Yes or No to Auctions?
There is a time and a place for Auctions. That time is not now, and it is not Corowa.
The purpose of an Auction campaign.
The general consensus from proponents of auctions is that they achieve the following:
- a shorter time on the market than a private sale campaign
- maximise the possible return to the vendor by generating a competitive environment where would-be purchasers seek to outbid each other
- in the event of instructions from a financial institution or a deceased / age estate
What’s needed for an Auction to work?
For an auction to work in the Vendor’s financial favour the following five factors usually need to be present:
- a financial environment where borrowers can rely on “unconditional approval” and bid accordingly at the auction; or a buyer demographic that does not rely on regular consumer finance to fund the purchase (ie cash buyers)
- a price growth period that encourages borrowers to go above and beyond to secure the property they desire without fear of over-capitalisation
- a sufficiently high pool of potential buyers from which to create a competitive environment
- a healthy level of demand from auction-savvy buyers for the property that is to be sold
- an indicative price range that has some reality with local market prices
If one or more of the above factors is not present, the potential for failure at auction increases.
In Corowa’s case, of the past 3 auctions conducted, over a period of 2 years, all properties were passed in, unsold.
So, why would an agent promote auctions when all the local evidence suggests that it is simply not the right thing to do if maximising the price is the aim? Here are three possible reasons.
- It could be an ignorance of, or a disregard of, the market in which an out of town agent has chosen to operate. One possible reason for an insistence on auctions could be the idea that miracle Melbourne buyers will see the property advertised via auction and bring their dollars to Corowa: that the Melbourne buyers will love the familiarity of the auction process and cough up.
- Auction Day. Melbourne buyers can’t always make it back for the auction. Or won’t. Or if they do, they see all the hands in pockets and keep theirs firmly hidden too. Plus, they’re smart. They research, and with the information that exists for sold results online, the miracles are few and far between.
- Most really well-heeled Melbourn-ites with tons of cash aren’t yet looking at Corowa. They are heading for more temperate climes and there are other more popular destinations. Corowa has had more success at attracting newcomers who have modest retirement incomes, and who are really are on the lookout for the bargains; not the Best in Show.
Let's assume that the auction isn't being run out of ignorance of the Corowa market.
Then, perhaps, it's self-promotion for the agent. For the only sure beneficiaries of auction campaigns in Corowa are the agents who conduct them. Here are five reasons why.
- A typical Auction campaign is based on the premise of a short, high profile advertising campaign. This puts the agent and branding in the spotlight over multiple media for up to six weeks.
- The agent does not pay for the advertising. The Vendor does, so it is effectively guaranteed, free advertising for the agent, no matter what the result on auction day
- The agent is able to justify limiting inspections to open days only, particularly if the selected agent is not from Corowa but rather a larger city base
- Because auctions primarily attract high-value properties, the agent is able to target and attract vendors of comparable properties without the expectation or demand from lower value properties.
- In most cases the agent retains the property listing following the failed Auction Day along with the following five opportunities:
- To promote the property at a lower price than the original quoted expectation
- To represent a vendor who has invested a whole lot of time and money (ie photos, photo boards, and floor plans) with the auction agent and who is therefore reluctant to commit to a potential repetition of these costs with another agent
- To represent a vendor who may well be prepared now to negotiate downward in price considerably more than their original intention. This increases the chance of for the agent to achieve a private sale where the vendor does not benefit from the unconditional sale conditions existing on Auction Day.
- To attract other starry eyed vendors of high-value Corowa properties who, due to the high profile marketing campaigns they have seen, gain the perception that the high profile auction must be the way to sell
- To eventually sell the reduced price property at a value considerably less than a quality Private Sale campaign might have achieved.
Why does this happen?
- An auction is an effective way to deliver a harsh price message to a vendor who may have entered the process with an over-inflated sense of their property’s worth. This sense may well have come from an agent’s inaccurate appraisal in the first place. Or, from the indicative price guides that the vendor might have seen advertised for other comparable properties up for auction.
- After the auction, the vendor’s spirits are likely to be low. The vendor is now much more likely to accept defeat and a lower final result. Ongoing inspections are likely to slow to a trickle and it may seem as though the only way out now is to drop the price.
What is wrong with this?
- A property that has failed to sell at auction in Corowa may well simply be a victim of the auction process. It does not necessarily mean that the reserve was too high. Accepting it is a price issue could be leaving money on the table.
- There appears to be an incorrect perception in some quarters that a quality sale campaign can only be delivered by via the auction process.