Information for House Sellers
Selling a house?
If you are selling a house, it is very important to realise that the decision as to how the house is to be sold is yours, the house seller, and yours alone. It is not the decision of real estate agents.
By the way, you do not have to use a real estate agent to sell a house – there is no law that requires that. However, for the vast majority of people, it is the most convenient way to sell a house, so all of the advice that follows assumes that you will use an agent to sell your house.
Even though this website and my book are all about house auctions, if you are selling a house, my advice to you is: don’t sell your house by open auction ! (By ‘open auction’ I mean the usual sort of auction where everyone turns up on a Saturday and an auctioneer calls for and takes oral bids until only 1 bidder is left.)
Instead, if you live in a capital city, I very strongly advise you to sell your house by means of a sealed bid auction. If that is too difficult to arrange, then use an expression of interest process.
If you don’t live in a capital city, then I recommend that you use an enhanced private sale method such as the Jenman method or the Ian Reid method.
If for some reason none of that is available, then go with the traditional private sale method.
What’s wrong with selling by open auction ?
The reasons why you should not sell at an open auction are set out at length in reverse in my book. (By ‘in reverse’, I mean that the book sets out the reasons why open auctions are great for house buyers – every reason why an open auction is good for house buyers is a reason why it is bad for house sellers.) Essentially my view is that, contrary to what most real estate agents will tell you, open auctions are a system that is designed to find the lowest price at which sellers are prepared to sell for. Sure, sometimes open auctions will result in sellers getting a price well above what they will sell for, but it is not something that happens often. And certainly not often enough to make the risks involved in going to open auction worthwhile.
What are those risks? Well, in most cases you’ll have to pay for a reasonably expensive marketing and advertising campaign (during which time you’ll have to have your house ready for inspection for at least 2 public open-for-inspections each week, and for any-time private inspections), with sometimes a less than 1 in 2 chance of selling the house at auction. There is also a very significant risk that you will sell the house at a price that you are not happy with.
In regard to your chances of success, you can’t have confidence that published clearance rates are accurate, and that there may be reason to think that they overstate actual clearance rates. And even if published clearance rates are accurate, they show that every 5th house gets passed in when it is a seller’s market (that is, a time that is good for sellers), and less than 1 in every 2 houses sells in a buyer’s market.
And just in case an agent’s response to that is that lots of houses that get passed in get sold after auction, in my book I show figures published by Domain. They show that for Sydney, in February 2019, 50.7% of houses auctioned sold on the day of the auction, and that this figure had increased to 65.3% by the end of 6 weeks after the auction. For Melbourne, in October 2018, 45.4% of houses sold on the day of the auction, and this figure increased to 65.2% by the end of 8 weeks after the auction. If I was a house seller, I wouldn’t find those figures to be overly comforting.
If you live in a capital city, you will find that most real estate agents will apply as much pressure as they can to get you to sell your house by open auction. From the agent’s point of view, open auctions are great
They give agents a chance to advertise themselves at your expense – although every ad they place on your behalf will feature your house, it will also prominently feature their name and the name of their firm.
Open auctions will result in a reasonably short selling campaign of a known duration if a house sells.
The open auction process enables agents to condition you in the lead up to the auction to be willing to accept a price at which the house will sell even though that price may well be considerably less than the price you might get if you are prepared to be patient. (Note: auctions and patience are incompatible concepts !)
The open auction process enables agents to apply intense pressure on you at the auction to sell at a price that may well be considerably less than the price you might get if you are prepared to be patient.
With the possible exception of the 2nd of those reasons, none of those reasons are good for you.
Sealed Bid Auction
A sealed bid auction is an auction where potential buyers of a house are invited to submit bids for the house in a sealed envelope by a specified time on a specified day. Once that time expires, all of the envelopes are opened, and the house is sold to the person who has submitted the highest bid. It is a system that forces bidders to submit their best price, or else take the risk that they will miss out. As with normal auctions, you can set a reserve price with a sealed bid auction. These auctions have the same advantage as open auctions in setting a deadline on the sale process, but have the added advantage that they get sellers the highest price that anyone is prepared to pay for the house.
This form of sale is my top preference as a method of sale because it is the fairest system for both sellers and buyers. Many expressions of interest systems are similar to sealed bid auctions, but with many of them there are suggestions that the prices bid are not completely confidential, which may allow certain manipulations that may be unfair to those who put in the expressions of interest.
By the way, many agents are ambivalent, at best, about sealed bid auctions. I strongly recommend that you not run a sealed bid auction campaign using one of these agents. Only use agents who strongly believe in this method. Hopefully the reason is self-explanatory. That may mean that you can’t find an agent in your area who can sell your house using that method. You may have to settle for an expressions of interest campaign, because there are now many agents willing to sell using that method.
Expressions of Interest
If a house is sold using an expressions of interest campaign, and, as just mentioned, many houses are now sold using this method, potential buyers of a house are invited to submit bids for the house by a specified time on a specified day. Each agent who uses this method seems to have their own way of conducting it.
The form of how bids are to be submitted sometimes means that those submitting bids can’t be certain who gets to see their bids and when. I have also heard of expressions of interest systems that leave one with no confidence that the highest bid submitted by the end of the campaign will be successful.
If the bids have to be submitted in a way that means that they can’t be seen before the bid acceptance time passes, and it is clear that the highest bid submitted by that time will be successful, then the system is essentially a sealed bid auction system, despite the name.
I note that ideally with both sealed bid auctions and expressions of interest campaigns, the rules in place should be quite specific as to what parameters bids must meet. For instance, if 2 bids for an identical amount are made, but one specifies a 30 day settlement, and the other specifies a 90 day settlement, the rules should make it clear whether those bids will be treated as identical.
This is the traditional method of sale, and is often the only sensible way to sell a property for which there is only likely to be sporadic demand (a house in the country being the classic case).
I would strongly argue that even in inner-city areas, private sale is a better option than open auction. In the case of sales in such areas, there are now refinements suggested to the private sale method by people such as Neil Jenman and Ian Reid which are well worth considering. Information about this can be found by Google search. And if you want more information about why auctions are bad for you, Neil Jenman has written (real) books on the subject !
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