Auction Bidding is comparative not competitive.
Once a property is sold, the chance for the owner to profit is irrevocable gone. Surely then, the aim of any sale is to maximize the final sale price.
As suggested by real estate advocate Neil Jenman (2000), sellers can fall victim to auction in two ways.
1. Initially told they will achieve a high price, sellers are then educated down to a far lower price during the auction period.
This price, the “reserve”, becomes the sellers Lowest acceptable price. Identified by the agent, the reserve often converts to the sale price at auction. If the property doesn’t reach the reserve price at auction, it doesn’t sell. The reserve price is then repeatedly lowered to a final sale price during subsequent negotiations.
2 .Achieving a sale at auction often leads sellers to mistakenly believe they have received a good price, the highest price. This, however, is seldom the case. Auction bidding is comparative, no competitive. The auctioneer calls on each buyer to compare their bid to the other buyers, then raise their bid slightly above the others. The last buyer to make a bid wins at a price marginally above the under bidder.
During this process, no consideration is given to the maximum price the successful bidder would have paid. In real estate vernacular, there is not even a word for the “Buyer’s highest price.”
Buyers should never be aware of another party’s offer. All buyers should be given the opportunity to privately make their highest offer, in writing to the seller. AS they are unable to compare offers, buyers are assured of a fair process, all having an equal opportunity to purchase. The sellers are assured of the buyers best price; unable to compare offers the buyers must submit their maximum.
An often-overlooked component of auction is the terms required for a buyer to bid successfully. An unconditional contract with a 10% deposit is ideal for the seller, but how many buyers are in a position to meet these criteria? Certainly not the majority.
Avoiding the dangers of auction and using the private treaty method, that is, a set asking price, doesn’t automatically prevent competitive bidding. The aim of all agents should be to find a buyers highest price. Auctions are great for finding the second best price, rarely the best. With a single buyer or multiple buyers, the skill of the agent is paramount. Yelling at buyers with hammer in hand certainly doesn’t pass the skillful negotiator test.
Private treaty allows all buyers to compete fairly for the property, and enables the skillful agent to fulfil their obligations and obtain the buyer’s highest price for the seller, often above the asking price. This is what agents get paid for.
This article is an excerpt from “Real Estate’s Greatest Dangers – How to Avoid Them Through Smart Decisions” written by Andrew Trim – Managing Director of the Johnson Real Estate group.
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