Going, going, gone… 

(Originally published in Pittwater Life Magazine December 2012)

In physics the notion of tension is defined as a pulling force exerted on one object by another. This month we look at the issue of tension as it relates to the local real estate market, particularly with respect to the process of selling a property by auction.

What motivated me to delve into this topic was a recent episode of Channel Nine’s ‘Hot Property’ series which featured an older style property on the Mornington Peninsula in Victoria. The property was part of a deceased estate and advertised for auction with a reserve of $290,000.

During the process of filming the open houses, the film crew captured a potential buyer and her partner, they both described the property as an ideal renovator – it had an elevated position in proximity to the water. The buyer’s partner described getting the house at the reserve price as the equivalent to winning (Tatts) Lotto. When pressed as to what they thought the property was worth they said at least $320,000.

Fast forward to auction day and there are three active bidders including the ones mentioned above out of crowd of about 50 people assembled. After slowing the bidding, the property stalled at $290,000, the bid is now with the buyers from the open house. The auctioneer declares the property on the market thinking this will spur on the other bidders but there is silence followed by going once, twice, three times, sold for $290,000….to the people who thought the property was worth $320,000. This was followed by a drama shot of the vendors looking pretty disappointed. All in all it was a neat case study of one of the main weakness of the auction process and may have been avoided.

The evening current affairs programs are rife with real estate based scams from over quoting to underquoting to so called card bombing and even fake photos of properties listed for sale. In mid-November NSW Fair Trading agents swooped on 20 inner west auctions in search of process breaches. The auction issue I refer to above is by no means a scam but actually a fundamental problem with the auction process itself - the successful bidder on your property only needs to be one bid ahead of the under bidder. You may never discover what the successful buyer was prepared to pay, only that they paid more than the next person bidding.

There has been an interesting trend in our area with agents now seemingly quick to recommend auction as the primary means of selling a property. The usual reasons cited are the benefits of maximum tension exerted on buyers and the defined time period to sell. What’s not often spoken about is the commensurate level of tension that is also exerted on vendors, the fundamental limitations of the auction process as described in the example above and the cost which in itself can be breathtaking with an extensive advertising campaign.

For whatever reasons, the Northern Beaches property market has resisted the auction process as a mainstream way of marketing property. Auction sales over the years have tended to be reserved for those quirky properties that don’t have direct comparable valuations or high end real estate where valuation can be largely made up of intangibles – views or position for example. Other areas in Sydney such as the inner city or inner west can tend to be dominated by auction sales, for many reasons again but in a nutshell it’s the way they do business over there. This trend can be evidenced by the reported clearance rates which according to the Sydney Morning Herald Domain Section fell as low as 29% for the Northern beaches in mid-November while other markets in the inner City and inner West experienced clearances around 50 - 60%.

So why list a property via auction with perhaps a one in three chance of selling?

To be effective an auction sale in theory only requires a single buyer and a vendor prepared to accept the highest bid on the day. Bids made at auction are in effect an expression of interest in the property and to have a truly delighted vendor usually means multiple bidders on the day, some of whom have probably formed an emotional attachment to the property. In the current subdued market, however, greater focus needs to be placed on the pre and post auction phase. This simply means that strategies need to be identified and agreed at the start of the campaign to manage the whole process rather than simply focus on the razzmatazz of the day itself, strategies that range from planning for the post auction direct negotiation with under bidders to the handling of pre-auction offers or even running a sealed bid process before the auction if buyers are present but nervous about bidding. Contrary to the clearance stats many homes do in fact sell in the pre or post period and these may not be accurately reflected in the published statistics.

Brian Hrnjak B Bus CPA (FPS) LREA

Brian Hrnjak is a Director of GHR Accounting Group Pty Ltd, Certified Practising Accountants, Authorised Representative of Premium Wealth Management Ltd, ABN: 11 091 418 861 Australian Financial Services Licence Number 237498 and licensee in charge of AltRE real estate. Office: Suite 12, Ground Floor, 20 Bungan Street Mona Vale NSW 2103, Telephone: 02 9979-4300, Web: www.altre.com.au Email: brian@altre.com.au

These comments are of a general nature only and are not intended as a substitute for professional advice. This article is not an offer or recommendation of any securities or other financial products offered by any company or person.brian@altre.com.au