Inside the auction house: Pricing is the key to success

Inside the auction house: Pricing is the key to success




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Benjamin Tobin, Chartered surveyor and director of Strettons, has been selling properties by auction since 1979. Each month he will correct our common auction misconceptions, giving us the real answers from the Rostrum...

"Over the past few years there have been a stream of television programmes on the subject of buying properties at auction. Frequently these have followed a similar format; the camera follows a buyer or buyer around the property market, inspecting buildings, most frequently houses or flats (but occasionally small business premises) with the suspense provided by following the auction process and watching either the joy or the disappointment of the successful bidder at the auction.
 
I have featured on numerous such programmes and I am still questioned by clients who see me on daytime satellite TV selling a property that went through our auction sometimes several years earlier. One lady tells me that her trips to the gym would not be the same without me selling (or occasionally not selling) a property.
 
But why the fascination with part of the property market that the vast majority of buyers never get to engage with? My guess is that it is the element of the unknown with the roulette of whether the buyer, the seller or sometime both, are overjoyed, disappointed or merely satisfied with the price, Particularly when competition forces them to pay over their target price!
 
Bridging Lenders frequently use auction and yet sometimes without a detailed understanding of how it works. The rational seems to be “it does work, so don’t get involved”
 
In any event, there is never any shortage of questions when people (whether or not they are from a property background) find out that I am a property auctioneer.
 
With that in mind I have gathered some of the most frequent questions and answers which will follow as a series over coming months, but why not start at the beginning.
 
 
Question
 
Aren't auction prices set at rock bottom levels?
 
Answer
 
This sums up one of the essential differences between an auction and a private treaty sale. When you sell by private treaty you may approach several agents and receive varying views (sometimes quite widely), of what you should ask. Of course, this may not be what the property is “worth” – the agent may be short of instructions and hopes that he may be able to bait the seller down after a few weeks. The agent’s job is to achieve best price and this may not necessarily be highest price. In many cases where I am LPA Receiver, particularly for bridging lenders, interest can be ramping up and to satisfy my duty of care to the borrower, I am better off selling by auction with a high certainty of achieving a sale in a limited period, thus “stemming the flow”, than waiting to achieve an uncertain result within an uncertain period.
 
The issues are really whether the property is suited to auction process and then setting the price. The former is a topic for another day, but pricing is the key to success. In a private treaty sale the seller quotes high waits for offers. Assuming any come, once a price is agreed the buyer goes of to do their due diligence and arrange finance. Frequently, in a weak market the transaction will be renegotiated and likely fall through several times. In contrast, at auction, the buyer comes to the auction with checks done, finance in place, funds arranged and ready to exchange a contract. To achieve this they need to be attracted by the possibility of making a profit and usually, by an attractive guide price. If the guide price is set too high then
buyers won’t bother to pursue. If it looks on the low side, they will be excited to get themselves ready and come to bid, and it only takes two for competitive bidding.
 
Guide price is thus the key. The RICS Auction Guidance Notes require the auctioneer to define Guide Price and then keep to that definition. Common definitions are the likely expected price or the range within which the reserve will be set. Our view is that we have no control over the former so cannot be accurate. We do have control over the latter so that is what we use. Our starting point is to look at how a bank valuer might value and then adjust up or down.
 
If we get it right, there will be much interest, many bidders and the reserve will be comfortably exceeded. If we get it wrong, or the seller holds out for too strong a reserve, we scrape past the reserve, or even fail to sell. The chances are that we will then sell after the auction but the seller’s bargaining position is greatly reduced.
 
So, in summary, there should always be a possibility of buying cheap and that is the attraction to
the buyers. Of course, not all auctioneers are diligent in keeping to the code of practice and I
have seen other firms taking significant risks in quoting guide prices which are blatantly
misleading.
 
 
 
 
Question
 
What is an auction?
 
Answer
 
The Oxford English Dictionary defines it as “A public sale in which goods or property are sold to the highest bidder”.
 
There are three elements here; public, sale and bidder but there is also an additional element which is key in current real estate auctions – a (relatively) limited time period for handing over the money (and the property). The essence is that unlike a private treaty sale, there is open competition which the seller hopes will boost the price, hence the Latin root of the word Augere – to increase. Of course it doesn’t always work that way and the key is to obtain proper advice from an experienced and appropriate auctioneer who will not be afraid to tell you that the lot is not best suited to auction.
 
There are other methods of sale which involve competitive bidding, such as tender but the point of auction is that the process is open and hopefully, transparent. It is also finite. 
 
That is not to say that auction is always the best means of sale for a particular property. Where there is a proven demand and where the majority of potential buyers will need traditional mortgage finance and will be involved in a chain, then so long as there is no great urgency, I would rarely recommend auction for a typical owner occupier house or flat in the UK.
 
Auctions have been around for a long time – in the Bible Abraham bought a plot of land with public bidding some 3,000 years ago, but in the UK the RICS publishes Guidance Notes for Property Auctioneers to regulate the practice, and this is kept under review and updated so that sellers and bidders should expect high standards. This extends the statutory regulation under the Auctions (Bidding Agreements) Act 1969."
 
Benjamin Tobin is a Chartered Surveyor and director of Strettons, who has been selling properties by auction since 1979 and taking LPA Receivership appointments for lenders since 1992. He co-wrote the original Guidance Notes for Auctioneers and is a member of the IPA/RICS body that Registers Fixed Charge receivers. Strettons are a UK top 30 Property Agent and a UK top 10 Property Auctioneer.

 

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