The reserve price is usually set on auction day or the day before. The figure is confidential between you, the agent and the auctioneer. You set the reserve in consultation with your agent, so take the time to go over your comparable sales data and all the market feedback you’ve received at inspections. A good reserve should be an acceptable walk-away price for you and appear achievable based on market feedback.
Let’s say you set your reserve at $400,000. If the bidding exceeds that figure, you’re home and hosed. However, if the bidding stalls at $380,000, you have a couple of options. Typically, the agent will give you the opportunity to lower your reserve to the highest bid. If you do this, the auctioneer will indicate the property will be sold.
Indicating that the property is on the market is often a catalyst for further bidding. The underbidder might be on $375,000 and their partner digs them in the ribs and says, ‘Let’s not lose this for $10,000.’ So they make another bid. Auctions often get a second wind once the auctioneer at this time.
But, as the vendor, you must consider your position carefully because just as easily, the bidding could finish there and then and you’ll have to sell at that price. If you decide not to lower your reserve, the agent will usually ask the highest bidder if they want to raise their bid. If the property meets the owners reserve , the highest bidder will be the purchaser at the fall of the hammer.
Your final option is to pass the property in. The highest bidder usually has the right to negotiate with you first, and will often buy the property straight after the auction. If the auction has been properly conducted and the property was priced correctly, there is usually not a huge gap between the highest bid and the reserve.
I strongly recommend making your decisions about the reserve prior to the auction. There is too much intensity, emotion and adrenaline on the day for you to be able to make a sensible decision.
From a buyer’s perspective, I encourage you to bid. Even if you’re not willing to meet the reserve, make sure you are the highest bidder when the auction ends as you’re likely to be offered first right to negotiate with the seller immediately after the event.
If no one else bids, you might assume that no one else is interested. The problem is, other buyers might be thinking the same thing, with the inevitable result being all of you approaching the agent with an offer as soon as the property is passed in. Being the highest bidder puts you in the driver’s seat ahead of your competition.
Auctions can be stressful and emotionally-charged events for both buyers and sellers. Important decisions such as the reserve price for the seller, and the highest price you’re willing or able to bid as a buyer, should always be made before the day of the auction. This way you’ll make a decision based on logic. If you wait until the day, you’re more likely to make a decision based on emotion.
By John McGrath
