From: Andrew Pennisi
Following is an email I received from real estate consumer alert. It is written by Neil Jenman author of Real estate mistakes. Although it is a little long it does have some excellent points on auctions
Home-sellers tempted to auction their homes should
remember four words: AUCTIONS GET LOWER PRICES.
Never mind what agents tell you, never mind what
you read in the papers, auctions are a financial
minefield for consumers.
Last year, despite the real estate 'booms' in
many areas, thousands of home-sellers turned their
backs on auction and benefited.
But there are still thousands of sellers who
don't realize, until it's too late, what happens to them at auction.
They get a LOWER price, that's what happens.
If someone is trying to talk you into selling by auction, then before you sign anything, please read this.
NINE REASONS WHY AUCTIONS GET LOWER PRICES
1. THE STARTING PRICE
It seems as if the price goes up at auctions. But that's only because it starts LOW. It's like starting the day with a massive hangover and saying that you are going to feel better as the day progresses.
That's not a good reason to get drunk every night.
Avoid drinking and you avoid the hangover. You start the day in good shape.
And that's how your sale should start - from
a good position, a position of strength, not
One of the BASIC principles of price negotiation is to ALWAYS START HIGH.
You will get a much higher price if you start higher and come down, than if you start lower and try to climb up.
When you start low, you can get stuck low. It's like climbing up a mountain or down the mountain.
When you are climbing up you run out of energy a lot faster than when you are climbing down.
If you want a high price, START high. Auctions start low.
2. RESERVE PRICE
The reserve price is the price at which the home can be sold. It's the lowest price a seller is prepared to accept.
And that becomes the central focus of the auction.
If you are trying to get the highest price,
do NOT make your lowest price the main focus
of the sale.
There are two parties in a sale price negotiation - a seller and a buyer. Each has their "final price" or their "limit". The sellers' final price is the reserve - that's the lowest the home will sell for.
The buyers' final price may never be known.
There is no procedure at an auction for determining the highest price a buyer will pay. Only the highest price of the losing buyers may be known because they stop bidding once they reach their limit. But
the buyer who is the highest bidder often buys at
less than his or her limit.
Most buyers at auction buy for less than their limit which means most sellers at auction under-sell their homes.
You can't possibly get the highest price for your home if the central focus is on the Sellers' Lowest Price. You can only get the highest price if the focus is on the Buyers' Highest Price.
As a seller, you are at a huge disadvantage
because your lowest price, the 'reserve', is
always disclosed BEFORE the home is sold. That's when you hear the agent yell, "It's ON the market."
Everyone knows your lowest price.
Not so with the buyers. IF their final price is ever disclosed, it will be AFTER the sale is over.
By then it is too late for the sellers.
3. REPELS BUYERS
Research shows that more than 90 percent of buyers
do NOT like auctions. It makes no sense to use
a system of selling disliked by most of the
You can only get the highest price if all
the buyers who may be interested in a home are given
the chance to buy the home. As auctions repel so
many buyers, the highest paying buyers often avoid
One of the BASIC rules of marketing is: make it
EASY for people to buy. Auctions do not make it
easy. They make it hard.
Many buyers see that a home is for auction,
and if the date doesn't suit them, they don't
even bother to enquire. The buyers that are lost
in this manner are often buyers who would have
paid thousands of dollars more than the auction's
final selling price.
5. BARGAIN HUNTERS
Investors, property dealers and bargain hunters
all know that auctions are one of the best places
to find cheap deals in real estate. It is well-known
that deceased estates and mortgagee sales are
often sold for a 'song' at auction. Auction agents try
to justify this by saying, "Look at the banks and
the Government departments. They use auctions."
But that's because they want to make sure the home
is sold. The sale is more important than the
price. The banks and the Government departments
are not the "owners" in the way that consumers are
owners. Many banks and Government departments
do not realize they are under-selling homes
at auction. Those who do, are now beginning to
Property investors, developers and dealers often buy at auction. But they almost NEVER sell at auction. That's because auctions get lower prices.
If two or more people want to buy the same home,
the worst thing you can do, from a negotiation
point, is to allow each person to SEE what the
other is offering! Instead of offering their
highest price, each buyer will only offer a
SMALL amount above what the other buyer offered.
Auctions are touted as being competitive -
but the competition is in PUBLIC not private -
which makes it COMPARATIVE more than competitive.
Everyone compares what everyone else is offering.
It's like playing cards and knowing what the others
are holding. By making the negotiation so public,
the buyers have a tremendous advantage over the
seller. Instead of having to offer their highest
price to win the auction, buyers only have to outbid
the buyer below them.
To persuade sellers to auction their homes, agents
will talk about high prices. And then to get
buyers to come to the auction, the same agents
will talk about low prices. Most times both the
seller AND the buyer are deceived. The sellers end up
selling for less than they were told they could
get, and the buyers often end up paying more than they
were told they could pay.
The most infamous deceit is Dummy Bidding where
agents use bogus bids to keep the auction
Some agents deny that Dummy Bidding exists.
But consider this: How do you have an
auction with only ONE bidder?
Most people think Dummy Bidding increases the
price. But Dummy Bidding deceives sellers as
much as buyers. It is used to get the price up to
the point where it can be sold - the reserve
Usually, once the home reaches its reserve, the
agent stops using bogus bids. The home is then
sold for its lowest price.
8. SELLS TO THE WRONG MARKET
To attract buyers, agents will market the home by
advertising it to "start from" a low price. This
is supposed to attract buyers. And indeed it does.
But it attracts buyers who want to buy at the LOW
price NOT at the price the seller wants.
Many of these buyers can't afford to pay much more than
the price advertised. And so, on the day of the
auction, there will be a crowd of buyers all
wanting to buy at a low price.
The agent will then say to the sellers,
"This is what the market is telling us."
But the agent has been looking in the WRONG market -
a market BELOW THE VALUE of the home.
This is why auctions get lower prices.
9. FAILED AUCTIONS
When a home does not sell at auction - and
thousands don't - it is labelled a "failure".
Buyers think something is wrong with it; and many
will offer LOWER prices. Like a wounded animal
with vultures circling, failed auctions are easy
prey for bargain hunters.
These are just some of the reasons why we believe AUCTIONS GET LOWER PRICES. We hope it's enough to make you think carefully when someone wants you to sign-up for an auction.
More information is available in the book Real Estate Mistakes and on our web site www.jenman.com.au
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