Author: Brian McNicol
What are the advantages of selling at auction for the vendor?
Traditionally, there were certain properties that real estate agents recommended going to auction; properties that were unique and difficult to put a price on, properties with attractive features such as stunning views, waterfront locations. Today, most agents will recommend selling a property at an auction. If the vendor needs to sell a property in a reasonably short timeframe then real estate agent (vendor’s representative) can set maybe a 3 or 4-week marketing campaign, the auction day and if sold normally about a month for settlement. The short marketing campaign can be beneficial to people with young children or busy lives in that there will be a certain number of open houses and disruption to our lifestyle.
There is normally a good marketing campaign to promote your property. If the property needs some Tender Loving Care (TLC) or a complete renovation, auctions can be a good way to sell without potential buyers pointing out the things that are wrong with the property in order to lower the price. If on auction day vendor has the ideal mix of a number of willing buyers and a good auctioneer then the auctioneer is likely to create more impetus and urgency to buy and drive the price up.
If sold under auction day conditions then the contract is unconditional meaning that the purchaser is legally obliged to purchase the property.
During the auction process, the seller still maintains control – they set the budget for the marketing, they can set terms and conditions of sale for example a longer settlement, they can accept offers prior to the auction, they can withdraw the property from sale and they set the reserve price at which they will sell the property.
We might digress a little here and also look at the advantages of auctions for the real estate agent. In some states, particularly Victoria and New South Wales, there is a fairly high success rate of the property either selling prior to, at auction or in a few days after auction. There is normally a reasonably large marketing budget that the vendor pays for so the agent gains exposure. Compared with private sale or treaty, there is potentially less time spent in negotiation for the agent as there is pressure on both the vendor to sell and the buyer to purchase. A success auction can result in more listings and auctions for that agent.
What are the disadvantages for the vendor?
Although real estate agents may argue that there is no additional costs in terms of marketing, many sellers believe that there is and it certainly occurs in a shorter period.
Auctions alienate some potential purchasers – they don’t like registering to bid or they haven’t been able to organise building and pest inspections or finance prior to the auction.
If the property does not sell at auction, then the seller normally has an exclusive agency with that agent for maybe another 90 days which may be to the detriment of the seller.
The major dread for any vendor is that there will be few bidders at auction and there is always a tense time until the first bid is received. Bidding can be fickle and a small number of bids or the slowness of the bidding can be interpreted by those bidding as an indication of the value of the property much to the detriment of the vendor.
If the property hasn’t reached the reserve price then there is increased pressure from the real estate agent and the auctioneer to lower the reserve price to achieve a sale. The real estate agent and the auctioneer are certainly after a sale, regardless of the price as sales under the hammer add to the reputation of the agent. The vendor has spent a considerable amount of money on advertising and maybe other reports that the agent has suggested so can feel pressured to lower the price in order that they haven’t wasted their money.
What are the advantages for the buyer at auction?
Buyers are always hopeful of securing a bargain particularly if there are few bidders and the seller desperately wants to sell.
If successful at the auction, the buyer can feel that they have purchased a property at market value.
There is some transparency in regards to price as buyers are able generally to see the other bidders and what price they started at, the price increments and where other bidders may stop bidding.
If the property is passed in at auction, there is the potential to obtain a bargain through negotiation.
What are the disadvantages for buyers at auction?
The buyer has to have done all their research prior to the auction and have organised their finances. Therefore they have committed money to purchase a property that they may be unsuccessful in purchasing. So buying through the auction process does present a higher risk to the potential purchaser.
The successful bidder is legally bound to purchase the property so there is no cooling-off period or ability to back out of the purchase.
Generally, a 10 percent deposit is required at the signing of the paperwork after the fall of the hammer so the purchaser needs to have this available.
Some less scrupulous real estate agents ‘bait’ people into attending auctions by suggesting a lower price range than is likely. Thankfully, State Government bodies are taking action and prosecuting agents that undertake such tactics.
There is no price guide for the potential purchaser unless they are well informed regarding the market in that particular location.
Some buyers feel pressured to bid at the auction as the real estate agents ‘work the room’ encouraging bidders to make one more bid.
If a potential buyer has not attended many auctions before, they may feel intimated and reluctant to bid. It is a good idea to attend a number of auctions prior to the one that the buyer intends to bid at so that she /he understands the process and feels comfortable.
Potential buyers must know their upper limit that they are prepared to pay for the property and then make sure that they don’t exceed that under any circumstance, not even for $1000 or $100.