How to set the reserve price for auction
The reserve price you set for your property has the power to make dreams come true or lead to bitter disappointment on Auction Day so the strategy for setting it is something we need to understand in order to achieve our goal.
A common way of thinking is that if the reserve price is set too high, the bidding may not reach the price we want but if we set it too low then we might risk selling it for a price we are unhappy with. Before we can decide on what level to set the reserve price, we need to go back through the period of time the home has been on the market to assess the state of play.
How has the interest from buyers been during the weeks leading up to the auction? Have there been consistent attendances at open houses? Buyers may not always directly communicate their interest however there are usually some strong signals such as; asking of detailed questions, inspecting on a second or more occasion, requesting the contract documentation and making offers to purchase the property prior to auction.
Despite some buyers efforts to play it coy, the reality is that at some stage an interested person must make their interest known to the agent. If they have not done so by the auction day at the latest, it is not really possible to consider them prospective purchasers.
Since 2017, Estate Agents in Victoria must provide a Statement of Information for each property they sell which includes a single figure price or a price range of no more than 10% to prospective purchasers. This is designed to increase transparency and supply information to allow purchasers a guide as to what the property might sell for. Due to the highly individual nature of properties and their title owners, this amount may vary due to a range of factors. Once the reserve price has been set, the Statement of Information must be updated to show that price. In many instances the reserve price is not set until the day of the auction which is the deadline for this to be decided on by the property owner.
The reserve price you choose may be set differently depending how the campaign went during the marketing period. That is to say that if we think there may be several buyers intending to bid, we may choose to set a reserve price that is likely to be considered fair by those buyers and may also allow the competition to heat up into a bidding war, the outcome all auction sellers dream of! On the other hand, if there is one buyer only, the reserve price may be set higher to allow for post auction negotiations. The auctioneer will not place the property 'on the market' unless the owners reserve price has been met.
A reserve price which is considered higher than the current market value is unlikely to be reached when the auctioneer is not authorised to announce the property 'on the market' by the owner. It is more likely buyers will pay a higher price when they are bidding against another buyer and when they know the property will either be sold to them or to the other person.
In many cases, if one person is prepared to pay a certain sum for something, it tends to reinforce the sense of value the next buyer feels they are getting so they may make a higher bid. This competition is the very essence of the auction and what we aim to achieve by selling a property using this method.
A high amount of buyer attention in a home combined with a reserve price considered to be fair can lead to spirited bidding on the day of the auction and push the price to a much higher level than is expected achieving the ideal scenario for a home seller.
Another possible scenario for auction day is that the reserve price is exceeded by a smaller amount or only just closely met. It may be that the bidding does not reach the reserve price during the auction. In many instances a higher price may be negotiated after the auction in the event there is not a second bidder to raise the bids. This scenario may still lead to a successful sale and it may have been the event of the auction day itself that helped each party to mentally prepare to transact on that day. A skillful and experienced estate agent will be needed to ensure that the best result is achieved or both parties will be unsatisfied having not achieved their goals of buying and selling.
Should there be no bids on auction day, it may be that further marketing and time is needed to reach more property buyers or adjustment of the price to appeal to a broader range of people. It is important to keep the momentum of the sale going post auction should the property remain unsold and proactive attention by the property owner and estate agent is crucial. Each property has a limited amount of energy and attention from buyers and it is vital to keep this spark alight if we are to successfully achieve our goal of selling. A property that is well presented, well advertised and well priced should sell within days or weeks after auction day.
The reserve price can be considered the price that we would not like to sell below, but with a well-considered strategy, a realistic mindset and an experienced agent to handle the process, the reserve may be a price that is well and truly exceeded after the competition is over.