject to finance, who are waiting to see if the property is passed in so they can make an offer.
When there is only one bidder you might ask why the seller doesn’t let the property get passed in and let all potential buyers compete together, after all there is the possibility just might get a higher price.
While that might happen, the huge advantage of dealing with a bidder is that they will make a cash offer, one that is unconditional and not based on the need to get finance arranged or for another property to sell. The seller gets a quick sale, and quick settlement. If you choose to wait you take the risk that a subject to finance buyer may take a while to get their finance approved and it may fall through, or a subject to sale buyer may take a long time to sell their home.
As for the bidder, why would they want to wait and take their chance competing with other buyers, losing their exclusive opportunity to secure the home.
So how does an auction work with just one bidder?
The auctioneer uses vendor bids, and in WA you are allowed to use up to 10 bids, to indicate to the buyer where they need to be to secure the property. Essentially you are negotiating under auction conditions to get a result.
Even having no bidders is not a problem, you can still have a very competitive environment when a property is passed in. And you can still achieve a very good price, but you may lose the benefits of speedy resolution to the sale.
I recently called an auction where two potential bidders wanted to vary the deposit conditions. The conditions asked for a $100,000 deposit. One buyer wanted to pay $10,000 immediately if they were the successful bidder and pay the remaining $90,000 later that day. The other wanted to pay $50,000 on the spot and $50,000 on the next business day.
Did we let them? Of course we did! Asking to vary the conditions showed they were serious buyers who were genuinely interested in the property. We knew we would have some good auction action and saying no would have lost two bidders.
It’s not very well known in the WA market that you can vary auction conditions, but if you vary them for one buyer you need to offer the same conditions to all buyers so that they are all operating on a level playing field.
The most common variations relate to the deposit and settlement date. Most auction conditions ask for a 10 percent deposit, but when you don’t know what the final price is going to be it can be a bit hard for all buyers to have the required funds available. Many ask to be able to pay a certain amount if they are the successful buyer and the rest soon after.
It is less common, but possible, to get a request for vacant possession where the property has a sitting tenant. This can be a bit more difficult, particularly when there is a fixed term lease in place, as it requires the owner to negotiate with the tenant to see if they are willing to leave the property before the end of their lease. This request should be made well in advance of the auction.
One of the more unusual variation requests I’ve seen involved an older property in an area that was undergoing a lot of subdivision. Unfortunately, under the zoning regulations, this particular property was a bit too small to subdivide on its own. One keen buyer said he would bid for the property on the condition that the neighbour “donate” some of his block, in return for a share of the eventual profits, allowing them to turn two blocks into three.
We approached the neighbour well before the auction. He agreed to the condition, and we put it in writing, subject to the necessary approvals. We offered the variation to all buyers at the auction, the particular buyer bid, but in the end was not the successful buyer.
So what do you do when you are asked for a variation? Firstly you need to discuss it with the seller and if they agree you should get it signed off in writing. Then you must announce the variation to all buyers before the auction starts.
While it is best to arrange variations before the auction, a variation can even be agreed to during the auction in order to get a higher bid. For example, I have seen a buyer offer to increase their bid by another $10,000 if they can get another 30 days to settle.
Auction conditions aren’t set in stone. As an agent be prepared to consider variations from serious buyers, and as a buyer, if you are genuinely interested in the property and want to bid but don’t, or can’t, quite meet the conditions, ask for a variation to avoid missing out!
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