The great Auction debate!

Transient

The property market (in Auckland at least) is running hot, so the reports of late have focused on the extent to which auctions are the preferred means of selling a property. The report from REINZ for September stated that 37% of Auckland properties were sold by auction.

The question I want to ask (and answer) is whether auction is the right selling method?

Firstly there is a difference between 'auctions' as a selling method and 'property sold at auction'. Today there are 1,428 of the 9,329 Auckland properties on the market being marketed as auctions. That is just 15% of all property on the market in the region. That would imply that auction properties are selling at over twice the rate of non-auctions!? - not quite.

Not all of these properties currently being marketed as auctions will eventually go to auction, and equally not all of them will “sell-under-the-hammer”, however from my experience and attendance at various auctions there seems to be a reporting of all property sales which were marketed as auctions being defined as sold-by-auction in the data regardless whether the sale was pre the auction, at the auction or after the auction.

Lets look at the pros and cons of auctions. In making this evaluation I have taken the viewpoint of a property owner reviewing the method of sale with an agent in order to provide this opinion.

In favour of an auction

An auction is a theatrical event, the opportunity for the real estate industry to showcase their skills in their natural setting. It is an event that forces buyers to be exposed to the worst of the emotional rollercoaster associated with the “heart vs head” property buying decision. As a seller you should be delighted to hear this!

As a vendor it brings the property sale process to a finite point where the “market” has to make the decision – is there someone out there who is prepared to buy this house at an acceptable price?. This finite-time sale period is great for focusing the marketing activity to generate maximum interest and standout of the property in the market.

Auctions enforce an unconditional legal sale at the fall of the hammer (if the property is ‘on-the-market’ with the reserve price achieved) this ensures certainty for sellers looking to be able to make a purchase decision on their next house.

An auction has the ability to hype the selling price as the emotional event of the auction can lead to aggressive and highly competitive bidding if the property can attract sufficient willing and able bidders.

Against an auction

An auction can exclude a certain segment of buyers who are unable to be in a position to bid, they may not have the necessary deposit or the financial pre-approval. They may also be excluded as they have other conditions which are not able to be a part of a bidding process.

An auction is a very public spectacle that can have the effect of bringing your property sale process crashing back down to earth if (a) nobody bids, or (b) the bidding falls short of the reserve. The buyer community attending such an auction are very aware of what the ‘market’ has stated in regard to the property and can use that to its advantage.

Once you have chosen the auction as a path to marketing your property, you have played that card and have to accept that you cannot re-play it. The next move is withdraw the property or market it as a normal property for sale.

On balance I am not fond of auctions.

In my view an auction most favours the selling agent as the process drives a specific time-bound event that seeks an outcome that drives an unconditional sale and this is what delivers income for agents. To be clear I am not saying that agents are so single minded in driving auctions that they omit the primary requirements of service and presentation, I just believe there is a vested interest.

As stated, an auction allows the agent to create a theatrical event that showcases their skills and builds their brand presence within their target audience.

Auctions tend to suit property sales in higher density areas of the country; that being the reason why Auckland sees the vast majority of auctions across the country. As of today there are 2,539 properties being marketed as auctions across the country, 56% of which are in Auckland. I did read once an academic paper that stated that auctions don’t work (from a purely theoretical psychological perspective) unless you have an urban population of at least 800,000 to create the competitive tension to fuel an auction.

Auctions tend to work best in markets that are seeing strong demand and limited supply – the classic territory of a seller’s market; as we are currently experiencing in certain areas of the country.

Auctions tend to work to favour property around the median price for the area as there tend to be more buyers for these properties. That is not to say high priced property don’t perform well at auction however the key is a strong and active buyer pool, who are in the financial situation to be able to bid.

There are a couple of personal pieces of advice I would offer if you are a buyer forced to participate in a forthcoming auction.

  1. Flag your interest in the property early with the agent. You will not loose any negotiating position but will ensure you are kept informed should circumstances change and also allow you time to review the documents
  2. Negotiate the deposit in advance of the auction – you can request that the vendor enter an agreement to allow you to bid based on a lower deposit. A Seller would rather have an extra bidder who is paying 5% deposit as opposed to 10% than no bidder at all.
  3. On the same note try and negotiate any other conditions you would like, the one I like is a different settlement date. Get these agreed in a signed side agreement that allows you more flexibility to bid.
  4. Be in control at the auction, a friendly agent offering advice is not working for you unless you are paying them – they are being paid / motivated by the vendor. Their objective in offering you advice is firstly a sale and secondly a higher price. If you want a professional to work for you to manage the auction to your benefit pay an agent yourself – nothing of value comes for free.