Home sellers who decline an early offer and proceed to an auction reap about 10 per cent more on average, real estate agency figures show.
But sellers who decide to accept offers prior to auction can also win from those transactions, based on previous academic research.
Auction sellers make more money than the highest prior offer on average.Credit: Rhett Wyman
Sellers who went ahead with an auction made an average of 10.9 per cent more than the highest prior offer in June, Ray White figures show.
The premium for selling at auction has hovered in a range of roughly 10 to 11 per cent over the past couple of years and pushed above 12 per cent in 2021, when interest rates were ultra-low.
Ray White head of research Vanessa Rader said the auction premium came about due to competition between bidders on the auction floor.
“By creating that sense of competition and urgency on auction day, that tends to get a lot more activity,” she said.
“There has been a consistent gap between what people are willing to pay when they’re having a casual discussion with you versus in the heat of competition and the possibility of missing out.”
She said that during 2021, when cities were in and out of lockdown, scant new homes were being built, and buyers could access cheap finance.
“Limited stock plus more buyers in the market, that’s what probably generated that additional price increase,” she said. “As soon as the interest rates came up a little bit, people were a bit more cautious.”
The figures measure only sellers who received an offer and declined it, and went ahead to auction.
They do not measure the outcomes of sellers who accepted the early offer or model how high a price those sellers might have received if they had decided to go to auction instead. If someone accepted an offer because it was a standout price, there is no guarantee that other potential buyers would have pushed the bidding that high on auction day.
RMIT senior lecturer in economics Dr Peyman Khezr cautioned that every house is a heterogeneous object, making it difficult to look at price premiums and conclude that auctions are a better choice than private sales. The best sale process depends on the home and the state of the market, he said.
“[Auctions] are good for sellers because in an open environment buyers will compete with each other, and usually these auctions allow the highest value buyer to win the property, which would be translated to the highest possible price for the property,” he said.
“There is a downside to auctions when the market is not very hot, and you cannot attract enough buyers, or if the property’s characteristic is that it would never attract enough buyers.”
Herd behaviour can be on display, when buyers will update their value if they see other buyers are willing to pay more, he said, but previous research found properties that did not sell at auction ended up being priced 2 to 3 per cent lower.
Khezr said a previous study he conducted found that sellers were usually the winners of pre-auction sales, as they knew what price they could expect if they proceeded to auction. For example, a seller who expected $1 million may accept an early offer of $1.1 million to cancel the auction rather than risk proceeding.
And more buyers can improve the result. For example, imagine there are only two buyers, and one is willing to pay $1 million, the other $1.1 million.
In a private treaty process, the second buyer will pay $1.1 million because they do not know what their rival offered. At auction, they will pay only slightly more than their rival’s $1 million bid to win, leaving almost $100,000 on the table.
But if there are many buyers competing, there is a higher chance someone has a budget of $1.09 million, bringing the price almost to the roof, he said.
Buyer’s agent Rich Harvey said buyers considering whether to make an early offer should independently assess the property’s value based on comparable sales rather than relying on the agent’s price guide. Or, engage a valuer or buyer’s agent.
It could depend on local market conditions, how many other potential buyers are keen, and whether the sellers are committed to going to auction or nervous about a possible pass-in.
“It’s a very emotional process, being at an auction – it’s a real pressure cooker environment,” the chief executive of propertybuyer.com.au said.
“If you’re going to make a pre-auction offer, you have to knock out all the other offers – you have to be prepared to pay a pretty decent premium price.
“Sometimes I say to the client, it’s not worth making a pre-auction offer. All that’s going to do is push the reserve up.”