Pros & Cons of ‘To Auction or Not To Auction?’

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Real estate agents love promoting auctions as a great way to get the best price for your property. They will tell you, “Your property is truly unique, the area is hot; you should auction it.” Or, “There are so many people wanting to buy a property in this area, you will get the highest price through an auction.”  Why do real estate agents love auctions so much?

Pitfalls of the auction process

Well, the answer to this question is not straightforward; it has as many different answers as the auction process has pitfalls. Auctions are an amazing money-spinner for real estate agents. Real estate agents convince clients to auction their property – drawing them into an inextricable web. The agent suggests an ‘essential’ marketing campaign, usually for about four weeks, sometimes longer. This campaign is presented as the best way to get the market into a frenzy over your property.

The agents will get you excited about the prospect of achieving a price well above your wildest expectations. You will gladly part with the advertising dollars, which serve not only to advertise your property but also the real estate agent’s business. Pause here for a moment… have you ever wondered why agents promote auctions as the way to sell? Why are they so popular no matter what the clearance rates are?

The true reason auctions are so popular

Buyers perceive auctions as a way to get a property for a bargain price; yet sellers perceive them as a way to get the highest price. This is a real dichotomy as both parties have expectations, which are diametrically opposed.

If you went to sell your car through a local car dealer and the dealer said to you, “I will take an ad out in the local paper on your behalf, and I’ll make sure my dealership name and my photo take up at least 40 per cent of the space in the ad. I will try and sell cars other than yours from the ad and also use the ad to get other sellers to put their cars with my car yard, and you will have to pay the whole cost” And, by the way, if I get any discounts, rebates or incentives from the newspaper, I will keep it all for myself and not tell you. What? Run that past me again?

It seems like an absurd suggestion; however, every time someone agrees to list their property with a real estate agent for auction, they actually agree to market the agent and their brand at the same time. The real estate agents often receive credits, discounts and rebates from media that are not disclosed. The ad attracts both buyers and sellers, and you don’t get any benefit from buyers that purchase other properties or sellers who list as a result of enquiries emanating from your ad.

Once the auction marketing campaign is underway, you will start to notice a subtle change in the agent’s demeanour. They may start making ambiguous comments about buyers not being as excited about your property’s price level as they were about other similar properties they sold at auction last month. They suddenly seem to be losing their confidence; you get jittery, and you start to wonder what’s wrong. You can’t put your finger on it, but you know something is not quite right.

What if I told you that this is normal real estate agent behaviour? What would you think if you were told that real estate agents are actually taught to behave like this? It is part of their training; it is referred to as pre-auction conditioning. They get you to agree to auction your property based on an unrealistic inflated price. They get you to agree to spend big on an advertising campaign and then they move into the conditioning phase so that you don’t set your reserve anywhere near the ridiculous price that they convinced you of in the first place.

The deception of auctions

Auctions are traditionally run as an exercise in deception for both the buyer and the seller. When a potential buyer calls the agent to get a ‘price indication’, they are often quoted a price that is well below what the agent honestly thinks it will go for. They are often quoted an amount well below what the agent has discussed with the seller in respect to price expectation. This tactic is to get a lot of bidders along to the auction.

The agent also tells the seller not to worry about setting their reserve until auction day. This serves two purposes. Firstly, it gives the agent time to ‘condition’ the seller to a price that they think will enable a sale. Secondly, not having a reserve puts the agent in a position if challenged by prior comments to a potential buyer, they can say, “I had no idea that the vendor was going to set the reserve so high until today.”

Many states have passed legislation to try and stop dummy bidders and phantom bids; however, they are weak and toothless. Agents can still get dummy bidders; all they have to do is register for bidding by showing their driver’s licence. Since the agent always tells the vendor to hide around the corner in the local park each time there is an inspection; on auction day, the vendor has no idea as to the identity of the real bidders; they could be anyone.

By the time the auction day arrives, the vendor is both anxious and excited; they do not know what to expect, and the auction happens very quickly, often it is over in five to seven minutes. If the property doesn’t sell at auction, the agent is still in a strong position as the agency sales agreement is still in place and they can carry on as if nothing happened. The vendor is stuck with the agent often for as much as another 60 days.

The agent, however, has a pretty clear idea by this time as to who, if anyone, may be interested in the property and at what price. This enables the agent to double back on some of these parties and miraculously come up with a hot buyer for the property albeit at a much lower price than was expected.

The agent brazenly presents this new mystery buyer to the vendor as the one person who sees value in the property. The agent will say things like, “The market told us it was not worth what you were asking!” The vendor is left in a state of total despair at all of the mixed messages and probably can’t even remember the true story surrounding the ‘what you were asking’ comment. The vendor then often agrees to sell at a price that is much less than what they would have achieved if they had simply gone to market using the standard private sales process, which would have saved the ‘essential marketing campaign’ costs.

The verdict on auctions

The buyer, however, is extremely happy in the knowledge that they have bought below the vendor’s expectations. The agent is quite happy because they have convinced someone to advertise their business for a four-week period at no cost to them; they have their commission and another sold sticker in another window (more advertising) and a whole lot of new enquiries. It is a great outcome for the buyer and the agent but possibly not such a good outcome for the vendor. When you really analyse auctions they are more con than pro!

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