Issue 72 - April 2011 - Auctions – why do sellers do this to themselves?

It would seem that the housing market is taking its first, tentative steps towards a recovery. Certainly, one of the larger real estate concerns was citing a 10% volume increase in February 2011 sales when compared with January 2011.

Closer to home, I’m happy to report a somewhat larger increase in our February 2011 sales volume, when compared with January this year – an increase of more than 50%, in fact. Is it mere coincidence that the other company conducts many auctions, whereas we refuse to even countenance them as an ethical method of sale?

It is tempting to think that there may be some correlation there…..

Along with this volume increase is a small increase in prices. It is always hard to gauge price increases, as it depends very much on the mix of the sales between one period and the next. – Are they mostly high end sales this period compared with mostly low-end sales in the previous period, for example? The only real indicator we have is when there is a sale of a property that had been sold previously and we can compare the prices achieved. Even then, note has to be taken of any changes in presentation i.e. has the property been improved or is it fairly much as it was at the previous sale.

Many years ago, when just starting my working life, I invested in some life insurance only to be told subsequently by a somewhat older (and possibly wiser) person, that Life Insurance was not bought, but rather, it was sold; meaning that it was far less common for people to seek to buy Life Insurance than it was for Life Insurance to be sold to them by commission salespeople.

i.e. There was greater benefit devolving upon the salesperson than there was upon the purchaser of the life insurance.

Now that I am older (and I hope a little wiser) I can look at other transactions and see something of a parallel. Now I tend to look at a transaction and ask myself the question ‘Who is the major beneficiary in this transaction?’  ‘Who gains most?’

In most transactions, the benefits could be said to be reasonably balanced between the providers of goods or services, and the consumers. In most situations, consumers have a good idea about what they are receiving in exchange for their money.

There are some transactions, however, where the balance between providers and consumers is not at all balanced.

Naturally, the one that springs to my mind immediately is the sale of the auction concept to people thinking of selling their property.

Any sale of a service is difficult to present to potential buyers of that service, simply because the seller is unable to point to something concrete, something that actually exists as an object.  Instead, it is necessary to use people’s emotions as a way to their wallets.  With auctions, the idea is implanted that there is a distinct possibility of being surprised at what they could receive (YES!) and selling for a premium (Probably not!)

Effectively, the real estate offices offering auctions, are offering just the hope of a really good sale price.

They will speak of ‘investing’ money in an auction programme.

(Big Tip: Always think more than twice about anything where it is suggested that you invest your money in something. By using the word invest, they are hoping to give the proposal greater weight than it really deserves.

A common line is that by investing in an auction programme, there is a greater chance of securing a premium on the sale. This completely ignores the realities:

• Auctioning a property decreases dramatically the number of likely buyers, thereby decreasing dramatically the likelihood of a premium on sale. More buyers are turned off by auctions than are attracted to them.
• Once the bidding is down to one bidder, it is that person who has the power, not the sellers. Logically, why would that person pay more when there is no-one else interested at that level – and the bidder is aware of that?

Remember: Most real buyers who attend an auction are looking for a bargain.
Remember to ask yourself: Who is gaining the most benefit from your dollars?

You, with the faint possibility of a greater price
or the company and salesperson promoting the idea of an auction?

Think about it.