When it comes to auction, the reserve price (or lack thereof) can turn the event into a resounding success or a train wreck.
So how do you set the reserve price, or should you have one at all?
Award-winning auctioneer Clarence White dropped by to share his insider secrets with Auction Day.
For buyers and observers, it can often be frustrating watching an auction in places like Brisbane, where agents are not required to publicly disclose a reserve price.
But White said he would rarely publicly set a reserve price.
“Setting the reserve price has a lot to do with whether the property is going to sell or not going to sell,” he said..
“It’s central to the process and sets the minimum price the property can be sold for on the day.”
What’s the difference between a price guide and reserve price?
A reserve price is not to be confused with a price guide, which is used by the agent and needs to sit in the 10 per cent range the agent has provided to the vendor as the likely selling point and likely value.
The reserve price is the minimum price the owner will accept to sell the property or not come auction day.
Agents are under intense scrutiny when coming up with a price guide, which has been a good thing for the industry to create more trust.
“We can be pulled up by fair trading if we are under quoting,” White said.
“We have to be able to provide data and evidence to show why we’ve come up with the price that we have.”
In Victoria, for example, an agent is obligated to provide bidders with a Statement of Information, which indicates the potential selling price. If this exceeds 10 per cent, the agent is at risk of attracting regulatory attention under new under quoting laws.
However, there can be some disparity between the two, because vendor are not held to the same standard.
Vendors also don’t have to justify their price point at all, White said, which can be another managing point.
This happens when the agent does their research and comes up with a fair and reasonable selling price according to the marketplace, but the vendor has different expectations.
“An agent when they are coming up with likely selling price ill use comparable sales, they’ll use other sales of comparable homes in the area. They have to give a maximum of 10 per cent to to the buyer on their agency agreement, that is required by law.
“Typically what will happen is you might err towards the lower side of that range to make sure you don’t overcook it to turn the buyers off from coming to the auction. You want to attract people.”
“The agent cant control the vendor’s reserve price at the end of the day.
“The vendor might have an expectation of the upper end of what’s been given by the agent. Sometimes its beyond the upper end of whats been given by the agent.”
Tts always a balancing act between getting the best price from the market as possible for the vendor, and balancing vendor’s expectations.
The challenge between a low price guide and a high vendor’s expectation is something good real estate agents will manage with honesty and transparency, white said.
“Vendors come in all shapes and sizes.
“Some of them are listening to market feedback, some of them are understanding the value of their property, some simply have their heads in the clouds which is quite prevalent in the current market because things have come off a little bit,” he said.
5 things to take into account when setting the price
White said to take into account the following five factors to work out a reserve price for auction.
As you come closer to auction day, you need to determine how many bidders are likely to show up and bid, plus the likely strength of the bidders.
Vendors should listen to buyer feedback on price and use that as a part of setting their strategy for the day.
They will also need to determine the bottom line price, balancing owner expectations and fair market price and conditions.
“The vendor will have a dream price they would love to achieve, they’ll have a pragmatic price they’d be happy to sell at, and they’ll have a bottom line price at which if things don’t go as well as we want, that’s the point at which they will sell.”
Benefits and risks of a ‘no reserve auction’
First of all, it’s illegal in New South Wales. In that state there is a requirement to have a written reserve price provided by the owner.
If it were possible, benefits could include increased buyer engagement through the campaign.
“It really is a marketing strategy as far as I’m concerned,” White said.
“The actual nuts and bolts of a no reserve auction means you’re going to sell the property on auction day.”
“It would give a sense of certainty and transparency for anyone engaging in the process, in that wherever bidding finishes is where it’s going to sit.
“It can potentially create strong competition on auction day, given the bidders know it the property will most likely sell on the day,” he said.
What are the risks?
“I would suggest to you the risks are far heavier than the benefits,” White said.
First of all, it’s not compliant in most states.
Second, the property could sell for less than it’s worth.
Vendors can also quickly lose control of the sale because bidders essentially get the message the property will sell no matter what price the auction reaches, creating a potentially disastrous result.
It can negate the value of your professional negotiators to get more money for your home, and crushes any chances of a negotiation after the auction.
“Our whole purpose as agents and auctioneers is to sell your home for the maximum price possible and auction is the strategy designed to help you do that,” White said.
Points to remember
- Choosing the reserve price is a balancing act
- You can set it anytime up to the day of the auction
- Speak to your agent and auctioneer about the reserve price
- Interest through the marketing campaign will assist you in setting your limit
- A passed in auction isn’t always a failure
- Attend local auctions for some more insight
- Consider your personal circumstances