Why Auctions are Recommended?

Most real estate agents prefer a property auction as a method of sale when recommending options to their vendors. Auctions are great in a rising market but in a subdued or cold market auctions can be quite disastrous. This article is going to look at reasons and motivations why real estate agents prefer auctions over private treaty and the consequences for property owners.

Reasons why real estate agents prefer Sale by Auction over Private Treaty.

1. No upper limit in property price
There is no upper limit on the price a property can sell for during an auction meaning greater return for the owner and agent.

2. Property sells quicker through Auctions
Auctions set a defined period in which buyers and sellers are forced to make decisions otherwise they will miss out on the sale. This often means properties are sold quicker then by Private Treaty.

3. Market value of the property is realised
The market value of a property is determined by what the market is going to pay and the best way to determine this is through an auction. Auctions are often used for unique properties where the value is hard to estimate. Agents often use them as a method to demonstrate that a vendors expectations are higher than the actual market value of their property.

Motivation behind each of points above;

1. Provides the agent with the opportunity to obtain a greater sales price for the vendor and greater commission for themselves.
2. Agents want properties to sell as quick as possible meaning they receive commission and can start selling other properties.
3. Vendors can’t be convinced their property is over valued so an auction proves the market value of their property.

All of the points outlined above and the motivation behind each of them make sense and are necessary for real estate agents to be profitable but whether they are in the interest of the vendor is another thing.

In a subdued property market the success of an Auction is going to be very limited. In most cases the property will pass in under the reserve price and post auction negotiations will need to take place. This isn’t ideal for the vendor because if a deal can’t be struck the property will go on the market by Private Treaty. Astute property buyers will know the Auction has failed and will use this against the agent/vendors when negotiating a price.

The majority of vendors are not in a hurry to sell their property and usually have a time frame between 2 to 6 months. This is at loggerheads with real estate agents who would like property to be sold as quickly as possible. In a subdued property market those vendors who are not in a rush to sell their property should not be convinced to use an Auction as the method of sale.

The marketing costs involved in preparing for an auction are usually quite large. In times when there is a lot of competition from other properties in the market even more money needs to be spent on attracting potential buyers to the auction. Agents and vendors need to come understanding for the value of the property so an auction does not need to be performed to determine the market value of a property. Agents need to stop over-quote the value of a property to vendors. Vendors need to put their emotions aside and look around at their neighbourhood to see what similar properties are selling for now, not 6 months ago when the property market was higher.

So next time you are discussion the method of sale of your property with an agent remember that holding an auction in a subdued market should only be considered if you are in a rush to sell or you have a unique property which is hard to value.