The auction option

More and more homes are going up for auction and under the hammer. Andrea Kirkby explains how agents can get in on the auction action.

Link to Auction feature

Every so often, the estate agency world gets a new market to play with and everyone piles on to the bandwagon. In the ’80s and ’90s it was financial services, later it was overseas property sales, after the credit crunch it was lettings. And now? It’s auctions.

Jason Lee - SDL Auctions - imageAs Jason Lee, National Sales Director at SDL Auctions, says, “Having an auction facility is probably where the market was in 2007-8 when every agent was turning into a lettings agent; that’s where we are with auctions.” No longer are auctions thought of as a last resort, they’re increasingly becoming just another of the options offered to vendors in the search for a quick sale and the best price.

Having an auction facility is probably where the market was in 2007-8 when every agent was turning into a lettings agent; that’s where we are with auctions. Jason Lee, SDL Auctions.

Link to Auction featureIt’s perhaps not surprising that the auction market is seeing a number of new ventures, from online auctioneer Whoobid to Midlands auction team Bond Wolfe, which is just completing its first year. True, CEO Gurpreet Bassi and his team are not new to the sector. He claims his 17-strong staff are “the most experienced auction team in the Midlands bar none”, but he believes expanding auctions’ share of residential property will be key to the success of his new business. And so far, it’s working. His private target was 500 lots in the first year, which he’s beaten handily, with just under £67m of sales so far. However, he says that commercial property has seen a fall as Brexit worries hit the market. Residential is what’s keeping the auction market moving. “Residential has been our bread and butter,” he says, “Commercial lots have struggled.”

There’s no price chipping at the end” – no gazundering or gazumping and none of the stress associated with it. All the stress happens before the successful bid, not after. Gurpreet Bassi, Bond Wolfe.

The property pitch

Auctions are expanding in every sector of residential, including new homes. Jason Lee says SDL has already worked with several developers. Auction has definite advantages, particularly right at the start of a phased development when the market price needs to be set. Using an asking price, if it’s pitched too high and sales are made below that figure, the development risks being perceived as ‘cheap’ or not worth what the developers were asking. “It can be quite difficult to sell that first lot,” Jason says, but with an auction “they can set the price they want to achieve, and if they beat it, that adds value. If auction is seen as a cheaper and better way to sell, it’ll work.”

While auctions aren’t the best option for all residential sales (most auction houses reckon they might be useful for about 20 per cent of sales) they certainly have a place. Jason Lee says the big question isn’t the type of property, it’s the seller’s motivation. Sellers who are just testing the market won’t want to go to auction. On the other hand, those who really want to sell, for instance, to move job or move abroad, may find auctions the best way to achieve their aims.

He says that 57 per cent of all properties are now sold by the second agent – the majority of these sellers are having to bring their asking prices down, and the property will be ‘stale’. Auctions can put new life into the marketing campaign, and potentially get a better price, if they raise enough interest to generate competitive bidding.

Auctions can also be a good solution to fall-throughs – an increasingly common problem with up to 40 per cent of transactions in some area failing to complete. Jamie Cooke, Auction MD at Iamsold, says properties his company sells through online auction have a fall-through rate of just five per cent and that’s using the modern method which, unlike traditional auctions, does offer a get-out route (though a costly one).

No gazumping! No gazundering!

The auction route, while making certain demands, can also be kinder to both buyer and seller than the private treaty sales process. Gurpreet Bassi says, approvingly, “There’s no price chipping at the end” – no gazundering or gazumping and none of the stress associated with it. All the stress happens before the successful bid, not afterwards.

Auction houses are now expert at advising their estate agency clients in what circumstances auction could be the best sales method. But Iamsold has now gone a little further, bringing artificial intelligence into play. Its AuctionBOOST product uses machine learning to analyse agents’ inventory and suggest those properties which are most appropriate for an auction sale.

In the past, most auction houses (on the residential side) have been regionally based, as have most of the vendors and purchasers. Now, Jason Lee says, the market has changed, with many professional landlords looking far outside their home regions. “People go on to our site,” he says, “and see properties we’ve got up for auction in the North, we’re selling so many properties to purchasers in the South. They’re not investing in the London bubble, but they are still investing elsewhere.” With yields that can go up to 15-16 per cent, against low single figures in most of the south-east, they have good reason to.

