The Right Time to Auction

The Right Time To Auction

Vendors often ask if there is a “right time” to auction and many agents shy away from the hammer in a falling market. Chris Wilson examines market dynamics and says auctions play an important role in any market.

"When buyer activity falls away it is time to attack the market and the only way to do that successfully is to auction, auction and auction."

"In these soft market conditions some agents, who are scared of auctions, start using selling strategies of “offers over”, “by negotiation”, “expressions of interest” and price ranging."

The Australian Real Estate market is showing signs of changing. Increases in interest rates and continuing global uncertainty is having a negative impact on the market. Agents are commenting that buyer activity is starting to wane. What does all this mean to you? It’s time to attack the market!

Understand market dynamics
During what are known as good times – that is a period of ever increasing prices – several things happen. Prices rise, days on market fall, buyers outnumber vendors and the situation self-propels itself to a point where either the price bubble bursts, or governments and central banks intervene and burst the bubble before it becomes too large. 

The dynamics of the market changes. The market moves from being strong to one of uncertainty. Price rises check and pause and then start to fall. The pool of buyers who are already in the market to buy gets depleted as they are soaked up by the existing stock for sale. The number of new buyers entering the market place starts to fall to a trickle, and so days on market increase. Over time prices fall and what many agents call the “bad days” are back.

Over the last 12 months real estate markets have been relatively buoyant and in some areas downright bullish. As prices rose, more and more agents began to recommend auction to their vendors. Auction clearance rates, along with prices, have been rising and everyone has been saying, “the boom times are back”. But since Easter there are signs that the boom has at least paused, and in some areas prices started to fall. Agents in those areas have started to pull back on auctions and are increasingly suggesting to their clients that they put an asking price on the property. BUT WHY?

There are some who fully understand the psychology of the market who question this strategy, and will argue vehemently that when buyer activity falls away it is time to attack the market and the only way to do that successfully is to auction, auction and auction.

Boom or fall, auctions work
Let’s examine what happens in both a booming and falling market. In a booming market when an agent is discussing options with the vendor, the vendor is aware that buyers are active and prices are on the increase. Buyers are also aware that the market is moving; they are attuned to the fact they need to act sooner than later if they want to buy because of where the market is moving. 

But the interesting thing is that it doesn’t matter what the vendor thinks their home is worth, there is a fair chance that there is a buyer, (or more than one buyer) who is already of the mind frame to pay more than what the vendor wants.  

Auctions sit well, both with the agent and the vendor because they understand that there are more buyers than sellers and so the chance to get a premium price is already in existence. When the property sells above the reserve the agent runs out and tells everyone that the auction sale was a success because they got more than what the vendor wanted. But was it the agent or the market? 

The real evidence of a boom market is when the buyer is already ahead of the vendor on price. Hence the quick sale at a premium price, and everyone is happy. The only reason a house won’t sell in these circumstances is when the agent gets in the road of the sale.

Educate vendors and buyers
When the market turns, agents’ and vendors’ attitudes also change. The agent suddenly finds the going tough and retreats from auction and returns to private treaty strategies, because they don’t want to be seen as a failure.

But is that the way to go and does the concept of ATTACKING the market come into play if the market is falling? To gain a sale in these circumstances one not only has to have a buyer or two, but to have a vendor who is in tune with the market, and so accept what the market has to offer.

But there is one problem. When the market turns, the vendor still has high expectations of where they think the market is going. They see buoyancy, and all their friends and family will confirm the buoyancy with them. Buyers, on the other hand, have changed their view on price and withdraw, waiting for value to return to the market. Suddenly days on market start to lengthen, sales fall and then prices fall as vendors come to the reality of the situation over time.

There has always been an old adage in real estate that most ready, willing and able buyers view properties in the first four weeks that a property comes onto the market. However, an analysis of buyer activity now suggests that the internet has changed that behaviour forever.

What we see now is that most buyers view properties in the first two weeks of a campaign. In other words, if an offer is forthcoming in the first two weeks, it is likely to be a very good offer – especially if it comes from someone who has been in the market to buy for some time. If this is the case, putting the property for sale by private treaty at a vendor “hoped for price”, virtually guarantees that the vendor will miss the boat when it comes to having meaningful offers from buyers who are ready to buy. The outcome is that it will take a lot longer to sell the property, and when it does sell, it will sell for a lower price, than if the agent had recommended a strategy of attacking the market.

Attack the market
How do you attack the market? To do that successfully the property needs to be submitted to auction. With a properly funded and targeted marketing campaign the agent can sell the benefits of the property and once they have unearthed interest, feed that interest back to the vendor on what the market feels about the property. If the vendor is a genuine seller (and most vendors are), it allows the vendor to establish where the market is at and then make a decision on what they are going to do about it. It doesn’t mean they have to sell, but if they want to sell, it allows them to establish what the market will pay before they make the commitment.  

The agent has a lot more work to do than what they would have had during the boom times. But if the agent targets the buyers correctly, obtains effective and timely feedback, fully informs their vendor and if the vendor is serious about selling, they will come to terms with market reality a lot quicker. In a falling market that means they will lose less than if they drag the whole selling process out by putting an inflated asking price on the property in the first place.

In these soft market conditions some agents, who are scared of auctions start using selling strategies of “offers over”, “by negotiation”, “expressions of interest” and price ranging. Surveys of buyers indicate that buyers are not fooled by such strategies, and generally read into such strategy that the vendor “wants too much”.  As well the vendor is left to the buyers’ time-table as there is no closing date to work towards. In an auction situation a date is set, and the agent has a goal to work towards. If the property sells, it will sell for a good price. If it doesn’t, then if the proper feedback has been supplied to the vendor, it will quickly become well priced so that it is the next property to sell.

At the present time the clearance rate for auctions has fallen from in the 80 per cent range to the 70 per cent range. Even if it fell to the 50 per cent range, which it was a few years ago, that means that 50 per cent of the properties are selling in three weeks. The days on market for private treaty properties will be a lot longer. So ATTACK the market and achieve the right result for your vendors.

Chris Wilson BA (Econ) is the Compliance and training Manager of Think Real Estate www.thinkrealestate.net.au a specialist provider of training, compliance and support services in the Eastern states.