Puzzle Finance Blog


Private or auction? How to pick


You want to sell, but which method is right for you? Our guide can help.

If you're selling a property that is unlikely to generate sufficient competition at auction, private sales are a far better option. The managing director of Wakelin Property Advisory, Monique Sasson Wakelin, says a private sale can be an especially smart move when the property cycle is in a slump or a flat period.

The following are the most common ways to sell privately.

Expressions of interest

This is often used to sell commercial properties and top-end residential real estate. The head of buyer's advocate company Secret Agent, Paul Osborne, says some vendors see an advantage in expressions-of-interest campaigns because the sales method does not reveal the intent of the seller as much as other methods.

''They are often run very similarly to a tender,'' he says. ''Usually, a date and time [to complete the sale] are specified as a mechanism to enforce interest.''

Tender, sale by set date, sealed bid

''These are similar sales methods, yet they often reveal more intent on the part of the seller,'' Mr Osborne says. Usually, the vendor enforces a ''one-shot'' policy and all bids are put in sealed envelopes that are opened after the set period expires. If a reserve isn't met, an owner can elect to keep negotiating with the buyers.

''Buyers are often unsure where they stand in this process,'' Mr Osborne says. ''A tender is often used to ensure that no money is left on the table. It's favourable for properties that might suit highly selective tastes, or where one buyer has a higher interest in the property, such as a next-door neighbour.''

Private sale

This is the most common sales method in Victoria and it is growing strongly. When you buy by private treaty, there are no hard-and-fast deadlines and the process usually works by negotiation. ''The 'staircase drop' is a common method used by owners,'' Mr Osborne says.

''They start at a price and then slowly drop the price until they find their market. The advantages to buyers are being able to include clauses in offers and buying subject to finance, and the ability to access the sale through a more drawn-out process, rather than have the heat of an auction.''

Private auctions and boardroom auctions

Here you must bid before the auction. The agent tries to find out how much money you have before you're ''invited'' to bid. Don't be fooled, Ms Wakelin warns. ''If an agent ever says you have to have X amount of money, I reply: 'Tell me what the reserve is and I'll tell you what I have to spend.'''

She says the concept of private auctions is all hype. However, certain kinds of properties - particularly top-end ones - are often traded quietly off the market within established networks.

''There may be specific circumstances surrounding a sale where the owner wants to be more in control of how that sale is effected, in which case an expressions of interest, a tender or some other permutation of a private sale is absolutely appropriate,'' Ms Wakelin says.

When architect Katrina Logan sold her renovated Northcote cottage at auction on the last Saturday in May, she received a runaway result.

About 60 people, including five bidders, turned out and competition was fierce. Bidding sped past the price range of $780,000 to $850,000 advertised by the selling agent, Hocking Stuart. As two remaining bidders fought on, the house passed its reserve of $935,000 before selling for $960,000.

''The auction generated the competition we needed,'' Logan says. ''I always thought people might lose their heads a bit on the day, and that's what happened.''

The ''architect's-own'' house had strong design elements that helped it sell well. Logan renovated and extended the property, increasing it from two to three bedrooms soon after buying it in 1999.

''It has a fantastic floor plan for a small house, and that worked for a lot of people,'' says Hocking Stuart agent Sam Rigopoulos, who conducted the auction. He believes good design was the driving factor behind the above-market result.

This is one of the success stories of the Melbourne auction market this year. Yet hundreds of other vendors who use auctions to try to sell property aren't faring nearly so well.

About 40 per cent of houses and units put up for auction so far this year have been passed in. It's increasingly common for properties that go under the hammer to receive only vendor bids made by the auctioneer, or perhaps a single genuine bid.

So is the auction system still the best way to sell? Should more vendors be more open to private sale techniques? Certainly, research indicates that private sale methods are closing more deals and generating higher prices.

Real Estate Institute of Victoria figures show the sharp decline in the number of auctions being staged in Melbourne is, in part, related to a shift towards private sales.

Auctions accounted for 30 per cent of sales in June, down from 35 per cent in the same month last year. At the same time, private sales appear to be producing better results.

Properties sold by private sale experienced median price growth of 2.1 per cent for houses and 2.9 per cent for units. Prices for properties sold via auction dropped 2 per cent for houses and 2.6 per cent for units.

The senior economist at Australian Property Monitors, Dr Andrew Wilson, says the premise of the auction is to create a free-market environment so the vendor can get people interested in buying a property at the one time.

''Although buyers are given a range of prices, they don't actually know what the vendor wants,'' he says. ''Competitiveness is the key to creating the auction atmosphere.''

A professor of real estate studies at Deakin University, Richard Reed, says auctions are best suited to unique or uncommon properties, where buyers will openly compete for ownership.

He says it is much easier for buyers to work out the true sale price of low and mid-price properties than higher-end real estate.

An auction also requires a comprehensive and costly marketing campaign that can be recouped with a more expensive property but not so easily with a cheaper one, Professor Reed says.

''Auctions require a 10 per cent cash deposit and an unconditional contract,'' he adds. ''However, this is often impractical for less expensive properties, which are typically starter properties.''

Cash does its bidding

What's the best way to bid at an auction? Should you go in early and hard or wait until the last minute?

''The best strategy is to have the most money,'' says 27-year veteran auctioneer Phil de Fegeley, who coaches other Melbourne auctioneers to improve their skills.

He says it doesn't matter whether a bidder has a great poker face or starts early or late, the person with the fattest chequebook almost always wins. ''But it is important to be consistent and not give your game away,'' he says. ''Consistency is the hardest thing to read for an auctioneer.''

Mr de Fegeley says the auctions that really fly are mortgagee and deceased estate sales. ''The sell price might be considerably higher than the reserve because the auction is allowed to do its job; people will think they are going to get a bargain and you have lots of bidders.''

Posted by Chris Tolhurst - The Age on 8th September, 2012 | Comments | Trackbacks
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