An Auction is a great way to sell a home. When a seller puts a house on the market, the goal is to sell the home for the most money possible in the shortest time period...right? A properly conducted auction sells homes fast for the markets top dollar. Here’s why. There is always a pool of ready, willing, and able buyers in the market. All of the buyers, however, are not typically motivated to pursue one particular house. Many of those buyers may have an interest however, for the right price. Out of those “potentially interested buyers”, there will be a handful of “good buyers”. Ideally, the best buyers are end users, or primary residence buyers (depending on the property). These are the buyers that think about more than just making money when they purchase a home…opposed to the bottom feeders. There will always be bottom feeders looking for a bargain.
The auction sales model says to the buyers in the market “Hey..We’re going to sell this house on this date. We don’t know what the true market value is but we’re going to sell it for the price that the market says it is worth. Come and get it if you are interested at all.” This skews, and takes advantage of, the economic relationship between supply, demand, and price (low supply + high demand = high price). By removing price as a barrier for buyers, assuming the marketing is excellent; an auction attracts mass attention, which is the key for getting the markets top dollar. It captures buyers’ interest with the opportunity to get a house for a great value. The timeframe creates a sense of urgency and compels buyers to participate, if they are at all interested in owning the house. A competition between interested “good buyers” is the best condition a seller can hope for, which is why an auction is a great way to sell a home.
There are factors of the auction that can affect the outcome. For example, an absolute auction (where the home will sell to the highest bidder on auction day regardless of price) attracts maximum attention, but it is more risky for the seller. What if it rains and there is a low turnout? To reduce the risk of potentially having to sell the property for less than the seller wants, a reserve can be set for the auction. This is the price that the seller will not sell if bids do not reach. A reserve does reduce the seller’s risk, but can have adverse effects on demand due to the uncertainty factor. There are several methods which can be used to reduce risk for the seller while maintaining the integrity of the auction.
Strong marketing and having the house in top condition are major contributors to the effectiveness of the auction. It certainly helps to have a highly desirable property. The real estate market is highly inefficient, but by using an auction based model that focuses on fundamental principles we can take advantage of that inefficiency and use it to the sellers favor. No model can sell a home for more than it is worth, and a home is worth what the best buyer is willing to pay. The auction model is the fastest, most efficient way to get to the market value of the house and that is why an auction is a great way to sell a home.