Auction winners and losers: How the market dictates which way to sell

Spring selling season is now in full swing. But who really wins at auction – the seller or the buyer?

In a strong property market – such as is the case in Melbourne, Canberra and Sydney – most experts agree the vendor almost always has the upperhand in a competitive auction environment.

When auction clearance rates are above 70 per cent weekend-in weekend-out, it’s a strong sign sellers are exceeding their reserve on the day.

For the auction technique to work to best effect, it requires competition and bidders passionately fighting it out above the reserve. A market with low levels of supply and lots of buyers desperate to purchase is ripe for a strong auction.

Sydney’s auction clearance rate was 78 per cent over September, while in Melbourne it was 76 per cent, Domain Group chief economist Andrew Wilson said. 

“In a market where auction clearance rates are above 70 per cent – or even 80 per cent in today’s market – it’s almost irresistible to go to auction,” he said.

For markets where the clearance rate is low, a private treaty sale is often preferred as the market favours buyers.

In Brisbane, the auction clearance rate was 49 per cent, but the ‘norm’ for the capital was for rates to be lower than those in Melbourne and Sydney.

But even in a very strong market you wouldn’t necessarily sell a home by auction every time, Century 21 Wilson Pride Clayton and Clarinda director Con Katos said. In Sydney, about two-thirds of the market sell by private treaty.

“If you’ve got an apartment where there’s another five or 10 identical ones in the same complex up for sale, you might not take it to auction even if the market is hot,” he said. Similarly, if a property is unique and will only attract a very specific type of buyer, an auction may not be best.

In most other scenarios, it’s the most effective way to sell as it allows emotion to drive competition, he said.

“Anyone can get market value … Emotion gets us over market value. After an auction I’ve been told by buyers that they were up all night working out the highest offer they’d pay and yet their hand kept going up at auction.

“When you see advertised that a home sold for a record price, that it exceeded expectations … I don’t know of many record sales that happened via private treaty. It’s emotional buyers that set these prices.”

As auctions are usually in favour of the seller, it’s “no surprise buyers prefer to buy outside of auction conditions,” Apollo Auctions director and Real Institute of Queensland Auctioneer of the Year Justin Nickerson said.

The auction environment also allows for the “one in 100” event where the highest bidder turns up on the day by chance and takes a liking to a home.

But there is a benefit to the buyer as well. As the auction environment typically comes with no cooling off period and no conditions attached to the contract, vendors may be more willing to negotiate once a home has been passed in so they can sell in these conditions, he said.

Auctions also offer buyers a level of transparency that’s not available during the private treaty process, Starr Partners chief executive Doug Driscoll said. At an auction, buyers can see who is bidding and know who they’re up against – while making offers blind during private treaty requires relying on the agent to update them on any offers.

“Plus, I’m yet to see any demonstrative proof that suggests an auction will achieve a better price for a vendor than through a private treaty sale,” Mr Driscoll said.

EPS Property Group buyer’s agent and author of The Insider’s Guide to Saving Thousands at Auction Patrick Bright is also not convinced that auctions achieve a consistently better price.

“A third of the time, on average over the long term, properties sell for above market value at auction. A third of the time they get market value and a third of the time I get a bargain.

“You only have to outbid the underbidder; you don’t have to spend everything that’s in your pocket,” he said.

During an expression of interest campaign, where buyers put their best offer forward in a sealed envelope by a deadline but under private treaty conditions, a buyer could offer an amount substantially higher than the “underbidder”. At an auction, they’d only need to pay a tiny amount more to outbid that person.

But this wasn’t unique to auctions, Cooley Auctions managing director Damien Cooley said.

“Even with a private treaty sale [the buyer] may never spend all that they were prepared to for the home,” Mr Cooley said.

He previously auctioned his home, on a Friday, to a good result and remained convinced that the competition created in an auction environment made them a successful method to sell a home.

What to do ahead of auction

1) Visit other auctions. Be a spectator and familiarise yourself with what it looks like and what happens on the day.

2) Organise your finance. When buying, have your deposit ready and your loan pre-approved in writing.

3) Have all inspections finalised. Building and pest inspections, checks of the home and other tasks should be completed ahead of time.

4) Check the contract. Obtain a copy ahead of time and review the contract with your solicitor. You can alter the terms, conditions and the settlement date if you choose.

Source: EPS Property Group