April 18, 2022 Luke Russell

WHY WE NEVER SELL AT AUCTION … IN ANY MARKET

AN ANALYSIS OF A HIGH RISK STRATEGY

  • Public auctions are a high risk method of sale.
  • Auctions present sellers with higher risks of losing an emotional sales premium, i.e. the difference between the market value and a singular outlier buyer who is above the market.
  • Auctions have been designed for hundreds of years to find the ‘market value’ not the ‘above-market value’.
  • Higher auction clearance rates and prices in 2021/2022 are merely a reflection of the ‘new market value’ and not a reflection of the ‘highest price in the market place’.
  • Auctions are highly transparent and provide buyers with information they would not otherwise have.
  • Auctions require a perfect storm of buyer conditions … multiple emotional buyers, with the same maximum spending capacity, who are competing with each other at the same time.
  • Contrary to popular opinion, auctions limit competition, due to the need for buyers to be ‘cash, unconditional buyers’ to be a successful bidder at the public auction. All other buyers, who are excluded from bidding at auction (e.g. buyers who may just need a 1 week finance period), who may even be able to pay a much higher price than any of the auction bidders, are not a part of the auction competition.
  • The highest price at auction is ALWAYS anchored to the second highest price. This is not the case with other methods of sale where the final price and second highest price (in any market) are often at significantly different levels.
  • Other methods of sale (e.g. Private Treaty) empower sellers far more than public auctions and significantly increase the chances of finding and securing an outlier emotional buyer, in any kind of market.
"For auctions to succeed they require the ‘perfect storm’ of multiple emotional buyers. Private treaty does not. "

This article may just ruffle some feathers! This is particularly true in a ‘hot market’ where lots of properties are actually selling under the auction hammer and setting new location records.

The following empirical facts may at first seem like heresy, but if you are not inclined to rely on ‘perfect storms’ and ‘luck’, and you would prefer to increase your chances of obtaining an ‘above-market’ price (instead of decreasing your chances), then read on…

QUESTION: What does a public AUCTION need to achieve an above-market price?

ANSWER: It requires a minimum of 2 emotional buyers, with the same maximum financial capacity, where these buyers are required to publicly compete for the property at the same time in the campaign.

QUESTION: What does a PRIVATE TREATY need to achieve an above-market price?

ANSWER: It requires just 1 emotional buyer, who only has to perceive they are in competition with other buyers, where the solitary buyer can make their offer at any time during the campaign.

But wait, I can hear the hoards of agents reading this post right now saying “but auction gives you three ways to sell, not just one … before auction, after auction and at the auction, so it’s the best of both worlds”.

Unfortunately, that is not correct.

"Auction is a high risk strategy. For hundreds of years it has been designed to find the ‘market value’ NOT the ‘above-market value’."

Public auction campaigns give you just two ways to sell, at the auction itself or by private treaty, before or after.

The problem with this approach is that it doesn’t give you the BEST of both worlds, it gives you the WORST!

Thinking you can sell by private treaty before or after auction day (with the same optimal private treaty outcome as a dedicated private treaty campaign) places you into a seriously sub-optimal, poorest-of-the-poor, private treaty environment.

Although there are many problems with using a ‘split interest’ (unfocussed) sell-before-auction-day strategy, one of the most relevant concerns is the fact that private treaty negotiations prior to auction completely water down the perception of competition (one of private treaty’s major strengths that transparent public auctions simply don’t possess).

This watered-down private treaty approach severely suffers from mixed messages about deadlines and time imperatives (FOMO reduction) and also suffers from the restrictions on an agent’s dialogue, due to the legal problems (particularly in Queensland) that the agent faces where they are not allowed to talk about price issues, due to the property being marketed as ‘for sale by auction’.

Similarly, private treaty sell-after-auction-day negotiations also face an uphill battle.

"Selling before or after auction day places you into a sub-optimal private treaty environment."

Once an auction is over, and the property has not sold, every buyer now knows that the auction itself has not produced a result. They also now know the level of buyer interest and they also know the entire market’s perception of the property’s value. This means that the final sale price is overtly ‘anchored’ to whatever happened at the public auction. What a disastrous private treaty environment!

Thinking that you will get the best outcome from any process that is clearly a ‘foot in two camps approach’ is no different than thinking that your chances of any business success are increased when you are wilfully ‘unfocussed’. It’s a delusion. It’s a process based more on luck than good judgement.

Ok, so here is a simple truth … Private Treaty, under any market condition, is a far more predictable, lower risk pathway to finding and securing an above-market buyer, whereas public auctions are dynamically restricted to exposing and finding the ‘market value’ of a home (even if the ‘new market value’ is much higher than last year’s market value).

