Is auction the best way to sell? Risks versus rewards

Whilst I love listing homes using the more traditional selling process, I also love the possibility, that in just a few frenzied moments at an auction, you can see your home sold to the highest bidder for an amazing price. More and more Australians are putting their properties up for sale at auction than ever before. But while auctions can be an exciting spectacle, there’s plenty of hard work and preparation that goes on behind the scenes. 

So, if you’re considering selling your property at auction, it’s vital that you weigh up the pros and cons and go into the process with a clear idea of what’s involved. This way you can enjoy the process and feel satisfied with the outcome, which is the ultimate goal we have at Sparrow.

Perhaps the best thing about selling a home at auction, is that the vendor sets all of the important conditions, especially the reserve price. This is the minimum amount you would be willing to accept for the sale of your home, similar to what you’d set if the home was listed on the market in the traditional way. However, the auction process doesn’t allow for low-balling – no bids below the reserve price can be accepted.

The auction process also allows you to control other conditions to your advantage, such as not accepting any bids that are subject to finance, insisting on a 10% deposit to secure the property after a successful bid, and a settlement date that suits you – usually 30 days after the hammer falls on the winning bid.

Best of all, an auction sale is unconditional. Once the auctioneer has gavelled the winning bid then the property is sold. There’s no waiting on finance or for a building and pest inspection to be satisfied. Done right, a property auction ensures that the sale is achieved quickly, smoothly and within conditions that the vendor sets to suit them. 

Another positive aspect for selling a home at auction is it may create some exciting conditions for triggering a sale that you wouldn’t usually see if you sold in the traditional way. When you set a date for an auction, it gives the market a very strong message that you are serious about selling the property, not just putting up a ‘For Sale’ sign for an unspecified period of time and seeing what happens. This can eliminate any impression amongst potential buyers that you may be testing the market.

With this clear sales signal, you could see interested buyers approach you before the auction date to make an offer, especially if buyers feel that competition will be fierce when the bidding begins. Perhaps it’s someone who’s had an eye on your property, waiting for the right price to come along. Suddenly, with an auction set to start, they will have to act quickly, with the price they offer influenced by their emotions. This could give you an advantage when it comes to negotiating the sale.

Then, if your property does go auction, the pressured nature of the day could also work in your favour and ensure you achieve a deal at the price you want. There’s no room for half-hearted offers, buyers either raise their hand or keep out of it. With bids coming thick and fast, an auction can be an exciting thrill ride that can cause buyers to offer a higher price than they normally would, for fear of missing out – especially in a seller’s market when the property is in high demand.

Whilst auctions can be very exciting and very effective, they also have some downsides that you need to consider.

The first is that not everyone is cash ready to buy a property at an auction. Remember, auction bids can’t be subject to finance. If an offer is made, the Contract of Sale is unconditional immediately upon the fall of the hammer, so if you don’t have your finances sorted, you could be in trouble. 

Whilst an auction does attract cashed-up buyers, there can also be a limit to how many could be interested in coming. Following on from this, with a potentially limited pool of bidders, there’s a chance the auction itself could be passed in – a term meaning the bidding did not reach the reserve price set by the vendor. This negative result can be published in the newspaper’s real estate section, letting the market know that your property did not sell.

Under Australian auction rules, the highest bidder from the auction day when the property was passed in has the right to approach the vendor to negotiate a sale. But the advantage can switch to the buyer and impact the final sale price. There’s no guarantee that your property will sell on the auction day. You are taking a risk, similar to listing your property in the usual way, but on a much tighter timeframe. Also, the competitive nature of an auction may discourage some cashed-up buyers who don’t like the process. They may not register to come or may not even bid if they’re not comfortable.

Whilst auctions can be very successful, remember that the winning bid only needs to marginally higher than the competitors. For example, if you set a reserve price at the *median house price in Brisbane of $670,000, after a few rounds the winning bid could only be $675,000.  [*SOURCE]

The risk in an auction is that you can never be certain that the winning bidder offered the maximum amount they were willing to pay. A skilled auctioneer could help make the process as competitive as possible and bring out the best bids. To ensure this happens, you can put a marketing campaign in place to drum up interest, but this can be expensive and erode any profits you could make.

Finally, the auction might result in the highest bid price that you are not comfortable with, and that you may feel pressure to accept just because it’s right in front of you. 

So, with all of this information in mind, would I recommend selling your property at auction? My answer is that I would only do that if the process suited you and the property you were selling.

Before you go down the auction path, it’s vital to consider what kind of property you own and whether selling it to the highest bidder is the best process for it. Where is located? What kind of market are you appealing to? What are the current market conditions – does it favour buyers or sellers? Also, consider the time frame. If you want to sell quickly, and the location and market favour an auction, perhaps it’s for you. If you have more time, then an auction could be something to explore later on.

Whatever you choose to do, I believe the way you sell your home has to align with your own personal beliefs. If the auction process ticks your boxes, then it’s probably going to suit you. But if you’re not comfortable with it, then consider a more traditional listing and keep your options open. 

Above all, the success or failure of your property auction will be heavily influenced by your choice of real estate agent. Make sure you pick someone who can spell everything out for you – risks and rewards – and who you enjoy the process with. 

Because at the end of the day it’s your property and your life. Whilst we all want the best price possible for a property sale, it shouldn’t come with compromises that you are uncomfortable with.