To auction or not to auction? That’s the question

By Lochore’s guest blogger Chris Gemmell

Going the auction route is not always the right solution for every property. However, if a vendor has a unique property and there’s a shortage of properties in their area, then an auction may well be the best marketing option.

But for vendors selling properties under $800,000, particularly townhouses, apartments or units, an auction is not necessarily the most appropriate approach to take.

I think some agents are pushing auctions too hard to vendors, regardless of whether their properties will sell more effectively this way. In my experience, what’s most important is to closely analyse the supply and demand dynamics in the area for that particular type of home and price point and to choose the right channel through which to market it. It’s also important to listen to the vendor and understand their goals, to make sure they’re comfortable with what you’re recommending.

What many vendors may not realise is that real estate sales agents in most cases get a higher commission if they sign an auction listing rather than a standard exclusive listing with a price guide. So they may have a vested interest in pushing auctions to their vendors, or this may be their agency’s modus operandi. According to our industry disclosure rules, agents should point out this commission difference to vendors at the time of listing. Lochore’s encourages transparency and disclosure.

This blanket pushing of auctions has resulted in many auction rooms not being filled and clearance rates dropping in some cases to 20-30 per cent. This does no one any good, least of all the poor vendors, who may have had to pay extra for an auction. There are some buyers who have become very wary of auctions. First-home buyers and parental investors who are helping their kids get a foot through the door to owning their own home often tell us at open homes that they have been put off the auction process. The main reason is because of the uncertainty about price. There’s also a high cost involved for bidders to get all their ducks in a row for an auction, in addition to getting their loans pre-approved.

Preparation costs can be as high as $1500. This includes around $700-$800 for an independent building surveyor (and now often a substance test) plus another $600-$700 for an independent registered valuation. But the potential bidder’s pre-approved finance might not even be in the ballpark when they get to the auction. The risk for first-home buyers is that they may shell out for these pre-auction expenses with no certainty of winning the auction.

Some agents are putting forward an indicative price range that the property could be sold for prior to an auction. Understandably, bidders often feel misled when the property sells for significantly more. Some buyers have paid their $1500 property research fees several times over, with no guarantee they’ll be able to purchase. They may well miss out on every property they’ve bid for at auction – or, worse, they may discover when they attend the auction that the bidding actually starts at far more than they can afford.

This can be a very frustrating situation.

First-home buyers would rather focus on a property that has a more definitive price guide. This gives them a higher chance of purchasing it. We find a price guide a very effective way to capture first-home buyers and parental investors for the sub-$800,000 properties.

Right through this winter there’s been a tightening up of listings in some price brackets, across the country. However, Auckland’s North Shore real estate market remains very active in the sub-$800,000 bracket. Our mortgage brokers are telling us they have plenty of pre-approved buyers, but they won’t necessarily risk an auction and the $1500 pre-auction investment.

At Lochore’s we have a very high strike rate at auctions, but that’s because we only recommend an auction if we think it’s the best way to go for a particular property and the vendors are keen on this approach. And wherever possible we hold our auctions at the property being sold. We find prospective buyers like to be able to touch and feel their potential future dream home.

It all comes down to the seller’s level of trust and confidence in their listing agent and the real estate company behind them. So it pays for vendors to do their homework and ask the tough questions of their agents. One of these questions may include getting very sound reasons as to why an auction is being recommended.