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 extra $30,000 for a new car, so make the reserve $680,000”.
When you are working with a good agent and a good auctioneer, neither is the case.
So if the aim of an auction is to get the best possible price the market will pay, how do you know what that is likely to be? How do you set the reserve price?
Initially you look at recent sales of similar properties to give you an idea of what price you can expect, but it’s during the marketing campaign that all the research is done.
A good agent will ask everyone, and I do mean everyone, who visits the home where they see value and what they would pay.
This information is then relayed back to the seller regularly during the campaign, letting them know how the market sees their property. This gives them realistic expectations for the auction.
In some cases this can be a reality check for the seller, they might have had very high expectations, but regular feedback can show them where buyers think their property sits and lets the agent set a genuine reserve to facilitate the sale. If the seller is still reluctant to accept the market’s feedback, an agent can often bring in their auctioneer to offer a third party point of view.
This feedback is essential to the success of an auction. While auctions are a very successful method of sale, they don’t work when agents don’t follow up buyers. Sadly, a secret shopper survey revealed that the majority of agents do no buyer follow up – out of 147 home opens only eight agents called the buyer back!
And even if agents do call back, or speak to buyers at home opens, they need to get the right sort of feedback. Superficial feedback like the bedrooms are too small, or the property is on a main road isn’t enough. Even if this is the buyer’s response, you should still ask them what they would be prepared to pay for the property.
Agents need to get genuine price feedback to report back to the seller so that they have a realistic expectation on price and you can set an appropriate reserve.
And of course, we have all heard the stories where a property sells for tens or hundreds of thousands over reserve, they make great news, but they don’t make for realistic expectations among sellers. This certainly doesn’t happen in every case, and while it might appear that the agent made a mistake in setting the reserve, if they have done their homework, it’s not a result of inaccurate price setting, but the outcome of the competitive nature of auctions and buyers who are willing to offer more than other buyers to secure the property.