A story about a seller who lost $123,000 at Auction.
When selling your property you naturally want to get the highest sale price possible. So choosing the right method of sale for your situation and property is imperative.
Of course, no one method of sale is perfect. They all have their pros and cons. The thing is, unfortunately at times my industry is good at telling you all the supposed benefits of their preferred method – without disclosing the negatives.
A prime example is ‘Auctions’.
You don’t need to look very hard to find real estate agents claiming that “Auctions achieve the highest price”.
And swarms of agents clearly believe it. Unfortunately, many of them are just doing and saying what the industry trainers teach them – without ever questioning if it’s true.
And since many of them don’t question it. We encourage you to.
Do auctions get the best price?
My experience, both personally and helping clients buy property at auction, suggests not.
Let me quickly share a true story…
We were once engaged to bid on behalf of buyers for a prime lake-front section at Lake Tekapo.
Long story short, we ended up helping them secure it at auction for $192,000. Which at the time was a record price. The Timaru Herald even ran a story on their front page.
But there was a shocking fact that nobody else knew. The buyer had given us a written authority to bid up to $315,000 on their behalf.
Yes, you read that correctly. The buyer was prepared to pay $315,000 but secured it at Auction for $192,000.
So how did this happen?
Consider two buyers who both desire to own the property. Since value is an opinion, each buyer will be prepared to pay a different price.
Let’s say ‘Buyer A’ is prepared to pay $550K. And ‘Buyer B’ turns up prepared to pay $500k.
There is spirited bidding up to $500k…
Then ‘Buyer A’ bids $505k.
‘Buyer B’ – caught up in the moment and not wanting to miss out – pushes themselves to $510k.
Pro Auction agents will say “See… the auction system pushed the buyer higher than they had initially planned”.
Yes, but what happens next?
‘Buyer A’ bids $515k.
At which point ‘Buyer B’ (hands in pockets) accepts defeat.
The property sells to ‘Buyer ‘A’ for $35k less than they would have paid.
Because at Auction, the highest buyer does not need to bid their best price. Only one bid over the second-highest buyer.
Yes, I’m sure sometimes at Auction two ego-maniac buyers (with unlimited funds) may continue beating their chests, outbidding each other, going well beyond everybody’s wildest dreams.
But how often does that happen?
I’d suggest very rarely. Of course, those rare stories are spread as supposed proof of how great the Auction system is. But what about all the cases where the property was massively under-sold?
Now consider the buyers in the example above, but competing in a sealed envelope or multiple offer situation – where each buyer gets one chance to make their best offer (without knowing what the other buyer is offering).
‘Buyer A’ offers $550k, and the seller is $35k better-off. Or in the Tekapo case – $123,000 better-off.
If you are interested in some more in-depth pros and cons of different selling methods – check out our Home Sellers Seminar.