Silent Auction

Silent Auction on Residential Real Estate. Does it deliver sellers the best result?

As a seller determined to achieve the highest possible price in the current market, the one thing that you should never do is let your interested buyers know what other offers you have received. When buyers competing offers are disclosed to one another at an auction, they do not focus on offering the highest price they are respectively willing, able and prepared to pay.

The buyers focus on beating the competition and winning the auction rather than paying their maximum price.

'...you want to know the highest price every buyer is prepared to pay for your property...'

When you line up all your interested buyers in next to each other and shout at them with a pointed hammer (as happens at a public auction), you invariably end up with a series of $500 or $1,000 bids to close out the sale.

But what happens if the final bidder was prepared to pay $50,000 more than the second highest bidder? In that case, as often happens at public auctions, the seller loses $49,000 they could have had, if they hadn't sold through a public auction.

Every Saturday across Australia - sellers sell their homes for less than the buyer was prepared to pay for it. It amounts to silent pain for the seller and silent gain for the buyer.

Never allow your interested buyers to know what other offers you have received, whether it be by public auction or Dutch auction.

A Dutch auction is where agents personally negotiate the sale but continually disclose competing offers to each of the interested parties. It is done in a futile and incompetent attempt to force buyers to leapfrog the competing bids. A Dutch auction is worse for a seller than a public auction because buyers usually refuse to partake in the process given its grubby nature.

As a seller, never have your agent put buyers through a Dutch auction process because you will probably lose your best buyer on principal.

Competition

Negotiation experts (and card players) all agree that you should never let the other side know what your position is. During a hand of poker, have you ever seen a card player turn their cards up for everyone at the table to witness and ask the competitors for advice? As a property seller, why let the buyers see your cards? Agents often talk homeowners into auction as the best way to 'create competition'. What is often overlooked is that buyers are competing for the property and are not bothered by the process used to sell the property. Interested buyers will compete for the home, regardless of which sale process is used.

Bidding at a public auction is not competitive – it is comparative. If a bid of $1,000,000 is made at an auction, the next bid will likely be $1,005,000, or $1,010,000. It won't be $1,200,000. Each buyer attentively listens to each competitor's bid so that they can bid at comparative levels and not competitive levels.

Many buyers who are the under bidder at an auction make an off hand comment that they stopped bidding because the other party was just going to keep going. When you drill down on that comment, the bidders are actually saying, “I let the other buyer have it cheaper by dropping out. If we cannot compete with that buyer, why make them pay more for it?”

This regularly happens at public auctions but would never happen using silent auction.

Campaign

Public auction campaigns focus mainly on maximising the number of interested buyers and setting a deadline for those buyers to act. But this is what all agents should do, regardless of the sale process chosen by the vendor. Some agents say that by having a public deadline, it pressures buyers into action. That may be true in some cases, but it also puts pressure on sellers to 'meet the market'. If not, they risk passing their property in at auction and having the final bid recorded in the Sunday paper as the AUHB (Auction Highest Bid).

That definitely won't help the seller achieve top dollar later. Having a publicly known deadline creates just as much pressure for the seller as it does for the buyer. This scenario is orchestrated by agents to ensure that a sale is made. At a public auction, getting a sale on the day in front of the crowd is usually the agent's main priority.

Silence is golden

In Scotland, when agents are ready to close out a real estate transaction, all the interested buyers submit their best, highest and final offer in a sealed envelope for the seller's consideration. Some call this a 'silent auction'. In most, if not all cases, the owner sells the property to the party with the highest offer. Scottish people do enjoy a quid. The Scottish know that if you let a $1 million dollar buyer know that the next best offer you have received is only $900,000, you will only be offered $901,000 from the buyer that was prepared to pay $1 million. How could the seller justify asking for that extra $90,000?

One real estate firm which regularly conducts silent auctions in Australia explains how the sale of a prestige family home in Balmain, New South Wales, achieved the highest possible price using a silent auction. Not only did it achieve the highest possible price, it achieved a price that would have been mathematically impossible using a public auction where bidding is transparent.

'The property generated enormous interest in a short period of time. Given there was sufficient interest in the home, a deadline was set to ensure closure whilst the interest was high.

The deadline was not advertised as this could have potentially pressured the buyers into an unnecessary position. It also saved the seller from any sort of public failure should the best offer fail to meet the reserve price.

The homeowner set their private reserve at $2 million.

'All four interested buyers submitted their best, highest and final offer on or prior to the nominated deadline. Each offer was submitted on a binding contract with deposit cheque. The offers came in at $1,950,000, $2,050,000, $2,150,000 and $2,210,000 respectively.

The contracts were exchanged for $2,210,000 providing the owners with a $55,000 windfall that a public auction would have failed to achieve.

A public auction would have sold the home for $2,155,000, which would have been an outstanding result for the owners. Although $2,155,000 would have delighted the seller, by conducting a silent auction, they achieved the highest price the highest bidder was prepared to pay.

If the property did sell at public auction, many people would have understandably left the auction mightily impressed. The newspapers would have reported how the property sold for a whopping $155,000 above the reserve price. The $55,000 left in the buyer's pocket would be a silent victory for them when it would have appeared to everyone that the owners had a public victory.

Most of the positive marketing components in play at a public auction work equally well for a silent auction. It is the process of closure on the sale where a silent auction wins handsomely.

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