To auction or not to auction, that is the question

Why do people auction?

An auction is a strange two-headed beast from which many people have taken a tumble, though others have had a great ride. The buyers are there because they hope they’ll get the property at a bargain. The sellers are putting it to auction in the hope that they’ll sell it at a premium. Only one party can be right, but which one?

According to Dr Andrew Wilson, Domain Group’s senior economist, it’s actually a fairly easy equation to solve.

“In a hot market, with lots of competition for properties, the seller usually benefits by going to auction. In a cold market, an auction gives the power to the buyer and the seller should probably stick to a private sale,” he suggests.

Not just the ‘when’, but the ‘where’ as well

However, real estate markets aren’t hot or cold across the board. In the inner-city areas there will always be more competition for properties, which is why there are usually more auctions. In outer areas, where demand is smaller, private sales are more likely.

So deciding whether to sell by auction is really about where your property is and how the market is going. In-demand location and rising market? Go for it. Otherwise, Dr Wilson urges you to consider carefully, because there are some added risks with auctions.

The downside

Auctions cost money, and it’s the vendor and not the agent who is paying. Typically an auction is preceded by a six-week period of advertising and inspections, so your property is going to be turned inside out for that whole time. The idea is to get as many people through the place and to the auction as possible; hopefully people who want to buy.

That means an inconvenience to you as well as advertising costs, which are usually in the thousands. On the day, you also have to pay for an auctioneer to do the deed; prices can vary pretty widely. You are also bound to sell once your ‘reserve price’ has been reached; there’s no changing your mind because you haven’t got the price you were hoping for.

The worst outcome is that you don’t reach the reserve price and the property is ‘passed in’, meaning that all that extra outlay was wasted. In this situation the agent will usually connect you with the highest bidder who may want to negotiate a private sale, but they already know they have you ‘on the ropes’ and can make a low offer.

The upside

When it works well and competition for your property is fierce, you will get the price you want, or higher, so the extra costs are worth it. It can also save you a lot of time in negotiations that don’t go anywhere and be a relatively quick result. You may also get some early offers from buyers who are hoping to ‘steal’ before being outbid, and one of them might be what you are looking for.

What’s the current outlook?

Dr Wilson advises that the market is cooling right now, with declining growth and auction rates dropping, so unless you are in a high-demand area, you might want to consider a private sale.

If the market is hot and your property is in demand, you can make a killing by going to auction. If it’s not, or your property isn’t much sought after (or both), you are probably going to be better off pricing your property to the market and going with a private sale, instead of throwing good money after an unlikely result. If you’re stuck with a property that won’t move, have a read of “What to do when your house won’t sell”.