The ins and outs of setting a reserve price

Written by view.com.au in Selling on January 16, 2015

The ins and outs of setting a reserve price

Setting a reserve price when your home is going to auction is not always a simple process. It is the fine balancing act between ensuring the reserve is high enough to guarantee you a comfortable amount if reached and low enough that it will not be prohibitive to encouraging bidding on the day. Remember, if your reserve price isn’t met then you are not obliged to sell. However, the bidders are also not obliged to buy.

There is a common fear of setting the reserve price too low to see the property sell for less than you were prepared to sell for. However, if you take the time to make your decision this shouldn’t be the case. Remember, the reserve price isn’t advertised anywhere and is confidential but there is always a concern of setting a reserve price so low that you are out of pocket or so high that it doesn’t sell. You’re walking a tightrope of considerations.

 

Make a decision about the reserve price anywhere up to a few weeks prior to auction day. Avoid changing your mind without evidence to back your decision up.  You are looking to try and make the decision as logically and unemotionally as possible prior to the day of auction. The amount of stress and excitement on the day of the auction can be acute and sellers will not want to be making critical decisions in that sort of environment.

How setting a reserve price can affect the outcome of the auction

Setting a reserve price is partly about your personal comfort level but also partly about how a high, low or predictable reserve price may affect the bidding activity on the day at auction. While every auction is unique, there are usually some common ideas that you should be aware of.

Auctioneers will let the bidders know when the reserve price has been reached, but not a moment before. This announcement may see some interested parties, who were previously holding back, jump in and bid. One concept is that some buyers may be more willing to bid if the property is officially “on the market” – or when another bidder has finally met the reserve price. For this reason, setting a reserve price too high can actually be prohibitive and stop other potentially interested buyers from purchasing. Unsurprisingly, this often applies to investors and there are a number of people who will not raise their hand to bid unless they know it’s truly going to be sold under the hammer.

This thought process and consideration is about making sure you can continue the momentum and energy in the auction, something that your auctioneer can explain to you.

 

However, remember, a passed in auction isn’t always a failure regardless of how undesirable it may seem – there are often negotiations afterwards that could see the buyer pay above the reserve price.

 

Selling without a reserve

Selling without setting a reserve price at all is risky. Yet, there are occasions when it can pay off. While it’s not the recommended method, as little buyer interest could leave you with absolute peanuts, sometimes the suggestion of no reserve can hype up interest on the day enough to make the risk worthwhile. Due to the risks, this type of auction is highly uncommon and usually makes headlines when advertised.

 

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How to make your final decision

When selling, you have access to plenty of expert information. Your real estate agent is an asset as can be the auctioneer. Both will have seen plenty of auctions in the local area and can let you know the chances of your home passing in or bidding going wild. They will be able to describe the auction process and what they know about the confidence of local buyers in the current market. Do not estimate the importance of a chat with your agent.

Similarly, your agent will know the specifics about your home. During the final few days before auction, you should be researching and using guidance from your real estate agent to determine what your final figure will be and whether you need to adjust it higher or lower.

Feedback through the course of the campaign can be crucial and your agent will help you interpret how much interest there really has been in your home and what this means. It’s very likely they’ll have some understanding of how many people will turn up on the day.

Do listen to your agent’s perspective and ensure to utilise the information they have been collecting about your property’s marketing campaign.

Consider:

  1. How many buyers have been through to see the home?
  2. Have you already received offers? (How much were the offers for? Why didn’t you accept them?)
  3. What have other comparable properties locally sold for recently? (How many people showed up to their auctions? What was bidding like?)
  4. How many people are likely to show up to the auction?
  5. What comments have the buyers been making about the home?
  6. How interested have the buyers appeared to be?

Attending local auctions is a worthwhile pursuit as you can get an understanding of when they are ‘on the market’ and a close margin as to what the reserve price is. Acknowledge how different levels of pricing affect bidding activity.

If there are few buyers and not much interest, then it’s time to discuss your options with your real estate agent. And then ask yourself: What is your lowest figure that you would accept a sale at? Effectively, this is going to be the absolute lowest reserve that you put on the property.

It’s then worth considering your personal circumstances and how crucial it is for you to sell on the day of the auction. Would you sell for less to achieve a quick sale? For those under pressure to flip their home, it may be the case that they should lower the reserve to ensure the sale. If it passes in then nothing is for certain.

You’re essentially looking for a balance. This is a balance between the price you want to achieve and what is low enough to entice bidders. Remember that buyers will expect the reserve to be within any range that it has been advertised with and, ethically, it’s likely that you would not want to  be setting a reserve price above the bottom price indicated. Steer clear of underquoting and bait pricing for a fair auction.

Whatever the case, be ready to accept your reserve price if it is met – at the end of the day it is your home and you ultimately have to deal with the outcome of the auction.

 

Points to remember:

  • Choosing the reserve price is a balancing act
  • You can set it anywhere up to the day of,
  • Speak to your agent and auctioneer about the reserve price
  • Interest through the marketing campaign will assist you in setting your limit
  • A passed in auction isn’t always a failure
  • Attend local auctions for some more insight
  • Consider your personal circumstances