Just like a public auction, there are times when a silent auction works better than a standard private treaty and vice versa. The success of a silent auction is equally dependent on the right agent and the right circumstance.
A public auction sells to the highest bidder above the reserve price. It is common for the highest bidder to win an auction merely by beating the second highest bidder by $1000. The tragedy, from the seller’s point of view, is that the person who just bought the property often has $50,000 or $100,000 left in their budget that they did not need to spend to win the public auction. They did not need to go to their maximum price because the process did not demand it of them.
The objective of the silent auction is to elicit each and every buyer’s maximum price for the subject property.
In May 2009, real estate veteran Bill Malouf chastised his industry colleagues at a national conference. Malouf was critical of agents that persisted with auctioning properties in market conditions that were clearly a non-auction environment. The market was suffering a crisis in confidence after the banking crisis, yet real estate agents were still listing properties for public auction as the clearance rate floundered below 50%.
Whether it be a public or silent auction, the market conditions need to be conducive to run a sales campaign that needs multiple bidders. If the market conditions are extremely flat, it’s advisable to run a normal private treaty campaign rather than a silent auction.
The marketing campaign to promote the silent auction is the same as if it were listed as a public auction or private treaty. It is crucial that you remember buyers are interested in your property first, and the process of sale second. Regardless of the sales process you employ, provided your agent runs a competent marketing campaign, the same prospective buyers will emerge.
A mistake that many home owners make with private treaty (for sale) is they set their asking price too high. To overprice with the intention of reducing down to the market price will cause your property to languish on the market and look stale. Conversely, many home buyers will attest to the reverse with public auctions, where they often see properties advertised 10 to 15% below the vendor’s reserve.
The good news is you only need to quote an accurate market price to attract multiple bidders. ‘Market price’ is different to ‘best & highest price’. It is completely legal, fair and reasonable that a home owner lists their home to be sold at the ‘best & highest price’ above the market price. In doing so, the owner (and agent) is not misleading anyone into bidding on a property they have not a chance of winning. Equally, they are making the understandable commercial decision to accept the highest offer.
Public auctions put a public deadline on the sale from the get go. As the auction deadline looms, the pressure that was meant to be on the buyers to act begins to mount on the vendors, particularly if the market is disengaged with the price guide the agent is quoting. Unless forced to do so by a court order or trustee, it is best to avoid putting a public deadline on the silent auction at the beginning of the campaign. Keep the use of a deadline open and only put a firm deadline on the sale once you are near certain that you have sufficient bidders/buyers.
Deadlines in a negotiation are classic brinkmanship. To set out on day one of the campaign with a deadline brings a high stakes pressure situation on oneself. The Sydney and Melbourne property markets kicked off the first weekend of Spring 2016 with clearance rates of 80% and 78% respectively. This is as good as the public auction market gets. Yet 1 in 5 still failed in a most public fashion. In normal markets, the fall-out rate is even higher. If the owners allowed themselves more time, they could have saved themselves the public humiliation of failing to sell in front of the neighbourhood.
Lower the barriers to entry
Many buyers refuse to bid at auctions because they have previously lost thousands of dollars on due diligence. To maximise the number of bidders in your silent auction, provide easy access to due diligence. Have pre-prepared strata reports, building reports and a straightforward contract so that the buyer can draw on communal due diligence reports at a lower cost. The agent will garner more respect and trust if they advise those buyers that are highly unlikely to win the silent auction of this fact before they spend money on due diligence. It is unconscionable how agents often watch buyers spend thousands of dollars on due diligence knowing their budget won’t buy the property.
Once the agent has established the field of bidders, it is crucial that everyone is working on the same structure. In order for this to happen, the agent and vendor must first agree on the bidders guide. The bidders guide contains pertinent information that the buyers need to factor in to their offer and the practicalities of the process. Issues such as:
- Undertaking that all buyers offers will be kept strictly confidential and only disclosed to the vendors and agent
- Deadline for final offers to be submitted to the seller’s agent or lawyer
- Only offers on signed contracts with deposit will be considered
- Required deposit on exchange of contracts
- Settlement period of the sale
- The price at which offers ‘at and above will be considered’.
- The vendor and agent reserve the right to sell to the highest offer without first informing the under bidders
- Any special conditions outside the normal.
