To auction or not to auction, for many property vendors, that is the question. Like to help your vendors weigh up their options? Read on for some pointers to keep in mind.
Auctions can be an effective way to sell a house, but a lot depends on the market and the type of property. For example, in a vendor’s market (where demand outpaces supply), auction rates and participation tend to increase. On the other hand, when the market cools down, other selling methods may gain more traction.
The pros of selling at auction
In some cases, selling at auction can be a great way to get a property sold in a timely and efficient manner. Here are some key advantages for vendors.
They may sell their property faster: Generally speaking, auctions are one of the fastest ways to sell a house in New Zealand. With a set auction date, the pressure is on for potential buyers to act quickly and decisively, leading to increased competition and (potentially) a higher sale price. It can be a good option for vendors who are eager to make their next move and need to sell within a set timeframe. As long as the reserve (the minimum price they’re willing to accept) is met, sellers might have the money in their pocket sooner than with other selling processes.
Only serious buyers can participate: Property auctions are always unconditional and legally binding in New Zealand. Once the hammer falls, the buyer is legally committed to purchase the house; they can’t backtrack or renegotiate the contract without heavy financial and legal costs. So, buyers need to do their homework in advance, including getting their finance approved, property reports ready, and building inspections done. Compared to conditional selling methods, with auctions vendors can save a lot of time.
Vendors are in control: With an auction, vendors are in the driver’s seat. They’re the ones deciding the reserve price and settlement date that suit them, and buyers are bidding under those terms and conditions. What’s more, the reserve price protects a vendor: the house won’t sell unless the bidding reaches a pre-agreed amount (which buyers don’t know in advance).
They may attract a greater buyer pool: Sometimes, buyers are put off by asking prices. But with an auction, there’s no visible price tag and buyers can’t compare it on price alone. In turn, this may increase the potential buyer pool, and with more buyers in the room, the competition is likely to intensify. Not knowing vendors’ sale price expectations also means that buyers often come to auctions thinking about the most they can afford to pay, rather than how low they can negotiate.
There’s potential for a bidding war: Depending on the market and the property, a house may attract several competitive buyers trying to outbid each other. This can drive up the sale price above the property’s market value. Increased competition isn’t always the case, but when it happens, the vendor can reap big rewards. Plus, if buyers anticipate fierce competition on auction day, they might even make a pre- auction offer: vendors then can either accept the offer and cancel the auction, or bring it forward and use the offer as the reserve price.
A passed-in property isn’t the end: Even if the reserve price isn’t met and the property doesn’t sell at auction, vendors still have options. Usually, the highest bidder has the first right to negotiate, but vendors aren’t bound to sell to them. Their real estate agent will outline possible steps, including contacting other registered buyers, re-marketing the property, or choosing a different sale method.
The potential drawbacks of selling at auction
Auctions come with many benefits, but they may not be for every vendor or property. Here are some potential drawbacks to be aware of.
Auctions can rule out potential buyers: REINZ data shows that the auction rate has eased in the past year. One key reason is that getting finance has become more challenging for buyers, so conditional sales methods have seen a resurgence. Buyers who aren’t able to secure finance by auction day may be forced to step out, which can reduce the number of bidders and limit the sale price. Plus, some buyers are intimidated by the competitive nature and simply avoid auctions if possible.
Vendors may not get the highest price: While vendors can set the minimum price, they can never be sure how high bidders will be willing to go. The bidding war might not actually happen, and the final sale price could be lower than what could be negotiated in the open market. If vendors are selling their property to fund the next purchase, they won’t know their exact budget until the auction is over.
There’s no guarantee of sale: The reserve is not always met. And if bids don’t reach the reserve price, the property can either be ‘passed in’ or withdrawn from the market. This can be a problem if vendors are planning to sell the property by a specific date. Also, it may affect the appeal of the property: with potential buyers now knowing how much others are willing to pay, they might revoke or reduce their offers.
It can be difficult to choose the right reserve: If the reserve price is set too low, the vendor risks selling the property too cheaply. On the other hand, if the reserve is too high, the property may not sell on auction day.
Vendors can’t change their minds afterward: Once the auction is closed, the sale is final for both buyers and vendors. So, even if the sales price is lower than the vendor hoped for, or their personal circumstances change, they can’t cancel the sale-and-purchase agreement. It’s crucial that vendors opt for this fast-paced process only if they’re certain that they want to, and can, sell.
Is an auction right for your vendor?
As we’ve seen, there are many factors to consider, and these also include the type of property, market conditions, and vendor’s timeframe. And of course, in this slower property market, it’s important to not underestimate the power of good marketing. Once the auction date is locked in place, a premium marketing campaign can help maximise the appeal of the listing, getting more buyers in the auction room.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.