Gaining Acceptance of Auctions in Any Marketplace

EVER TRIED AN AUCTION AND it didn’t come off as planned? Has a trainer or boss told you auctions don’t work or that they aren’t worth the effort? Are you in an area where they just aren’t the done thing? Have you ever lost a listing because you pitched for auction and the vendor wanted private treaty? One of Australia’s most qualified auctioneers, Mark Kentwell, has some solutions for you.

I TEND TO STUDY the way real estate sales are conducted pretty much everywhere I go, in Australia and overseas. In Australia, in particular, it is blatantly obvious that a large percentage of elite-level agents (let’s say 100-plus sales a year, or $1m-plus GCI) are using auctions as their preferred method of sale, and in some cases their only method of sale.

However, in each of these marketplaces, it is apparent from discussions with agents that many of the more regular performing agents haven’t been too successful with auctions and therefore revert back to private treaty.

On further investigation, there are a few main reasons for this lack of success. In many cases these are barriers that can be overcome.

BELIEFS AND THE BARRIERS
Interestingly, most agents saw the benefits for all parties in auction, though one of the main fears they had was that if they went for an auction listing and the vendors didn’t like it, they would lose the chance of listing the property.

Some other reasons agents choose not to use auctions are because of the extra workload involved, limited training, the area or the market being unsuitable, or because they feel it’s only a process to be used for mortgagee sales, extremely rare or high-demand properties, knock-downs, deceased estates, and so on.

Do any of these comments sound familiar? That may be because you have been harbouring the same beliefs yourself. You see, the key learning  here is that many of these beliefs originated from agents and over time have become opinions  and public perceptions in the marketplace. That’s right, a key message here: the public are influenced by the predominant beliefs and messages of agents.

Whether its sale method, vendor paid marketing, commission rates, overpricing or any of the variables an agent is faced with, every marketplace is influenced by what the agents in the area are doing as a collective.

I’ll give you an example. I have driven less than an hour in some areas and found patches where the average commission rate being charged  by the majority of agents has varied by as much as 50 to 65 per cent from the surveyed average; that is, 2.0 or 2.2 per cent to 3 or 3.3 per cent from the next couple of suburbs over with a similar median price. It’s obvious that a couple of agents have started discounting in what was a strong fee area and, rather than develop good dialog ue and rationale around tackling the issue, all the agents have just jumped on board out of fear of losing business.  This is in suburbs where  just ten minutes’ away the majority of agents are getting the same fee as they have for the last decade.

The same thing happens with auctions. I’ve seen areas that were known as ‘auction areas’ slowly drift into a mix of private treaty, expressions of interest, price on application and other re-branded sale methods that in many cases are essentially  just watered-down versions of auction. When talking to agents in these areas, the reasons stated are often a mix of the following: the market cooled down and auctions stopped selling (I assume they mean under  the hammer); vendors didn’t want to pay for advertising; a dominant agency stopped doing them so we stopped doing them; we didn’t want to be seen as failing so many auctions  in public; it’s much easier just to put a price on and sell; properties in our area are selling in just a few days so no need to auction; the buyers don’t like them; the vendors don’t like them… the list goes on.

Now in one way or another, many of these statements may be true; but let me ask you a couple of extra questions:

• Do all vendors like and trust agents? (No)
• Do all buyers like and trust agents? (No)
• Do buyers like seeing private treaty homes sell before they get to inspect? (No)
• Do buyers like getting gazumped on private treaty homes when they would have paid more? (No)
• Do vendors like finding out they could have got more but sold too quickly on day one? (No)
• Do neighbours think you’ve sold too cheaply if it sold quickly? (Yes)
• Have you ever lost a listing because you pitched private treaty and didn’t pitch auction? (Yes)
• Have you ever lost a listing and the other agent listed it as auction, even though the vendor told you they didn’t like auction? (Yes)
• Have you ever had a private treaty not sell? (Yes)

If you look at all these questions, you can see that we are more than happy to accept that not everyone will agree with the things that happen every day in real estate, but as soon as a vendor or buyer says they don’t like auctions, we run for the hills.

Let’s change that.

If you believe that an unconditional sale, in a lower average time than any other sale method, with no ceiling on the price that can be achieved, a high-exposure marketing campaign, a chance of true competition and a structure to work to is an advantage in a sale, then you do actually believe auctions can work. If they haven’t worked for you in the past, you may just need to get better at them. What will make that even easier is to make sure that you get more buyers and sellers on board with the way you’re doing auctions in the marketplace.