That’s not the furthest distance investors will come. Gurpreet Bassi says, “We have a lot of overseas buyers now. They know if they’re interested in a property, there’s no back and forth; if they’re the highest bidder on the day, they’ve exchanged contracts and they can complete.”

That’s one reason his target isn’t just to be the biggest auction house in the Midlands (already achieved), but to be “a national auction business that holds its auctions in the Midlands” – he’s looking to move into other regions strongly in 2020. Bond Wolfe will also be moving its online auctions forwards, leveraging the team’s long-standing relationships with estate agents.

Is the price right?

While estate agents are increasingly using auctions, though, there’s one big difference between the two branches of the business, and that’s pricing. While estate agents start from an asking price and work down, auctioneers start from a guide price and work up. That leaves some high street agents wondering whether auctioneers are setting their sights too low and selling vendors short.

Jason Lee says there’s a lot of mythology around guide prices. For instance, he says, “There’s a big misconception that it needs to be ten, 20 or 30 per cent below what’s perceived to be the market price. It’s a bit more complicated than that.”

He suggests that if a vendor wants to achieve a sales price of £100,000, an estate agent would probably look at a £115-120,000 asking price; “that gives a little bit of leeway, a bit of wriggle room. The guide price gives some wiggle room too, all we’re doing is flipping it round the other way.” For the same property he might set a guide price of £90,000, but he’d expect it to go to £100,000 or better in the room.

However, guide prices are also about stimulating interest, viewings, click-throughs, phone calls, and, eventually, bids. “It’s irrelevant where you start,” Jason says; “what matters is where you finish.”

Justin Beckwith at Pattinson says the guide price needs to consider the vendor’s situation – for instance, “If a property is on the market currently, and if so, for how much” – but generating interest is its biggest job. “Is there an element of discount for a buyer? That can make the property stand out. We need to get multiple buyers through the door.”

He stresses that the guide price is not the price a property is actually expected to achieve, nor is the starting price. “I was looking at some numbers the other day,” he says, “and we have been generating round about 110 to 115 per cent of the starting price, on average. I’ve got a property next month which is starting at £1, though we expect it to fetch £40-60,000.”

Those in the know

For Gurpreet Bassi, the guide price is “your basic marketing tool”. Some professional clients set low guide prices to guarantee a sale; “They know that price will generate interest,” he explains, “and they’ll usually do better on the day.” Some portfolio landlords are happy to set guide and reserve prices 25 per cent below their target. “They are putting their necks on the block,” Gurpreet says, but that’s a level of risk most private buyers wouldn’t be willing to take.

Still, he says, the guide price is not a valuation, and the relationship between guide prices and sales prices can vary widely. “We’ve sold for four or five times guide price – sometimes we sell bang on the guide price, quite often two or three times the guide price.” And they sell 85 per cent of the time, too.

‘Best and final’ is not the same

Of course, many estate agents, across the country, run a type of auction themselves, in the shape of “best and final” bids. However, Jason Lee says that he believes it is because these are one-off bids, separately submitted, you don’t get bidders competing against each other, and there’s no ticking-clock suspense as there is with an auction.

Vendors can also set a reserve price, below which the property can’t be sold. But Jason says that what happens in the room isn’t the whole story. Options will always be discussed with the vendor afterwards, and “the amount of properties we sell after auction is immense.”

Often, the difference between sales price and reserve price is minimal, for instance £99,500 when the reserve was set at £100,000. Most reports of ballroom auctions only include what’s sold in the room, not properties sold afterwards, so they are a little misleading.

Meanwhile, success rates are good. Justin Beckwith says that while five or six years ago success rates were around 55+ per cent. Now 80 per cent or so is par for the course.

“So far this year, Pattinsons is hitting 76 per cent, with room auctions that are well attended, including phone and online bidding. We’re livestreaming now, too,” he says.

So, auction business is motoring on, and continuing to gain market share in residential property. Pattinson just had a record month, Bond Wolfe is “going into 2020 with strong optimism”, and Iamsold reports record levels of properties coming to auction.

As we bring the hammer down on 2019, next year looks set to be an exciting and (hopefully!) a particularly good one for our auctioneers.

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