As the vendor, if you negotiate a compromise with one buyer, ensure that the same concession is then offered to all bidders. For example, a buyer may ask for 5 months to settle, so they have more time to pull the necessary funds together. Other buyers may also be prepared to pay a higher price if offered the same concession that you just agreed to.
Agents that have been working in sluggish markets are often caught by surprise when a boom rolls in. In 2013, the monster of all housing booms moved through Western Sydney after several tough years for vendors and agents. Agents started selling everything for full price after 3 days on market, thinking they were doing their respective clients justice. Homes were being listed on a Monday and sold by Friday, without a weekend on the market.
In these situations, it is crucial that a structured bidding process is employed. When multiple buyers want to buy the one house, it is a tactical error to exclusively negotiate with individual buyers, rather than offer the open marketplace bidding terms.
Furthermore, if the agent distributes the silent auction bidding terms without the consent and full support of the vendor, the process will fall apart. The power in the bidders guide is that the buyers, the seller, the lawyers and the agent are all acting on the terms and conditions outlined in the bidders guide.
If there is clear upward pressure on the price from the original advertised price guide, be sure to telegraph this to the market. Do so for two reasons. Firstly, it is the right thing to do to those buyers that are priced out of the running. Secondly, it shows the remaining bidders that the property is in high demand. If you list a property with a price guide at $1 million yet the feedback quickly comes in that the buyers are thinking beyond $1.2 million, you are missing an opportunity to increase market expectations if you don’t increase the price guide. In some states, it would also be illegal for the agent to persist with a price guide of $1 million when the feedback is $1.2 million.
The essence of a silent auction is to keep all specific offers confidential. Just as you would not give an opposition player a little peek of your cards in a hand of poker, don’t give the buyers a peek at the offers they are competing against.
Understand unique, generic and in demand
A unique property requires a unique buyer. ‘Unique anything’ does not translate into ‘abundant demand’. Many a vendor has felt that their property ‘must be auctioned because it is unique’. Don’t mistake unique for in demand. Auctions require multiple bidders to fuel the process. Putting a $20 million waterfront property to auction in a recession will almost certainly end up in no bidders or only one bidder being present on auction day.
If you attempt to run a silent auction on a generic two-bedroom apartment, when there are 200 similar apartments on the market in the same suburb, you are doomed to fail.
It is crucial that you ensure the environment and product is right before running a silent auction.
While this article articulates the clinical structure of a silent auction, rest assured the execution of it is an emotion-charged event. Many people feel that public auctions are the right selling path because of the emotion an auction generates. The buyers’ emotion exists because the buyers love the property and they know it won’t be available tomorrow; it will be sold today. It is crucial to the success of the silent auction that the buyers are aware the property will be sold and the sale is competitive. The same intense buyer emotion that exists in a public auction will be in play with the silent auction.
It is crucial that the winning bidder submits their offer on a signed contract. You cannot have a circumstance where buyers are able to submit non-binding written offers against contract offers. It is the agent’s responsibility to get all interested buyers in a position to sign a contract by the deadline. If you accept a non-binding offer in favour of a signed contract, you are taking a gamble on that buyer, given your under bidders are unlikely to return to the bidding in two or three weeks’ time.
It is an inevitability that some auctions, both silent and public, will fail to meet the owner’s reserve price. If you do have to pass the property in at a public auction, you are doing so in front of a large crowd. The price at which you passed in at becomes public knowledge. This price will probably turn up in the Sunday morning auction results published across your city. It will more than likely be recorded by data houses, such as Core Logic RP Data, forevermore. This becomes powerful information for a buyer and haunts the seller’s campaign post auction.
If you publicly pass in for a low price, you have no chance of getting a high price.
In a silent auction, if the price fails to meet the reserve, there is no public failure for the property, the vendor or the agent. The only people who know what the property passed in for are the buyers, the owners and the agent. The owner and the agent can continue to sell the property without the stigma of a public failure hovering above the campaign.
The first step to successfully executing a strategy is to ensure it works on paper. If the plan does not work on paper, it won’t work in reality. A silent auction is the right sales strategy to adopt in a multi-bidder situation provided the agent and vendor are working as a team.
Credit: Peter O’Malley