For this article, I’ll focus on getting the buyers on board with auctions, increasing bidder numbers and getting better marketplace acceptance from buyers (who may be sellers or talking to sellers too).

WHAT BUYERS DON’T LIKE ABOUT AUCTIONS
I have surveyed and studied buyers right across Australia on what they don’t like about auctions. Here are the top five complaints.

1. There is no price guide and the agent won’t help me out by giving me an understanding. (This can vary from area to area; in some areas where guides were used, underquoting was a complaint.)
2. We have to pay for pest and building reports and/or strata properties to buy at auction and we don’t even know if we’re going to get the home. We’re forking out for what could be nothing.
3. The contract and deposit conditions for auction seemed inflexible, and we have to get legal advice on the contract prior to auction which could be costly. (Varies from state to state.)
4. Getting finance for the auction is a pain; we need a large deposit, the bank is reluctant to help us get finance and we don’t know what amount to apply for.
5. We don’t like the pressure of having to decide right there on the spot what we are going to pay for the property and having to compete for the home in that environment.

Now let’s take our agent’s hat off for a while and have a look from the consumer’s perspective. These five things can easily be overcome with a little thought, planning and structure. Some of it will create a bit of work upfront, but the 6P rule definitely applies with auctions. (I’m sure you know it: proper prior planning prevents poor performance.)

THE FRIENDLY AUCTION SYSTEM (FAS)
The Friendly Auction System is a system we have developed and tested in our marketplace and some others across Australia for over five years now. It works especially well in ‘non-auction’ marketplaces but also in areas where auctions are the done thing, and it can create separation from competitors.

It starts with a consumer-centric point of view that says if we can address  the concerns of the buyers, we will get more buyers. If we get more buyers, there  will be more bidders. If we get more bidders, there  will be a better  sale result for the vendor. Therefore the FAS is better  for buyers and sellers.

Let’s look at the five main concerns listed above and find a solution for each one.

1. USE A PRICE GUIDE, VERBAL OR WRITTEN
   If legislation allows it in your state, go written. (I believe those in states where guides aren’t used should lobby their governing bodies to allow guides, using consumer-based research and a clear set of rules and protocol  for how guides are to be used.)The guide should have a lower figure no less than that on your agency agreement. You may choose to use a range of 10 to 15 per cent or just an ‘Over’ guide. When listing for auction, your agency agreement figures may be within a range of 10 per cent or so. You may explain to the vendor that there is no ceiling on the price that can be achieved, but start with conservative comparison figures.It is important to invite buyers with a logical comparison range, and if an emotional price is out there we will achieve it through finding the ‘must-have buyers’ and creating competition. You need to explain this process to the vendor from day one. A good tip is to pick a comparable that is clearly inferior or at the very lower end of comparable (worst case scenario, fire sale price). Use this, or just above, as the lower figure. Have four to six sales in the total range, with the upper being clearly better or at the upper limit of what you can achieve. These sales will come in very handy later with valuer information kits.

   Now the key thing with having this information is how you communicate it to buyers. Most agents who sell a lot at auctions will be familiar with the term ‘cooking’ an auction, by quoting a price guide or indication too high too early and losing buyer interest. The buyers must know that ‘Although the vendors may love to achieve a price in line with some of these other sales at the upper end of our comparison sheet, they are fully aware of the sales at the lower end as well. They have chosen auction as they are willing to listen to the market and, based on their investment into the campaign and their desire to sell, if you have capacity anywhere in this range, it’s definitely worth your while pursuing. Is any part of this range in line with your budget?’

   If yes, move them through the prep steps (download our Friendly Auction Guide for buyers at friendlyauctions.com.au). If no, use the ‘John West’ principle and get as many buyers early as you can, though let them know once you start getting interest well above them. This alone will gain you massive acceptance and credibility amongst buyers due to your honesty and transparency.

   For example, the buyer has a budget of early $500s and your guide is ‘over $550k’. The vendor may initially want $600k, but as we know that can change. ‘Well, Mr Buyer, although the guide I’ve just given you is above the budget you’ve mentioned, often the guide can shift throughout the campaign and sometimes it can be downwards. It would be an advantage  for you to be prepared in advance if this was to occur, as often the guide may move in the last week or so of the campaign. This may be too late to prepare for auction and you could miss an opportunity to buy around a price you could afford. If the serious interest is moving well over your head, though, I’ll let you know so as not to waste too much of your time.’

