Traditionally auctions were the reserve of prestige properties, the well heeled would gather and quietly duke it out until a property sold – or didn’t.
As a model for buying a home it is perhaps the most fair, transparent and difficult to manipulate method available. Auctions have become more fashionable, especially with the success of the Allsop Space auctions and many other agents are looking to use the model. It is similar to private treaty with the exception of how the offer and acceptance works. You can view the property, get inspections, ask questions and do all the normal things, but the offer isn’t made conditionally, in other words, you can’t pull out after you make a bid.
Two categories
Auctions come in several types; they tend to fall into two broad categories, the kind with only one property being sold, or a multi-lot one. There are also two pricing trends, the first is an advised minimum value (AMV), which means that even if that price is bid the seller could have a clearing price higher than it and the auction could fail (the property doesn’t sell) if the magic number that only the seller knows isn’t reached.
A more transparent way of doing things is the option popularised by Allsop Space, and that is the minimum reserve, which means the property will definitely clear once the minimum reserve is met.
There are ways that sellers create “auction-like non-auctions”. The practice of best bids or sealed bids occurs regularly, it is like having an auction where you get only one chance to make a bid, but that bid isn’t binding the way an actual auction is.
Auctions still tend to favour cash buyers, although that trend is changing, many buyers are now completing with a mortgage. And banks are willing to issue loan offers that are fit for use at auctions.
Making a bid
The natural tendency is for people to hold out until someone else has made a bid. This often means that people who have committed to attempting to make the purchase now have new competition, it doesn’t mean they drop out.
In theory you just have to keep going up in price until there is nobody left, but few have the luxury of having unlimited wealth that guarantees you’ll be the top bidder.
Which means that a better solution is to have a maximum price and ensure you don’t bid over that number. Unfortunately, many people get carried away and over-bid with financially negative outcomes.
When the property lot comes up, and this goes for a single listing or one of many in a multi-listing auction, a dynamic that scares people away is momentum. It’s like the opposite to bidding well in private treaty, at an auction rapid bids going up fast spook your average mortal and they drop out.
The most highly motivated bidders don’t scare so easily, but you’ll have to face them down either way because they are going to be in it to win too.
Momentum
If it’s a one-off family home, sadly it often comes down to whoever has the most money, because there isn’t a second substitution, other than to fail to buy and look for a new home elsewhere.
At multi-lot auctions some buyers have their eyes on several properties, hoping to close on only one, this is where you can win and not have the most money, that’s if the other bidder is an investor.
If they have their sights on the same home of their dreams as you, then it means having the most money or using a scare tactic, reading this in the cold light of day makes it seem ineffective, but at auctions aggressive bids work in clearing out other bidders.
The idea remains the same, scare people off with momentum, some people even go beyond the raise the auctioneer mentions, it’s an effective but risky proposition.
That so much has been written on auction theory is evidence that there is no one way to do it, but we do know that the least effective way is to wait, join late after other parties become actively engaged in the bids and then raise in low increments.
Karl Deeter is a mortgage broker and media commentator
