Auctions - Bad news for everyone (except the agent)!

Ever wondered why some agents work to persuade a seller to auction their home?

I think that we would all agree that in this market many sellers have been on the market for months without finding a buyer. So if you can’t find ONE buyer, how about we go to auction and look for TWO?

Over the years I have attended a lot of 'industry training' and the main message that I got out of it is that auctions are of great benefit to the agent. I don’t remember a lot of seller benefits being discussed...

In these industry training sessions, agents are taught glib lines like: "the spirit of competion will get you the top price"; "whatever price you want Mr Vendor, if it’s out there an auction will get it!"; "you need a high profile marketing campaign to create competition"; "auction creates a deadline which puts pressure on buyers."

The trouble with that is that most of it is plain wrong! Auction almost immediately eliminates more than 50% of buyers. You see, to buy at an auction you need to be able buy, cash unconditional. Far less than fifty percent of buyers are in a position to do that.

The benefits to the agent are:

  • The seller pays for all advertising costs.
  • Once the seller has paid out $1,000+ dollars they are more likely to ‘meet the market price’ when an offer comes along.
  • The agent can avoid the question of "what is my house worth?" Instead are able to infer that a much higher price may be achievable at auction with glib lines like - "the market will tell us". Every seller thinks their house is worth more than the buyers think it is worth. This is a fact of life. In the industry, agents are taught that it is best to avoid a straight answer about price. The price a seller wants is referred to as the VHG (Vendor Hope to Get).
  • On auction day with all eyes on the seller, the pressure to sell is enormous. Don’t underestimate the discomfort of knowing that you have spent a small fortune on advertising and here you are with an offer only $30,000 below what you expected. The majority of sellers cave-in with the pressure of being ‘on stage’.

The main trouble that I see with auctions is that the whole process is built upon a foundation of deceit. Vendors are not made aware of what their house is worth.

A typical auction may look like this... 

Let’s say for the sake of discussion that a house has a value of say $190,000 to $210,000. The seller will genuinely believe that it is worth $210,000 to $220,000.

Buyers on the other hand will want to buy it well below the $190,000. So instantly, there is a gap of at least $20,000.

If a buyer knows what price the seller hopes to get they will avoid the auction. After all why would they pay out hundreds or thousands of dollars for building inspections and bank valuations if the property is overpriced?

The agent then needs to attract buyers to the auction for this $190,000-$210,000 home. To do this, they under-quote. They will say things like "bidding expected to start around $170,000". One industry trainer actually named this method "feed the greed".

Many buyers have become very angry when they have learnt that the price they were told has absolutely no bearing on either market value or the price that the vendor wishes to achieve.

My advice to sellers is to: avoid an auction like you would typhoid fever. If you see that an agent sells some properties by auction, know that they are hoping that you will become their next ‘auction conditioned’ seller.

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