2. IF THEY DON’T HAVE A SUBSTANTIAL FINANCIAL OUTLAY JUST TO REGISTER AND BID FOR THE PROPERTY, THEY WILL BE MORE LIKELY TO REGISTER AND BID
   Simple. Of course some buyers  will wear this cost on a regular auction, but try this method and watch how many extra bidders than normal you will get, especially those who are on the fence about bidding.Get a panel of contractors to sign off that if you refer the vendors to them to get a pre-sale pest and building inspection done, they will be prepared to let buyers view the report too (the NSW State Government is currently looking at making this mandatory), and will talk to buyers about questions on the content. These contractors must also agree to sign the reports over to the successful buyer, so they can know the report is prepared in a neutral fashion and will have any associated warranties.Many inspectors will claim that their insurance doesn’t allow this; it may be so some of the time, in which case they can’t be on the panel. My research has confirmed there  are plenty who will do it. The insurance is most likely an excuse to try and get more reports done. The ones on the panel will likely end up with more work anyway, as more auctions  create more reports.

   Get them to write all of this on a cover note to the buyer that their solicitor can also see; it will earn them more acceptance and the information will be more credible. I recommend using a panel, though, so you aren’t coming across as using one inspector for the vendor’s benefit, which is what a buyer may suspect. A reputable inspector will write the report the same, no matter who it’s for.

3. DO THE SAME AS THE PEST AND BUILDING INSPECTOR PANEL, BUT WITH SOLICITORS
   Most solicitors or conveyancers who are looking to grow their business will welcome dozens of potential referrals a month from your company of buyers who would like a PDF contract looked at prior to auction.It can take a solicitor as little as 15 minutes to highlight  any issues for the buyer to watch out for. Even if the buyer doesn’t buy that home, the chances of them using the same solicitor or conveyancer next time become much higher. It’s a win-win. Other solicitors will soon join in the trend anyway, as they will be losing business if they don’t. If they need to put their overall fee up slightly once the buyer buys, I doubt this will have a negative impact on the market.
4. FINANCE IS A KEY FACTOR IN GETTING UNCONDITIONAL BIDDERS FOR AUCTIONS
   Get the broker’s details off the buyer very early in the piece, like week one or two. (This is part of the ‘preparing for auction’ checklist in the FAS guide.) Pass on a ‘valuation kit’ to the broker, with the property details, floor-plan, contract front page, lot plan and the two highest comparisons on your sheet of six (maybe even one over).Comment  as a valuer would on the facts of each property and how they compare to your subject property. Most of the time valuers haven’t seen inside these homes or known the back-story of the sale. Include this commentary; it will give them the evidence required to value the home at its upper capacity, so your buyer can bid freely up to their limit, rather than an overly conservative figure you will likely get from a valuer given nothing but a guide of what the buyer may like to pay for it, or no information at all.Your price guide may confuse some valuers into going towards the lower end without a valuation kit too. Once again, you need to communicate transparently what this is all about to the buyer, so you don’t ‘cook’ them. This is just about the valuer giving the property a fair go so the buyer can decide for themselves, not be hamstrung by an overly conservative valuation.
5. TO ALLEVIATE THE PRESSURE ON YOUR BUYERS, START THE EDUCATION ABOUT THE AUCTION DAY EARLY
   Follow the 10 steps in the free FAS guide referred to earlier. The key thing on reducing stress for buyers is to book a face to face meeting or a 10-minute structured call (both partners on speaker-phone) about how to bid, payment of deposit, negotiating reserve and the opportunity to buy for their price.Get them thinking on four levels of price; 1. Hot buy. 2. Fair deal. 3. A bit of a stretch. 4. Walk away. Tell them to pre-plan these four figures and stick to them. It will alleviate stress and also help get your first bid!I hope this has been helpful; I know it made a massive and measurable difference to the bidder numbers, clearance rates and marketplace acceptance in all the areas I have trialled it.

   I would love to see more consumer- centric approaches to auctions used fully across the country in time. I’m sure if that was to be the case auction numbers would rise and the marketplace would be thriving with a sale method that is win-win-win for buyers, sellers and agents.