HOW TO BUY LOW AND SELL HIGH!
by Neil Jenman
Article written and provided by Neil Jenman from Jenman.com.au . To see the original source of this article please click here. https://jenman.com.au/auctions-in-the-2022-market/. Neil Jenman is Australia’s trusted consumer crusader. He can support you, all the way, from choosing an agent who will get you the highest price guaranteed to when your removalist comes! You get an unprecedented level of total support. All for free. To find out more visit jenman.com.au
Steve and Marie live in Melbourne. They are in their mid-30s.
Two weeks ago, after more than 10 years of hard work and committed savings, Steve and Marie bought a home. They paid $1,530,000. Although they were willing to pay $1,600,000, they didn’t need to pay their highest price.
As happens with many homes, this home was sold by public auction. And Steve and Marie had just read ‘7 Reasons to Buy at Auction’ (see details below) which gave them a huge advantage. They understood how auctions – especially in the current 2022 market – are a fabulous way for buyers to save tens (even hundreds) of thousands of dollars.
Although Steve and Marie only saved $70,000, they were overjoyed. A small sum for many but a huge amount for them – about a year of savings!
Given that Steve and Marie saved $70,000, the sellers lost $70,000. This happens at most auctions, especially when a boom is over, sellers short-sell their homes. Buyers nab bargains.
As with all auctions, the buyers never have to reveal their highest price. The only people who must reveal their price at auctions are the sellers. At every auction, sellers are required to tell the auctioneer the lowest price they are prepared to accept. There is no such requirement upon the buyers. They don’t have to tell the auctioneer the highest price they are willing to pay.
No matter what the market conditions, many agents tell sellers that auction is the best way to sell a home for the highest price. But these agents never ask the buyers to reveal their highest price. The stupidity is breathtaking. How can you sell a home for the highest price that buyers are willing to pay if you don’t ask the buyers to reveal their highest price?
This gives auction buyers like Steve and Marie a huge financial advantage. Imagine playing cards (like poker) and other players are forced to show their cards but you don’t have to reveal your cards. The other players would refuse. They’d say something such as, “Do you think we are stupid?”
And rightly so.
It would be horribly unfair to have one set of rules (especially as important as “disclosure”) for one player and yet the other player has a different set of rules.
And yet this is exactly what happens at all public auctions all the time. Instead of offering the highest price they are willing to pay, the buyers only need to pay the lowest price the sellers are willing to accept. As happened with Steve and Marie their highest price (which was their secret) was far higher than the sellers lowest price (which was public knowledge).
Sellers short-sell their homes by massive amounts of money at auction. Buyers nab bargains.
Agents who push auctions use many slick lines to persuade home-sellers that auction is the best way to sell. But saying that auction is the best way to sell a home is one of the biggest and most common lies in the real estate world.
Auction is best for agents not sellers.
Auctions allow agents to put pressure on the sellers in two ways. First, by giving sellers plenty of bad news during the “marketing campaign”. Understandably, most sellers, according to most agents, want too much money for their homes. Especially at the start, when a home is first for sale.
Therefore, once the agents have got the sellers signed-up, the next step is to persuade the sellers to “lower their expectations”.
To do this, agents use a process openly called “conditioning.” It’s like a form of psychological torture where bad news constantly follows more bad news – with agents saying: “This is what the market is telling us”. By the time the auction date arrives, the sellers are ready to crack as agents hit the sellers with the second form of conditioning pressure – sell now, often followed again by “This is what the market is saying.”
As the Real Estate Institute teaches agents: “Auction is the fastest and best conditioning method.”
That’s right. Auctions allow agents to be sure of getting a sale and faster than if they had to use another method – such as hard work. Auctions suit lazy agents.
“SUCCESS RATE” – for whom?
As for “success rates” with auctions, agents count any sale as a “success.” If the agent gets a big commission, that’s a success. If a home is short-sold, as happens at most auctions, the agents still count the sale as a “success.”
If the success rate of auctions was measured by whether the sellers sold for the highest price the buyers will willing to pay, it would not reach 5 per cent.
Auctions hoodwink the public. Even the weekly “auction clearance rates” are always fake. And not just some of the time, all the time.
And now, with the market cooling – and most auctions failing (to sell) – the industry is doubling-down on its auction falsification rates.
Agents are starting to panic as the market starts to cool. To keep the cash (commissions) flowing, they must keep sales flowing. And, as you have just seen, the best way to keep sales flowing is to push auction as the best way to sell.
