Do Auctions Really Work In Getting The Best Price For The Vendor?

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Auction Bidding

Yes, we are all aware of the state of the property market in Brisbane right now given that we hear and read about it across all kinds of media sources to the point that it is on the lips of most pub chats these days.

What we are also witnessing right now is a huge rise in auction sales in the Brisbane market and whilst this method of sale has recently become the most frequently adopted & promoted method of sale by sales agents, vendors need to ask themselves “Is this sales method actually the best way of discovering what a buyer is prepared to pay for their property?”

At the time of a pre-market property viewing this week, I had a conversation with the sales agent that I have known for some time, who knows his local market very well, and who is also part of a large team of sales agents within that sales agency. He informed me that if I was interested in this property then my client had to be at the top of our level, we would have no room to negotiate as he was confident that the property would attract a lot of interested buyers and would inevitably result in many offers being collected from buyers. As we have mutual respect for each other the resulting conversation was frank and open and went something like this;

ME:

“So Jim, (not real name) It’s clear that your office gathers a huge number of offers from buyers wishing to purchase on practically all of the properties that you guys list for sale but in the interest of transparency and so that the multitude of buyers don’t have to compete in another MULTI-OFFER scenario tell me why does your office not promote auctions to your vendors?”

JIM:

“Good point Steve and here’s why-

We believe that the highest bidder at the auction is not necessarily the buyer that is prepared to pay the absolute best for the property. 

As is our office Best Practices Policy we would usually hold buyer inspection times for an hour on both Thursday & Friday and two opportunities on Saturday, with clear instructions related to all interested buyers that offers are to be submitted by 5.00 pm Saturday. These offers would then be presented to the vendor on Saturday evening for consideration on all aspects of the offers.

Our sales team meets every Monday to chat about what offers gathered from the teams’ open houses are still on the table and those that have been accepted. Then we know what we still have to sell that week and do buyer follow-ups.

Steve, there are only 5 suburbs in the area that we service and there are currently only 130 properties being marketed online between the price range of $600,000 to $1,000,000. Now out of those 130 properties, 70 of them are already unconditional so in effect, they are already sold. Out of the remaining 60 properties, 20 of them are under contract already but still waiting to satisfy the relevant contract conditions. That leaves only 40 properties to consider for all the buyers between $600k to $1m. 

Steve, that’s such a small number of properties as vendors agents we need to make sure that we get the maximum dollar value that we can out of these buyers and this process that we engage in with our open houses gives the buyers an idea of what their level of competition is, and we both know that there is not a great deal to look at so the buyer competition is huge. This buyer inspection process would typically result in a property receiving between 10-14 offers from buyers.

What we find in our Monday meetings is that typically across the 14 offers received 2-3 of them will be on a cash basis, so NIL conditions. We can assume that these would be the buyers who would bid at an auction.

The remaining offers would all contain certain conditions that provide a safety net for the buyers who require that level of comfort and safety. However, usually out of the 10-11 conditional offers there are 4-6 offers that have a dollar value significantly greater than the cash buyers and all the vendor has to do is take a chance that the chosen buyer is appropriately positioned and wait for the conditions to be satisfied, usually between 10-14 days. So effectively, it comes down to a trade-off between time and money. 

We do not have many contracts that collapse on finance these days so it is usually a risk that the vendor is willing to take and one that rewards them much greater than if they had taken the property to market with an auction. It’s clear to us in our team that the buyer who paid the premium price for their property would actually not be able to take part in the bidding process at an auction.

So, for this reason, we do not encourage our Vendors to take their properties to the market, rather just let the buyers show us what dollar value they are willing to walk away from the property and miss out.”

ME: 

“Thanks, Jim- that explains it very well and that’s actually the reason that I like to buy our clients property at an auction. It’s a lesser talked about fact that it’s not the highest bidder who controls the outcome at auctions, it’s actually the second-highest bidder, but when that bidder reaches their capacity, then the vendor actually does not know what dollar value the highest bidder had in reserve.”