In this article we discuss the potential Dangers of Selling Property on Auction in 30 to 90 days or less. If you need to sell property urgently, you have likely noticed several auctioneer advertisements (online and next to the road) offering to sell your property on auction fast, with no seller’s commission. The allure of a quick property sale and zero seller’s commission are the two main benefits portrayed by prospecting auctioneers. No one however seems to know that if you sell your house on auction, it could be an almost sure way for a home owner to lose a lot of money on his sale.
Dangers of Selling Property on Auction #1 : Impact of Negative Stigma on price
Auctioning your property creates an immediate negative impression:
If you put your property for sale on an auction, the average property buyer would immediately think something is wrong with the seller or with the property.
Selling your property on auction could create the perception that the seller is in financial distress. This attracts opportunistic buyers who don’t intend paying full market value for properties, but who rather want to buy bargain properties.
Putting your house for sale on an auction could also create the perception that something is wrong with the property:
- Traditionally, selling on auction is mostly considered for items that no one wanted in the free market and that no one purchased at a fair market price. Buyers would typically wonder and try to figure out why the auction property did not sell in a normal market transaction.
- Buyers might also wonder if the seller is hiding defects in the property and just wants to get rid of the property quickly.
A perception that a property could not sell in the free market and that a property has defects, increases the level of risk that a purchaser would have to accept if they want to buy the property. Higher levels of risk demand higher returns on investment. This means that buyers would want to make more profit if they buy an auction property, resulting therein that the maximum price someone would consider paying for the auction property comes down.
Dangers of Selling Property on Auction #2: impact of fewer buyers
Few people are able to afford purchasing on auction, because it typically requires immediate cash payment of commission, regardless of whether a sale registers successful or not. Being liable for 10% commission if an auction purchase fails (in the event of a bank refusing to finance the sale because of the purchaser’s finances, affordability, credit record, risk associated with the property, the property’s security value, or any other unforeseen reason) is a risk that almost all bank-loan-buyers face.
Because only people who have cash available for the full purchase price can avoid this risk, it significantly limits the number of people who are willing and able to take the risk of buying a property on auction – driving down demand for your house and ultimately lowering your sales price. Why?
Auction commissions are payable by the buyer on the fall of the hammer, while commission when selling through an estate agent is only payable upon transfer of ownership after a successful sale. Normal buyers who need bank loans to buy houses typically can’t take the risk of buying on an auction, because they will have to dish up a deposit to cover commission in cash up front (cash which they might not even have) when the auction hammer falls, regardless of whether they end up securing financing and concluding a sale. Because only cash buyers can be 100% sure that they have the funds available for a successful purchase, only cash byers can take the risk of paying auction commissions up front before transfer of ownership. This eliminates the majority of open market buyers for your house, if you sell your house on auction – driving down the number of people who could consider buying your house. Because of the basic economic principle of supply and demand, the price that your property will sell for drops lower on auction as fewer people could buy it. In contrast, a proper marketing plan crafted by a professional estate agent, could also offer the benefits of selling your house in less than 30 days, while attracting a much higher price for the seller by including a much larger scope of potential purchasers.
Dangers of Selling Property on Auction #3: Who really pays the commission
As discussed above, many house sellers trying to sell property on auction end up disappointed by the low offers that they receive from an auction. Yes, auctioning might excite a small number of cash buyers and start a mini bid war, but typically auction buyers still have their cut-off price in mind – especially considering that they will also have to pay around 10% auctioneers commission on top of the bid price.
Zero seller’s commission looks attractive as a catch phrase, but the 10% auctioneering commission payable by buyers is certainly factored into the cost of the property in a buyer’s mind. The higher the commission, the less the seller’s net price would be (regardless of whether the buyer pays for it on the fall of the hammer in addition to an already lowered auction price, or whether the seller pays for it from the sales price upon a successful transfer of ownership concluded through normal professional estate agent marketing. The typical 10% auctioneer commission is much higher than the typical commission charged by estate agents, so a homeowner has to carefully consider which option would put the most money in his pocket.
Dangers of Selling Property on Auction #4: What if you don’t get your price on the auction?
Suppose you don’t get an acceptable price on auction? What happens then?
Auctioneers would typically take a 3 to 6 month exclusive mandate to sell a house before going to auction. If the auction is not successful, the seller has to wait until the end of such mandate, before they are able to properly market their property to the full spectrum of buyers in the market (i.e. the majority of normal house buyers who purchase houses with bank loans – as explained above). By this time however, the reputation of their house could already be hurt by having the stigma attached to it that the house was not even able to sell on an auction – likely pushing up buyer’s perceived risk and lowering the price that even the open market would now consider paying for the house after it failed to sell on auction.
Dangers of Selling Your Property on Auction #5: Fees payable, even if not sold
Auctioneers typically charge a seller advertising fees in preparation for the auction – in addition to commission that a buyer would have to pay. These auctioneering advertising fees are payable by the seller either up-front or after the auction, and are usually payable regardless of whether you achieve an acceptable price that enables you to sell your property on auction. This effectively pushes all the cost risk to the seller, and in a sense exempts the auctioneer from sharing in the risk. In contrast, estate agents only earn fees when a sales transaction is successful, and usually only get paid once the change of ownership registers in the deeds office. Estate agents carry all the costs of advertising themselves, offering a much less risky deal to the seller.
The potential dangers of deciding to sell property on auction as portrayed above, show that an auction could be an almost sure way for a house seller to lose money.
Opposed to targeting a limited number of buyers and likely settling for a low price when selling on auction – if you appoint the best estate agents to sell your property, you get the benefit of a comprehensive marketing plan that balances all 4 p’s of marketing. When price, product, place and promotion all line up, it quickly attracts the full spectrum of potential buyers. A professional estate agent marketing plan maximizes the number of buyers for your property, and drives the demand for your house, ultimately pushing up the price that you could sell for and decreasing the time that your property stays on the market before selling successfully.
Conclusion
Even if you have to sell property urgently, go for a full-fledged marketing plan through the best estate agents you can find: benefit from including more potential buyers and attracting a high price with a professional marketing plan – which could still sell your house in 30 days or less.