Hence the fake figures will be more fake then usual.
Look at last weekend (June 11, 2022).
552 homes were listed for auction in Sydney. 120 homes sold at auction. That’s a [sales] “success rate” of 21.7 per cent. The published “success rate” was 58 per cent.
In Melbourne, there were 446 homes scheduled for auction. From these, there were 130 sales. That’s 29 per cent. The publicly released “clearance rate” was 57 per cent.
In Brisbane, there were 161 auctions. 42 homes were sold. That’s a “clearance rate” of 26 per cent. But the public was told that the clearance rate for Brisbane was 48 per cent.
BOOM HIDES SINS
A property boom hides sins. For example, when sellers decide to auction in a boom there may be a hundred people in the crowd. There may be a dozen spirited bidders. In a boom, homes often sell at auction for more than owners expect – which hides the “sin” that they could have sold for a lot more.
It’s a financial maxim that the greatest losses occur during times of greatest profit.
So, at an auction if sellers expect to get, say, $1 million but their home sells for $1.5 million, they are ecstatic. The fact that the highest price the buyers were willing to pay was $2 million, is a fact the hoodwinked sellers never discover.
But not now.
Now when the boom is over and the market is cooling, even falling – or predicted to do so – sellers are starting to realise what’s going on with auctions.
Bad enough to auction your home in a boom when you never realise how much more you could have received – but to sell by auction now is to invite almost certain disaster.
If your home does sell at auction, it will almost certainly sell for less than it should have sold by private negotiation.
And if – as is happening with close to 80 per cent of auctions now – your home fails to sell at auction, it then carries a horrible ‘tag’. It becomes an auction lemon. The world sees your home as a “failed auction.”
And that’s how it’s described – “failed to sell at auction.”
In the mind of the buyers, there are only two reasons a home “fails to sell at auction”: Either the price is too high or there is something seriously wrong with the home.
Sadly, neither of these may be true.
The reality (truth) is that the agent gave the sellers bad advice. They will now be pressured to accept what agents refer to as “nose-bleed offers.” They will be told “the market has spoken” and that if you don’t “listen to the market” things will get worse as prices fall ever lower.
To make matters worse, sellers will have lost thousands of dollars in advertising costs. Or, if they have used one of those “pay later” companies, they may be in debt for several thousand dollars. If the sellers realise they have been duped, too bad. If they fail to pay up, they often have a caveat placed on their home.
Auctions are never a good way to sell. And now, with the market cooling, auctions are a financially reckless way to sell. If you want a fair price, for goodness’ sake, choose a fair method of selling. Any agent who has studied the basics of negotiation will never do auctions to you, especially in today’s market.
Once you sell – if you need to buy another home, then you can consider auctions. As a buyer you will not have to show your hand. Unlike sellers who must reveal their lowest price, your highest price is secret. You can easily do what Steve and Marie did – and save $70,000. Indeed, their “saving” is minuscule compared with how much many buyers are saving these days.
Not even “these days.” Ever since auctions started to become the rage with agents back in the 70s and 80s, buyers have been grabbing bargains. In 1996, my wife and I bought a property offered for auction. We paid $700,000. I used a buyers’ agent but when the auction agent saw my name, he laughed and said, “Hey, look at Jenman. He says auctions get lower prices. But he just paid $700,000 when the reserve price was $650,000. Neil Jenman paid $50,000 above the reserve. Gotcha Mr Jenman.”
Er no, Mr Auction Agent. Sure, my wife and I paid $700,000 and that may have been $50,000 more than the sellers’ lowest price. But nobody, other than the buyers’ agent, asked us to reveal the highest price we were willing to pay. It was $900,000.
So yes, this is the stupidity and sophistry that auction agents have perpetuated for decades.
One of the good things about the real estate boom ending is that many “sins” are now exposed. Like the famous comment about “seeing who’s swimming naked when the tide goes out” without the boom so much is clearer. Including the appallingly low skill level of agents who still push auctions.
In the bush, they have a saying: “Everyone’s a good farmer after the rain.” In real estate, the boom has made many agents look smarter than they are in reality.
Reality is coming back.
It’s now that you’ll see which agents are truly successful. And remember: “true success” is not whether a property sells, but whether it sells for the best price.
Only the best agents get the best price for sellers.
And the best agents never suggest selling by auction, especially in 2022.
Auctions are the place to buy for a low price, not to sell for a high price.