Welcome to Glover Real Estate

Issue 60 - Caveat Emptor! (Buyer beware) - March 2010

Many years ago, there was a common expression about buying a ‘pig in a poke’, literally a pig in a sack. People were offered the pig in the sack but it was always on the understanding that the pig was unable to be examined. The sack was tied at the neck and buyers had to take the seller’s word for the quality of what was being offered.

It is much the same with real estate services. In real estate, as elsewhere, buyers of real estate services have to be on the look-out for services that don’t match up to the hype to ensure that they are receiving value for money. One area of concern is that of sellers paying for real estate companies to take their properties to auction.

Many years ago, we too used auctions to sell property and if ‘success’ in auctioning is measured by the volume of sales achieved, then I would have to say that we were successful. Now I have another measure of ‘success’ and volume of sales, in itself, is not it.  Certainly, every business needs a certain volume of business to remain viable but there needs to be some caring there, some thought for those whom I now perceive to be the victims of this unfortunate method of selling.

The truth is that auctions only ever achieve the second best price. A system where everybody knows the bids that are being made by everyone else may seem to be all about openness, but this very openness makes it all the more difficult, if not impossible, to obtain the price that a willing buyer may have been prepared to pay in excess of their winning bid.

It is a peculiarity of the auction system that the only bidders that you can be sure bid their highest offer, were those who failed to buy. Those who ‘win’ the bidding very rarely have to go to their best bid. This means that the sellers almost invariably lose money – quite apart from the actual costs of the auction.

Since the 17 November 2009, it has been a legal requirement for Real Estate Agents have meant that they are now required to disclose to sellers, prices of comparative properties. Sellers should report to the Real Estate Agents’ Authority, those agents who are not complying with this requirement. In relation to auctions, this will be even more intriguing as it had been common practice to either refuse to give a price-range to prospective sellers (I know of one auctioneer who was proud of the number of ways that he could use to avoid answering this question – he knows who he is) or over-quote to sellers and, if a likely sale range was being divulged to buyers, to under-quote to them to encourage them to come along. ‘…you may get a bargain…’

The whole point about auctions, however, is that they give agents massive control over the process. By playing on the fears (principally those of the sellers) they put tremendous pressure on the participants, to cave in and agree with the agents’ wishes. In many cases I believe that the agents are not really interested in ‘fairness’, but just want to secure the ‘deal’ and nail down another commission. It is not uncommon for sellers, particularly, to be pressured to accept the highest offer that a buyer has made despite that it may not actually be that buyer’s best offer.  In many cases participants become aware of the seller’s lowest price that they will accept (the ‘reserve’) but no-one ever knows what the buyer’s highest price would have been.

It is worth noting that although the seller’s reserve is often touted as the seller’s safeguard against selling too cheaply, that reserve is simply regarded by agents as ramparts to be stormed at a later, more appropriate stage. Agree to the reserve (almost any reserve) at the time of taking the auction listing and then work on it later – especially on the night immediately prior to the day of the auction. If that fails to get the sellers to lower it, there is always the moment when the pace of bidding stalls.

When the bidding becomes a little desultory and further exhortations fail to deliver any more bids, it is time to confront the sellers. They will told that their ‘investment’ (the cost of going to auction) will be wasted if they don’t accept the present highest offer; that the present offer is the highest that they will ever achieve in the present market, that this is the best price achievable ‘on the day’ and that they would be making a mistake to refuse it.

Finally, if all else fails, the sellers will be asked to put the property ‘on the market’. Most sellers would have thought that the property was already on the market and agree. If they don’t agree, they will be told that many buyers don’t reveal their presence until they know that the property is on the market and hold off bidding until that time. By putting the property ‘on the market’, it is explained, these buyers will be flushed out and bidding will usually go up from where it is now.

When sellers agree, the cry goes up that the property is ‘on the market’ and quite frequently will be knocked down to the highest existing bidder without any further bids being made. This is quite normal practice for auctioneers.
Remember! ‘Auction’ has the same letters and in nearly the same order as ‘caution’. Caveat emptor!

For those interested in finding out more about Auctions, I suggest further reading at Chapter 7, ‘Don’t sign anything’ by Neil Jenman.
The very well documented cases are a warning to all and make fascinating reading. Copies are available at all of the Waitakere City Libraries.