Skillful, focussed, private treaty negotiations are faster (every powerful negotiation parameter favours the seller – think FOMO) and they generate significantly more ‘bids’ or offers than public auctions as public auctions restrict bidders due to the requirement for the auction participants to make an offer with no finance and no building and pest conditions.

"After a property is ‘passed in’ the final sales price is overtly anchored to the transparent highest bid in the auction. "

In contrast to the public messaging agents regularly provide about the (false) benefits of public auctions (“auctions are the best competitive environment, Mr Seller”), auctions do in fact, LIMIT competition and empower buyers with the inappropriate knowledge of the level of ‘buyer interest’ in a property based upon the fact they provide the buyers/bidders with ‘pricing’ reference points that they otherwise would not have.

So what’s the reason that everything from horses, to cars, to boats, to artwork, to houses, have used public auctions to complete a sale?

Simple. It’s the most convenient and best way to establish the ‘market value’ of almost anything (but more often than not, NOT the ‘above-market’ value).

While most sellers know that the public auction process has always been a simple way to ‘clear stock’ (think liquidation auctions), they also know that auctions don’t require complex negotiation capabilities due to the fact that the auctioneer is predominantly ‘managing’ the public bids.

Many sellers also lose their mind when they hear a one-off ‘sold above reserve’ hot market auction story, so they race to holding an auction under the gross misunderstanding that ‘sold above reserve’ is the same as ‘sold above-market’ … which it emphatically is not.

Increased prices generated by auction are more often than not the new market value of the property being sold which is why most valuers are happy to accept the price result at auction as the bankable market value of the property.

"While auctions are an extremely convenient way for agents to sell for market value, auctions dramatically limit the competition by limiting the bidders at the auction to buyers who are ‘cash, unconditional’. "

But “what about the high prices sellers are achieving right now under auction conditions in this hot market”, I hear you ask? Perhaps the better question should be ‘was the high price at auction the highest price the final bidder could have, or would have, paid under different circumstances?’.

The reality is that no one knows just how far above the final auction price a singular buyer would have gone if they weren’t aware of the second highest bid, but almost everyone knows that the highest bid at auction will almost only ever be marginally higher than the second highest bidder. This is because the second highest bidder ANCHORS the highest bidder. It’s just the way auction works, but rarely is this problem addressed or discussed.

Conversely, in a ‘hot market’, auction agents rarely talk about the multiple-offer private treaty sales that generate suburb records where the final price is often significantly higher than the next highest offer.

In addition, all of  the ‘bidders’ in ‘hot market’ private treaty multiple-offer sales find themselves in an even more competitive environment than auction, as there is no restriction on who can make an offer. Amazing!

This is exactly what we have personally experienced all over Brisbane during the current ‘hot market’ using a fully optimized private treaty negotiation process.

"The second highest bidder at an auction will anchor and limit the highest bidder and reduces the chances of finding and securing an outlier buyer. It’s simply the way public auctions work. "

Effective and skillful Private Treaty negotiation is the most reliable way of identifying and securing an above-market price regardless of whether or not there are multiple emotional bidders or just one emotional bidder (both of which still occur even in a hot market).

Auction, however, requires the perfect storm … MULTIPLE emotional bidders who all have the SAME MAXIMUM spending capacity for that property and who all need to compete at the SAME TIME.

So, if you’re into luck, random chance, limited competition, higher risk and handing excess ‘buyer-interest’ information (and total control) of the sales outcome over to the marketplace, then the convenience of auction may be just what you’re looking for.

However, for sellers who would prefer a far more reliable way to achieve a sales result over and above what the majority of buyers believe their home is worth (under any market condition), then these sellers may prefer a fully optimised private treaty negotiation process.

Final question …. “Does all this mean you cannot get a ‘cracking’ price using a traditional public auction approach?”

No, of course it doesn’t.

There are always exceptions that prove the rule, the same way that price anomalies occur with ANY sales methodology (priced, un-priced, ‘offers over …’, tender etc etc).

The question isn’t, “could I get an above-market price with this method of sale”? The question is ‘how LIKELY is it that I could achieve an above-market price with this method of sale?’. It’s all about the ‘probability’, or your ‘chances’ of success.

Why would anyone choose a method of sale with a 1 out of 10 chance of success instead of a 9 out of 10 chance of success?

You only get one shot at a great campaign … choose wisely!

"Selling at auction is actually a high-risk strategy if your goal is to secure an above-market buyer. Optimised private treaty sales methodologies offer a far more predictable way of finding and securing the highest price for your home."

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