Auctions are frequently touted by real estate agents as the best way to sell a property. What they omit to tell their clients is that in most cases it's their own self-interest that lies at the root of this widespread preference for auctioning.
Auctions are loved by agents because they operate within a fixed timeframe and usually entail a hefty vendor-funded advertising campaign. And, because a reserve has to be set prior to the auction taking place, the agents are able to draw out of the vendor information vendors would normally be well-advised to keep a closely guarded secret: the absolute lowest price he or she is prepared to take for a property. With auctions, the focus is always firmly fixed on the bottom dollar.
For the auction process to go well there needs to be two motivated would-be purchasers who keep outbidding each other and naturally forcing the price upwards. Eventually one of them will withdraw from bidding, leaving the other bidder as the auction winner for just a few dollars more.
By their very nature, auctions do not draw out the best price that could have been achieved that day. Regardless of his or her actual spending capacity, the winning bidder has to offer just a small amount more than the second-best bidder to secure the property. All too often the price achieved at auction reflects the bidding capacity of the unsuccessful bidder - which may be significantly less than the maximum amount the winner was prepared to spend.
In recommending an auction for your home, the real estate agents are gambling on there being two motivated prospective purchasers to ensure lively bidding. That's the best case scenario. If there's only one party interested in the property then it will probably go for reserve - that is, the very lowest price the vendor will accept. Any agent who tells you they want to secure the best price for your house and then recommends an auction is presenting conflicting ideas.
I first discovered these fatal flaws in the auction process while doing research for Buying Your First Home: An Essential Kiwi Guide, a 2008 book I co-authored. It all remained just compelling theory until I was one of three trustees involved in the purchase of a property at auction and saw it unfold just as the experts predicted.
A property, which was valued at around $520,000 and was to be offered at auction, had been earmarked as a desirable asset for the trust. We were very keen on the property and decided the trust's top dollar lay somewhere between $600,000 and $620,000. We were prepared to pay a premium for several reasons. We planned to hold the property for a long time, we'd been searching unsuccessfully for just such a place for almost three years and we'd made unsuccessful offers of over $700,000 for similar but (in our opinion) inferior properties.
The outcome of this auction represented a textbook case of why you should never allow your house to be auctioned if you're keen to achieve top dollar for it. Our trust secured the property for the reserve price of $470,000. We were happy, the agent was happy and presumably the vendors were too - although they'd have surely been gutted to know we'd had an extra $150,000 up our sleeve. All of which, as far as I can tell, goes to prove that the auction process favours purchasers and agents rather than vendors.
What's your view on auctions? Have you ever purchased at one or sold at one? Do you love them or loathe them?