Why sellers undersell in strong markets
An irony in real estate is that sellers are more likely to undersell in a strong market than they are in a soft market.
The reason for this is that in a soft market, sellers tend to fight very hard to protect whatever equity they have in their property. They hold out for every possible dollar and really work towards getting the best possible result in the market.
By contrast, in a strong market, a seller’s minimum price expectations are achieved a little more easily, so there tends to be a lack of focus on the maximum price buyers are prepared to pay.
The most common term used to describe a seller’s minimum price is the ‘reserve price’.
Would you prefer to simply sell to the highest bidder at your reserve price or sell for the highest possible price that bidder is prepared to pay?
When an auction stops with the final bid above the reserve price, that price is unlikely to be the highest price the buyer was prepared to pay. It is simply one incremental bid above what the second highest bidder at the auction was prepared to pay. You will never really find out what price the highest bidder was prepared to pay if you sell by public auction.
If you were prepared to accept $1,200,000 for your property and it sold for $1,262,500, would you consider that sale a success? On the surface, most people would call that a great success.
But how would you feel if you found out later the buyer who bought your property for $1,262,500 was willing to pay $1,300,000 (their approved limit)? That’s $37,500 more they were prepared to pay for your home that you didn’t get. Would you still consider the sale a success???
Buyer’s agents are well aware that some of the greatest value in real estate can be found at auctions. This is what Patrick Bright, a buyer’s agent and author of The Insider’s Guide to Saving Thousands at Auction had to say about the selling method:
‘I attend many auctions and bid for properties on behalf of my clients. At the majority of the auctions where we were successful, we had ‘money left on the table’ – that is, we spent less than our authorised limits.’
As happens so often, the buyer who secured the property at the auction left with the seller’s money still in their pocket.
This article is an extract from the bestselling book Real Estate Uncovered.