Alistair Helm: Auctions getting out of control in Auckland

Property commentator Alistair Helm says auctions are being compressed into a shorter marketing period, which is "dumb and somewhat illogical". Photo / Thinkstock
Property commentator Alistair Helm says auctions are being compressed into a shorter marketing period, which is "dumb and somewhat illogical". Photo / Thinkstock

The latest data from the May property market as reported by REINZ states that of all sales in Auckland; 38 per cent "went under the hammer" - up from 28 per cent a year ago, outside of Auckland auctions are also on the rise albeit off a smaller base up from 7 per cent of all sales a year ago to 9 per cent in May.

The comments within the real estate industry, as expressed by Harcourts Northern regional manager, support these rises saying sellers were wising up on the benefits of auctions - higher prices with less fuss. She went on to say sales by auctions had shorter and more thorough marketing campaigns that limited "stress periods" for vendors.

Sounds perfect - less stress, less fuss, higher prices!

The fact is, not only are auctions becoming more the norm, they are also being compressed into a shorter marketing period, which in my view is dumb and somewhat illogical.

Take the data for yesterday (June 13) - in Auckland 185 new properties came onto the market. A pretty normal day, although Thursday's tend to be busier (a hangover from the days when this is when the property magazines used to publish the weekly selection). Of these 185 properties; 98 (53 per cent) were auctions, with 28 per cent being marketed with a price and the balance for sale 'By Negotiation'.

More than half of all new listings today are being marketed by the auction method of sale.

However when analysing the auction date for all of the 98 auctions, what I found even more alarming is that nearly two thirds of those new auction listings have an auction date of 3 weeks or less from today. A staggering 1 in 12 have an auction date before the end of June, with one providing only 9 working days between listing and auction.

How long to Auction?

Making the process of selling your house a rushed and truncated process is sure to do one thing - spook buyers. Buyers who are already pulling their hair out trying to bid on houses with so little time to undertake due diligence.

As to the claim made by Harcourts Northern regional manager of 'higher prices', this is a claim that can never be truly substantiated. There is never a 'control' benchmark for houses; they are all unique in form, location and circumstances; measuring against CV is misleading as that is proven to be a poor benchmark.

So, real estate agents who are paid a commission by sellers and who have the sole interests of sellers at heart, are constantly pushing auctions. Nowadays as the supply constraints grow larger these agents are choosing to recommend shortening the selling period. In my view this can only drive more potential bidders/buyers from the market, rather than as they hope, bring more buyers together to bid up the price.

Just imagine this scenario played out by an Auckland couple who are in the market ready to buy:

This young couple have been looking at buying a house for over six months, they constantly hear tales of super-heated property market and having already lost out on an auction or two already, stress levels are high!

They get an email alert today for a property which meets their criteria. They review and decide to view at the weekend, they can't do Saturday as they are away, so they attend on Sunday. They like the property a lot, but the auction is on the 3rd July, just 13 working days away. Now, normally they would go back to view the property again on the second weekend before deciding if they are keen, but they realize the urgency. So they talk to their bank next Tuesday, who show support for the price they think they can bid to, but the bank tells them they will need a registered valuation.

The couple pause - they don't want to spend another $600 for a valuation - after all they have only seen the property for 12 minutes so far!

They decide to wait until a second viewing at the weekend which goes well; so on Monday 24th June they decide to get a valuation. But the valuer says he cannot fit them in until Friday the 28th (just 3 working days from the auction). The next question is should they do a building inspection? Left with just six working days they decide to forgo this, although they do request a LIM through their lawyer.

Days go by and the weekend of the 29th/30th lets them see the property a third time, but with no real idea of the condition or what the valuer says he will value it at. By Monday they're pulling their hair out and losing sleep, the valuer delivers the valuation placing the property at a value just below the level they had hoped based on their loan to value ratio. However all is not lost. One of the parents has said if needed they would lend them $30,000 to help. They call up on Monday night to literally plead for help, however the access to the money is not available due to the money being on a term deposit.

Whilst they could have bid at the auction and as they find out later with that $30,000 they would have been able to buy the property; they just gave up - totally frustrated on Wednesday night, instead of celebrating their new home, they drown their sorrows, vowing to give up on buying a house - they have a guts full!

(Note this is a scenario of a couple who are renting and don't have a place to sell, just imagine the compounding issues if they had that property to sell, scraping together the cash deposit and then the panic about selling their own house.)

So, another prospective buyer fails to present themselves to the seller, unbeknownst to the agent. How many buyers are being squeezed out of the market by such circumstances? Equally how many buyers are buying without due diligence? This could be a dangerous long-term issue especially if there turn out to be structural issues with the house.

Agents may well like short notice auctions. They may well get a sale and thereby service the vendor in a shorter period (this is clearly their idea of reducing 'stress') it certainly meets their needs as they get paid sooner with less work. Let's not forget that an auction requires less work by the selling agent around the process of facilitation and negotiation, the auctioneer actually does the negotiation at the auction.

Finally, what about that claim about auctions provide 'more thorough marketing campaigns'? Auction marketing is no different to any other form of property marketing, except for the date of sale and the word 'auction' in the marketing material and, of course, the cost of the auctioneer. Properties all get loaded onto Trade Me and in the same way and promoted online the same way regardless of the chosen form of sale. Arguably and perversely the shorter auction period is further reducing the relevancy of print advertising, as lead-times for print are measured in days rather than the seconds it takes to get a property online.

Auctions are undoubtedly the favoured method of sale by agents, this they detail to vendors citing the data of 38 per cent of all Auckland sales being by auction. Be aware of these number as sometimes what is reported as an auction was not a true auction sale.

However the vendors should be more wary; they actually end up undertaking a sub-optimal marketing of their property by going for an auction or worse a short notice auction. They may actually end up eliminating buyers and thereby reduce demand for their house.

The underlying problem is that this situation in today's market has not become transparent as due to the current demand, as long as they get just two bidders at the auction, the property may well sell. The question has to be asked - was money left on the table?

In my view marketing a property needs to be a focused process undertaken with consideration. It should be undertaken with an appropriate period of time - sufficient enough to allow prospective buyers to satisfy themselves of the property, undertake due diligence and approach the sale in a clear-headed manner. That period is probably between three and four weeks. I think a fixed date of sale is appropriate. In fact, I think there should almost be a sell-by-date. I favour tenders as a method of sale - it achieves the same outcome as an auction without all the hype, razzmatazz and undue very public pressure!

Whilst on this topic it is relevant to reference the analysis undertaken by highly regarded ecomomists and authors of Freakonomics, Stephen Dubner and Steven Levitt. When analysing the sales of agents' homes in the US (as this video shows), they found that agents marketed their homes for longer; 10 days longer than their clients' homes, and they ended up getting a better price. Makes you think!

Alistair Helm is a property commentator and creator of the Properazzi website.

- NZ Herald

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