OPINION: Auctions are becoming more popular but they have their downsides, writes Tony Brazier.
There has been much written about the benefits of auctioning to sell real estate.
Cities such as Melbourne have been trained by the local real estate industry to accept auctions as the way to sell, and Auckland seems to be moving in the same direction.
Traditionally about 15 per cent of New Zealand home sales went to auction - with 5 per cent sold under the hammer, 5 per cent before the day and 5 per cent in the weeks after they were passed in.
Why then are some agencies telling us that it is the only way to go? In 2011, 9 per cent of its sales were by auction; by last year this was 16 per cent. Do some agencies know something the rest of the industry and the public don't? Or is there another reason why they like the auction marketing process?
Auctions are an important part of the real estate arsenal and Christchurch has some of the best auctioneers in the world. But is it the best method for selling all types of homes, as it is done in some places?
The benefits of auction are often quoted as transparency, a set time frame and unconditional buyers. But there are downsides that are seldom mentioned. Australian real estate website Allrealestate found 72 per cent of buyers will not even ring or take an inquiry further if there is no price indication on marketing as is the case with auctions.
Also, a surprising number of people say they would never consider buying at auction. Some sellers have admitted taking a lower price than their auction reserve just to justify their high marketing costs and didn't want to go away empty-handed. You can also find buyers who would have paid more than they did at auction. Therefore, is the idea of "auction everything" always the best for the seller?
An example is the sale of a local property a few years ago (I have changed the figures to protect its identity). Two buyers, at just under and just over $1.5 million, said they would not attend the auction but wanted to buy beforehand. The agent insisted the seller call their bluff and go to auction anyway. A local investor went along to observe, quickly realised there were no other live bidders there, and bought the home at $1.25m. He then sold it to one of the original buyers at $1.5m. Now who should that $250,000 have gone to? Under today's rules we would be compelled to report such negligent behaviour from the agent or agency.
Let's be realistic, there are stories against all different methods of selling if you dig deep, and owners need to think carefully about which method suits their needs. So what properties should be auctioned?
This answer varies depending on who you talk to.
Some will say every property. An auction might be most beneficial where the salesperson knows at least five buyers who would put in an offer if they knew about the property.
Some of the city's real estate bosses use a similar yardstick. Unless there is a particularly stressed market, this yardstick does not include your average house. For example, before the earthquakes, 27 houses were for sale in one street in Rolleston. Auctioning would not have been a wise use of the owner's marketing money but, of course, it could be a different story now.
If there are that many people interested in making an offer, why spend all that extra time and money to get a result?
In Christchurch now, it takes 27 days to get a sale, down from 41 in 2009. This shows buyers are biting within the first two weeks of marketing. The average auction marketing usually requires a campaign substantially longer than this.
One recent argument put forward for transparency and against tender or "multi-offer" situations, was that the buyer goes away not knowing whether they paid too much. We as agents are here to find the highest price for the vendor, not worry about the lowest price the buyer can get away with.
One home marketed as negotiable over the seller's bottom line of $550,000 attracted eight buyers offering between $545,000 and $576,000. Buyers were told to play their best shot and, as it wasn't transparent what everyone else was offering, a ninth buyer paid $658,000. He had a completely different reason for buying than the market had seen - he developed the property further and made a good profit also. He's unlikely to have paid what he did knowing his competition was tapped out at $576,000.
I am not anti-auction by any means, (I have done my auctioneer's ticket) but I am anti auction-everything. Auctions may not produce the best result and are just one of the choices available to sellers.
Putting a price on a property is still a skill that takes years of refining. It shouldn't be left always for the market to decide. Who's to say the market wouldn't have paid more?
Tony Brazier has worked in the property industry for 24 years and owns a real estate company selling and managing property. This column is of a general nature only and readers should seek their own professional advice.
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