by In2assets  |   February 16, 2015

Auction Sale compared to conventional way of selling

Auctions are very much a study in reverse psychology if compared to conventional sales methods

There are many ways in which the auction sale and conventional way are different

Below we compare the two methodologies side by side to help understand why they are very different sales approaches.

In a brokerage situation, the seller lists with the broker. Naturally, the seller wants to obtain the highest price, and the buyers want to pay the lowest price. Thus, there is an adversarial relationship between buyer and seller. The broker’s job is to provide the interface between the seller and the buyer in this adversarial situation. The seller usually lists a price higher than their asking price, giving the buyers some room for negotiation. The price ultimately paid is bracketed between the high of the asking price and the low of what a particular buyer is prepared to pay, with the resultant price being determined by which party is the most motivated.

In an auction situation, the seller is not in an adversarial role. Negotiations with the Buyer are handled by the Auction House. The auctioneer’s job is to provide a platform but highly competitive platform so that the array of bidders, rather than a single buyer and seller, determine the price. By not divulging an asking (reserve) price, the auction process eliminates any artificial ceiling which may be placed when an asking price is set. As a result, the price obtained at auction may far exceed the price that would have been set in a brokerage situation.

Auctions are very much a study in reverse psychology. If bidders believe that the seller will sell for a fair market value and accept the highest bid, they will participate openly and competitively. On the other hand, if bidders believe that the seller is trying to influence their actions (by having price expectations), they will typically lose interest in the property. Bidders must believe that the price will only be determined by competition and not an artificial price, or an auction cannot be successful.

Another important difference between auctions and most brokerage sales is the fact that auction are legally binding, in other words, the auction contract is un-suspensive.  Brokerage sales, in most cases, utilise suspensive conditions in contracts.  It allows the buyer time to obtain finances and conduct due diligences in place for a period of time (often 30 to 60 days or more).  Effectively what this does is that the buyer takes the property out of the market allowing him time to perform, only for him to cancel the contract if any suspensive clauses are not fulfilled.  This often delays the seller because the seller has to start the whole process over again with another potential party and he has effectively lost 30 to 60 days (or whatever time frame is applicable).

In an auction, when the property is sold, it really should mean it is sold!  Whereas often brokerage contracts go to closing perhaps 50% to 70% of the time, an auction, once the seller has accepted and signed, the deal is typically closed. The only contingency is the Buyers ability to deliver financially in terms of the sales agreement. Should the Buyer default, he will loose whatever deposit and commission payment.

Auctions almost always deliver a result and conclusivity in a transaction.