3 buyers have been attracted to a home that is up for auction.
Buyer A is prepared to bid to $1,300,000
Buyer B is prepared to bid to $1,400,000
Buyer C is prepared to bid to $1,500,000
This is a dream scenario for the seller. The thousands of dollars the agent charged the seller for advertising is about to yield a great result.
Or is it?
Ask yourself 3 questions:
1. Who will end up buying this home?
Answer: Buyer C – because Buyer C has more money to spend than Buyers A & B.
2. How much will buyer C end up paying?
Answer: $1,405,000 – because bidding between buyers A, B & C will go something like this:
Buyer A – “$1,000,000”
Buyer B – “$1,100,000”
Buyer C – “$1,200,000”
Buyer A – “$1,300,000” (Buyer A has just bid their maximum so Buyer A is now out. Only Buyers B & C are left to bid).
Buyer B – “$1,350,000”
Buyer C – “$1,370,000”
Buyer B – “$1,380,000”
Buyer C – “$1,390,000”
Buyer B – “$1,400,000” (Buyer B just bid their maximum so buyer B is now out. Only Buyer C is left but remember Buyer C has $1,500,000 to spend!)
Buyer C bids “$1,405,000” – SOLD
Now we ask the important question: How much money have the owners just undersold by?
Answer: $95,000 because although Buyer C was prepared to pay $1,500,000 but they didn’t need to
because the next highest bidder stopped at $1,400,000. There was nothing forcing Buyer C to bid to their maximum of $1,500,000 and they will feel they got a bargain!
Agents know that the only buyers who pay their maximum at an auction are the ones who miss out! The winning bidder always buys the property for less than they were prepared to pay. It’s madness for sellers lose this much money!
The seller loses $95,000 because bidding at an auction is not COMPETITIVE it’s COMPARATIVE. Anyone who has studied negotiation knows you should never allow buyers to know what the other buyers are bidding – and this is unavoidable at auction. Agents know this and that’s why you never see an agent selling their own family home by auction – so don’t let them do it to yours!
In all cases a better result is achieved for the seller when Buyers A,B & C are kept separated and are not told what the others are offering.
Each buyer should be informed that the property has more than one ‘admirer’ and that unfortunately two buyers are going to miss out.
Each buyer is given a contract to take away, sign, and return by a certain day with the maximum they are prepared to pay for the property written on the contract, with a full deposit cheque.
The buyers are told that the seller will be presented with the 3 contracts and that the seller will sign the most attractive one.
The buyers know that no second chances will be given to ‘up’ their offers, so their absolute maximum must be on the contract.
This method keeps the 3 buyers focused solely on paying their maximums (unlike at an auction where the buyers are allowed to focus on paying just a little more than the under bidder).
Sellers love this method because each buyer will return their contract with their absolute maximum offer because they love the home and don’t want to miss it. They will find every last dollar and put it on the contract. Don’t you want your buyers doing this?
The owner will be presented with contracts from Buyer A at $1,300,000 – Buyer B at $1,400,000 – Buyer C at $1,500,000.
The property will be SOLD for $1,500,000 – $95,000 more than the best auction could have produced.
Auctions are great for buying bargains, but are very costly for sellers. Your agent should be a skilled negotiator who knows how to get buyers to pay their maximums and if an agent recommends that you auction your home, you’re talking to the wrong agent.