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.

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