Auctions – Going, Going, Gone?

Posted on December 10, 2008 by | 4 Comments

David Morrell of Morrell & Koren OPINION
by David Morrell
Real Estate Buyers’ Advocate
Director Morrell & Koren


 


 


Right now the real estate auction system is on the ropes because the market has tanked; but its problems run deeper than that. The elephant in the room is whether the auction system itself is working in vendors’ best interests.Sad news for estate agents!


The agents make the argument that auctions work because they bring buyers and sellers together at a known time and place and that they have the clearance rates to prove it. This while people, especially at the top end, are keeping their hands in their pockets and refusing to bid. “Ah!” counter the agents, “That’s only in today’s market and that’s when post-auction negotiations begin and the sales are made.”


Then why blow $30-40,000 marketing an auction if its only effect is to trigger a private sale? (OK, some properties are still selling at auction, some even against vendor bids, but that only illustrates Mr Barnum’s reported adage regarding the birth rates of suckers.)


Agents and auctioneers are suddenly having to earn their fees; and a lot who have known nothing but rising markets are now out of their depth. The cardinal sin that we’re seeing is starting with a vendor bid that’s way too high and is then greeted with stony silence. Where to from there? Plead with buyers? Sure. Here, help yourself to my millions, I hate to see you suffer.


Then why is it that the auction system itself should be called into question? (A disclaimer here: we have used the system for our clients’ and our own profit for a great many years. It’s not in our interests to see it die, but nor is it sensible to pretend that it’s not.)


A little bit of history: Wind the clock back 30 years and the only auctions on the landscape were Mortgagee or Deceased Estates. Everything else was a private sale.


So why and how did Melbourne become the auction capital of the world?


Short answer: The Money.


Agents realised that if properties were auctioned, auctions had to be advertised. For many, many years, they took commissions from the media and that alone was enough to keep them in BMWs.


Today they can’t take that commission, but still when a property is advertised, it’s also an ad for the agency. They build their brands and their vendors pay for the privilege.


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4 Comments

  • The auction system works best in any market, including the present. If fact, i am finding that in the Lane Cove property market its working better now whilst there is all this negative press around. You only need 1 buyer in any market, auction included. A professional agent can get a deal together so long as there is one buyer and one seller. An auction puts a set time frame that the property is to be sold buy and if a buyer wants to buy that particular property  then they MUST act either before auction day or on the day. It just boils down to negotiation skills. I am having great success at Hamilton and Co Lane Cove selling properties for higher prices now in a depressed climate. I welcome all buyer agents to inspect my homes for sale to. Carlo Palamara

  • Hi Carlo,

    What you have left unsaid is that the auction is a great conditioning tool for unscrupulous estate agents in a depressed market. All you have to do is convince a naive vendor to sign up with you on the basis of your spruiking (and I can see that you’re a good spruiker), and then convince them to drop their price until they reach the low market.

    You’re right about an auction setting a timeframe, but what you’ve cleverly left out is the fact that the timeframe is set for the vendor and for you.

    As for negotiation skills, my clients regularly complain that auctioneers falsely tell them that they cannot negotiate an auction contract – so much for negotiation skills. Tell me Carlo, are you qualified to explain the contract terms and conditions to vendors and purchasers – no, but you do it anyway, right?

    And what do you mean when you say “I am having great success…selling properties for higher prices now in a depressed climate”? Higher prices than what? Have you sold the same properties twice in recent times to be able to compare?

    Carlo, if you’re silly enough to attempt to use this blog as a podium for promoting the shonky auction system…well, what can I say.

  • ‘Then why blow $30-40,000 marketing an auction if its only effect is to trigger a private sale? ‘

    Just a quick one, but does this imply that a post auction sale, to a buyer that saw the above mentioned $30,000 advertising is any less desirable than one uner the hammer at auction.

    I assume the job got done, the property got sold by a skilful negotiator, working for their seller and achieved the highest price the makret was willing to pay on that day. Is there a problem with that. (so long as $30,000 wasn’t wasted when $4000 could have done the trick).

    Also, Peter, why is the vendor (and their agent who works for them) not supposed to set a timeframe for selling THEIR property. If you were selling your widget on ebay, would you let the marketplace of buyers tell you where and when you can sell your item. I’m just not sure why this was mentioned.

    Thanks again for the forum with which to discuss these issues.

    Glenn Twiddle
    Real Estate Training Brisbane

  • Hi Glenn,

    It is important to differentiate between what the vendor wants personally, and what the vendor wants after having been advised by the estate agent.

    The setting of timeframes is rarely the vendor’s idea; rather it is the estate agent who sets the time limit, whether it is in the conte

    xt of an auction or a private auction (the “lucky envelopes” method, also known as private tender). Time limits are important to estate agents who need to ensure a sale before the Exclusive Sale Authority ends.

    There is a conflict of interests where an estate agent, who needs a sale to win commission and needs that sale before his agency contract expires, advises a vendor to sell before a nominated date – particularly where the agency agreement states that a commission is due even if the vendor’s asking price is not reached.

    I have seen standard form letters from well known real estate agencies using the “lucky envelopes” method telling purchasers to make their best offer because “some purchasers have been known to have missed out by as little as $100.” This raises the question about the estate agent’s negotiation skills and the role of the estate agent in getting the best price. I have NEVER sold a property where the successful purchaser has succeeded by a mere $100. I regard this a negligent in the extreme.

    The conflict of interests could be lessened if it is the vendor who requires the time limit, AND the estate agent accepts the challenge on the basis that no commission is payable if the agreed price is not reached. In such circumstances the estate agent should accept no more than a fee-for-service.

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