Auction Sale VS Conventional way of Selling

There are many ways in which these two methods of property sale are different. Let’s examine the two methodologies side by side, to help understand why they are very different sales approaches.

Auction Sale VS Conventional way of Selling

There are many ways in which these two methods of property sale are different. Let’s examine the two methodologies side by side, to help understand why they are very different sales approaches.

In a brokerage situation, the seller lists their property with the broker. Naturally, the seller wants to get the highest price he or she can, and the buyers want to pay the lowest price possible. 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 lists higher than they want to sell it for, giving the buyers some negotiation room. The price ultimately paid is bracketed between the high of the asking price and the low of what a particular buyer will 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. He gets to sit out the fight thereby eliminating the entire negotiation process. The opponents in an auction are the universe of bidders who want the property. The auctioneer’s job is to provide a level but highly competitive field so that the 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 attained 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 and drive up the price to its true market value. On the other hand, if bidders believe that the seller is trying to influence their actions (either by participating covertly in the bidding or by having price expectations such that their bids are not honoured), they will typically lose interest in the asset. The sure-fire way to chill an auction is to set a high asking price and expect the bidders to participate in an auction. 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 contracts are binding immediately upon execution, in other words, the auction contract is non suspensive.  Brokerage sales, in most cases, utilise suspensive clauses in contracts.  It allows the buyer time to get finances and 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 terminate the contract if any suspensive clauses are not met.  This often jeopardises the seller because the seller has to start the whole process over again with another potential party and effectively 30 to 60 days, or whatever is applicable, has been lost.   

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 contract, once the seller has accepted the auction price, is typically going to close 100% of the time. Because the only contingency is seller’s ability to deliver title, the buyer loses their earnest money (deposits and commissions) if they do not close for any other reason, so auction contracts almost always deliver a result and conclusivity in a transaction.

Resource: In2assets, Andrew Miller Auctioneer

 

Posted by In2Assets