Welcome to our latest blog, which will be focused on the topic of auctions and what you need to know if you’re considering selling your property.
While this topic may be reasonably familiar for many people, we appreciate that there are many aspects related to the auction of a property that people won’t be as familiar with, so this helpful little article should give you a good idea of the auction process and what to expect if you are selling your property by auction.
Let’s start with a definition. A real estate auction is a public sale of a property, usually conducted by a specialist auctioneer or an estate agent acting as an auctioneer, and is governed by strict rules (with such rules displayed publicly at the auction).
Auctions are generally thought to be the best way to achieve the highest price for your property, as buyers are competing (bidding) against each other to win and to secure the property. That environment of competitive spirit often results in an above market price, as buyers are willing to stretch that little bit further in an attempt to avoid missing out in the moment.
There are now three common approaches to holding an auction, which are:
- Larger audience reach, as people can attend from remote locations (or if they happen to be in isolation due to covid-19).
- Convenience for buyers to still attend if they have limited time to attend in person, (i.e. people with particularly busy schedules have a higher chance of being able to attend).
- Online bidder registration process for security and to ensure the buyer is genuine (if an online bidder does not register, they will not be able to bid).
- A more traditional format where the auction is held at the property being sold.
- Allows buyers the final chance to see the property directly before the auction is held.
- Having a physical presence at the property can create additional competition at the auction.
- Held in a physical location, such as a conference centre or hall, but not at the property being sold.
- Can often provide a better, more easily controlled environment than on-site at the property (think weather, accessibility, etc).
- Can capture late additional buyer interest if the property is being sold in a group of properties being auctioned, adding further competition.
Key Vendor Benefits of Auctions
Control of Timing
By having a specific time frame for your property to be sold at auction, you can make future plans with a little more certainty. While there is no guarantee your property will sell at auction, the auction process inevitably reduces the time the property is ‘on the market’ for sale, meaning you can move forward in a faster time frame. Depending on your circumstances, you may need to have more certainty around timing than what a traditional private treaty method of sale may provide. For example, you could be headed overseas for a long trip and want to have your property sold prior to leaving rather than dealing with the matter from another country.
More Buyers, More Competition, More Value
As a property being sold by auction is marketed for a finite amount of time (generally between 4 and 6 weeks), with the auction day being the deadline for buyers to act, it forces any interested buyers to act on that interest early or risk missing out. This deadline, by forcing buyers to act early, essentially condenses the time frame in which buyers may have otherwise enquired, so the natural result is an increased volume of enquiry and buyer activity, which leads to increased competition on auction day. Naturally, every vendor wants to maximise the value they get when selling their property. The auction environment offers a great way to achieve this, as buyers understand the need to act now or miss out!
Selling Before Auction, At Auction, or After Auction
We always tell our clients that selling under the hammer on the day of auction is not the only way to sell your property when selling via the auction method. While it may seem the ‘obvious’ thing, given that it’s the essential nature of an auction, the process needs to be considered more holistically. Ultimately, the goal is to sell your property for top value, and while this can commonly happen ‘under the hammer’ on the day of auction, that is not the only way it can occur. Below we’ll briefly cover why properties are often sold before the auction date or after the auction date.
Selling Before Auction
Often, through an auction marketing campaign, buyers ask us if they can buy the property prior to auction. Some buyers prefer to avoid the potential of missing out on purchasing the property on auction day, so will try to strategically position themselves to buy prior to the auction. In such an instance, naturally, the buyer would need to make a very attractive offer in order to entice a vendor to sell the property prior to auction. Given this, buyers will sometimes put forward a very good offer in an effort to secure the property before having to compete in an auction setting. The buyer is effectively risking paying over the market value for the property, as the consequence of avoiding the risk of losing the property at auction. We would discuss this with a vendor fully to assess the value of the offer and how it suits the circumstances of the vendor to assist in making a decision. Additionally, we would ensure in such an instance that the buyer was able to exchange contracts without delay, as that would be essential to occur prior to withdrawing the property from auction.
Selling On Auction Day
Selling on the day of auction is very common. Leading into the auction, the vendor will set a reserve price (more on this below), and the agent will have worked hard to create as much interest from buyers as possible in order to create a competitive bidding environment. At the time of the auction, the auctioneer will set the scene summarising the details of the property and the essential rules of conduct for how an auction proceeds, then the auctioneer will call for an opening bid. The auctioneer and agent(s) work cooperatively to create and keep as much momentum and energy as possible through the auction, working ultimately to achieve and surpass the reserve price and sell ‘under the hammer’ to the highest bidder. Following this, the parties sign the contract, the deposit is paid, and you have an exchanged contract!
