Selling Your Home by Auction: The Pros, Cons, and Key Considerations
Selling a property by auction can be very effective, especially in strong markets. But the auction method of sale is not without its trade-offs. In fact, depending on your situation, there can be some unexpected and significant limitations to be aware of. Here are some of the pros and cons laid bare.
Strengths of the Auction Method
1. Competitive Bidding
Emotion is a key driver in all human purchases, and especially in a live auction situation. With a charismatic and engaging auctioneer, the results that can be achieved in a seller’s market will often speak for themselves.
The most obvious and undeniable benefit of selling at auction is harnessing the power of urgency and competition. With multiple motivated buyers, the pressure to outbid others can drive the price well above the seller’s (and buyer’s!) expectations.
2. Fixed Timeline
Auctions follow a clear timeline, with a set marketing period and sale date. This creates certainty and can be ideal for sellers needing a quick and decisive result.
3. Transparency
Buyers can see the competition, and the process is out in the open. This can help to build confidence for the buyer that they aren’t over-paying (social proof is the real driving influence here) and it also avoids lengthy back-and-forth negotiations between many parties.
Potential Downsides of Auction
1. Price Limitations
The final price at auction will be just above the second-highest bidder’s limit. Please take a moment to digest that: if your top bidder is willing to pay significantly more than bidder number two, the extra value may be left on the table. If Bidder #1 has a top price of $560,000 and Bidder #2 has a max price of $500,000, the property will sell for $501,000, not for $560,000. In other words, you will have left $59,000 on the table (well, technically, still sitting in the pocket of the top bidder).
2. Hidden Issues with Online Auction
If bidding doesn’t meet the reserve, the property passes in. Some auctioneers using an online platform (such as Openn Negotiation here in Western Australia) will extend out the auction date perpetually until the property sells. This gives the impression that they have a perfect track record of selling almost every property they list, whereas often they have simply worked on the seller over time to reduce their reserve price. Live auctions don’t have this same level of flexibility, so it is important for the agent using live auction to appraise correctly at the start.
In extending out the date, the auction result may technically be ‘above reserve’ while falling below what the seller had originally anticipated.
3. Limited Buyer Pool
If the top potential buyer doesn’t want to engage in the auction method due to previous bad experiences or the fear of being pushed too high, this will also limit the offers that are on the table. If the buyer has a strong purchasing capacity but is simply unwilling to engage in auction, this will reduce the final sales result, unbeknownst to the seller.
Conclusion
There is no denying that there are times that auctions can be powerful – in the right market and for the right property. But auctions are not a one-size-fits-all solution, considering some of the risks and limitations as described above.
Auctions cap the selling result just above the second-highest bid, while private treaty sales can enable the agent to negotiate a better result from the top buyer.
A smart agent should be able to help you weigh up your options and whether auction, private treaty sale, or even a fixed date sale will produce the best result in your unique situation.
