Vendors often face a dilemma prior to the scheduled auction of their property. Do they accept a pre-auction offer and sell, or do they wait till auction day and hope there’s strong competition which could drive the price even higher? It’s a common story that has played out many times. But right now the market is running ‘hot’. House hunters tired of missing out in the property market are increasingly making pre-auction offers, in a bid to avoid going head-to-head with other buyers on the auction floor. But why are home owners so keen to ditch their auction plans? Particularly when clearance rates are at their highest level in years – at 82.3 per cent in Sydney and 74.8 per cent in Melbourne in March – and strong competition is pushing some prices hundreds of thousands of dollars above seller expectations?
Excerpt from an article by Kate Burke in Domain 19.4.21
Having an offer that is too good to refuse and a fear of the unknown, are the two key reasons why home owners sell before auction, according to Peyman Khezr, a lecturer in economics at RMIT University.
“Sellers are winners of the pre-auction deal,” said Dr Khezr, who did a PhD on selling mechanisms in the Australian housing market. However, he noted this was only the case if one or two parties were prepared to pay well above other interested buyers.
When the market is hot, Dr Khezr said, emotional and inexperienced buyers were more likely to overestimate values. Irrational exuberance was the term used to describe a psychological phenomenon in which buyers overestimate an asset’s future value, based on non-accurate information about the price increase, he said.
As such the proportion of homes sold ahead of auction tends to rise when prices are rising. In Sydney, a record 37.3 per cent of homes sold before auction last month, Domain figures show, while in Melbourne, just over one in five home owners sold early – still above the decade-long average.
“If there are a few buyers with a very high value … it’s best to not allow them to compete publicly,” Dr Khezr said. “In a public auction, because people observe other people’s bids … if they’ve overestimated [the value] they will update it immediately and reduce what they will bid to. [But] in a silent auction [when they make early offers] they never get to see the other bids.”
Risk aversion is another factor when making a decision about whether to accept a pre-auction offer. We can have a fair idea of how an auction will play out on the day, but there’s no guarantees. If the offer is there, and you accept then there’s no risk.
Luckily your real estate agent is on hand to offer advice specific to your property and to your campaign. They will know who is genuinely interested and whether there will be competing buyers on the day, or indeed whether accepting a pre-action offer is the best option. For advice and further information contact Barry and Mark Goldman.
- Posted by The Goldman Brothers
- On April 20, 2021
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