Selling After Auction
If the property does not sell ‘under the hammer’ at auction, then negotiations can immediately proceed following the property is ‘passed in’, which is the official term used for when the property did not sell ‘under the hammer’. During the auction, if the reserve price has not been reached by any bidder, the auctioneer and agent will discuss with the vendor as to whether to place a vendor bid (one vendor bid can be placed and must be disclosed at the time it is placed) or consider adjusting the reserve price. Adjusting the reserve price is something you may consider if the bidding is close but has stalled prior to reaching that reserve value. If the bidding is close, reducing the reserve price and/or placing a vendor bid may enable the auctioneer to advise the buyers that the property is now ‘on the market’ meaning that any further bid from that point will secure the property. This can stimulate bidding again, as buyers now know the property will be sold and not ‘passed in’.
If the property does get passed in, then the agent will proceed to negotiate, post-auction, with the party who had the highest bid prior to the property being ‘passed in’. If agreeable terms can be negotiated on the same day as the auction, then the sale contract can still be executed by both parties under auction conditions, thereby securing the sale for both parties. Often, if an agreement cannot be made on the same day, negotiations will continue with all interested buyers over the following days with a view to negotiating the best price and outcome. In the rare instance that a sale cannot be successfully negotiated within a fairly short time frame following the auction, further strategies would be discussed for how to proceed with the sale campaign, which may include transitioning to a private treaty method of sale with an advertised price.
At all times, the agent should be working with the vendor to achieve the best possible outcome for their circumstances, whether the property is sold before, on the day of, or after the auction.
A few Final Notes and Tips on Auctions
Experienced Auctioneer & Agent
Don’t underestimate the importance of a good auctioneer and a good agent. While we’ve all attended an auction that has had buyers acting like seagulls fighting over the last chip, in which instance almost any auctioneer could achieve a good result, not all auctions have bidders screaming to win and sometimes it can be very slow going. In these instances, having an auctioneer who has the experience and ability to get the most out of a crowd and ‘work their magic’ can be the difference between achieving a positive outcome or not.
The agent is also instrumental in this situation, working hard in conjunction with the auctioneer to keep momentum and energy in the auction to do everything possible to achieve a great result ‘under the hammer’. The agent also clearly plays a very important role prior to auction day, as it is their job to market your property and work with buyers to generate as much interest and as many genuine buyers as possible. This lead-up work by your agent can be the difference between achieving a good result and achieving a great result.
Setting a Reserve Price
A reserve price is a value that is disclosed to the auctioneer prior to the auction as the minimum amount the vendor will accept for the property. If the bidding reaches this value, the auctioneer may call the property ‘on the market’ effectively disclosing to the buyers that the property has met the reserve price and will be sold ‘under the hammer’.
When it comes to setting the reserve price, it is helpful to find a balance between maximising the value of your property and meeting the market value. To determine the market value, your agent should have been giving you regular feedback leading up to the auction, both in respect of what value buyers are giving in their feedback about the property and any new recent sales that may indicate current value. Ultimately, you need to have trust in your agent when it comes to this decision, as you will need to consider their advice and feedback when it comes to setting your reserve price. Read our blog on “Choosing the right commercial property agent to work for you” for more on that topic.
Generally, for commercial properties, we want to be mindful of avoiding times that may result in a reduced number of buyers that may attend an auction. That may sound obvious, but there are some key things to be mindful of in this regard, which can be shared through the benefit of our experience.
When setting the date for the auction to be held, you should avoid having a date that is too close to a public holiday or holiday period, such as Easter. Given our specialisation is in the commercial property sector, it naturally follows that the majority of our prospective buyers are businesses/business people. Such clients ideally want to be conducting their business matters during their business hours. It is common for people to take holidays around public holidays and holiday periods, so holding an auction too close to such a period may result in a number of buyers being unable to attend.
Federal budgets and elections (or state elections) are also things we are very mindful of when setting an auction date. People generally, but especially business people, can be very cautious when very close to an election due to a feeling of uncertainty. This is quite broad, and while it may not make sense to everyone (considering we all have to simply ‘get on with it’ regardless of which party holds the balance of power), the uncertainty still has a profound effect and we find people are less confident in making big decisions. Clearly, this is not the mindset you want for an auction.
Simply put, fewer buyers equals less competition, which may result in a lower price at auction. As such, we always try to find the most ideal conditions for an auction date to improve the chance of getting the best result.
Selling Your Property? Get in Touch With Us!
We’d love to hear from you if you are considering selling your property and would like to discuss the auction process and if it is right for your property and your circumstances.
Just call one of our team today for a confidential, no-obligation discussion.