Overachieved and Undersold

Why the Reserve Price & Auction Clearance Rate don’t matter.

When the real estate market is strong, it’s easy to confuse apparent success and genuine success. A lot of commentary on the real estate market is focused around the vendor’s reserve price and auction clearance rates. Neither is a genuine success indicator yet both are being pushed by industry spin as evidence that all is great in the real estate market.

To fully appreciate how a lot of conventional “wisdom” in the market misses the main point, it’s best to examine the definition of reserve price and the relevance of the auction clearance rate.

Reserve Price

The reserve price is the seller’s bottom line, their worst case scenario in terms of price. An agent’s role on behalf of the home seller is to attain the highest possible price from the market place. Gauging the success of a sale in terms of how much the price exceeded the seller’s reserve price misses the crucial point….

What was the buyer prepared to pay?

Many successful buyers at auction secure the property above the seller’s reserve price and below the buyer’s maximum price.

In such instances, the seller’s have overachieved yet undersold. The auction sale amounts to a public victory for the agent and a silent loss for the seller.

The owners are assured that the sale is a success because they exceeded their reserve price and the property sold on the day, it “cleared”.

A High Reserve Price

At the point in time that sellers sign up for auction, they are comforted by the agent that they can protect themselves by setting a high reserve price. That way, the sellers will only have to sell if they achieve a high price. So the theory goes…

Many a seller has been confronted by the second reserve price. The one they did not see coming nor were they warned about. When the bidding stops below the original high reserve price, the auctioneer will stop the auction and “refer to the vendor’s for instructions”. At this point, the sellers are faced with excessive pressure (in front of a crowd) to drop the reserve price in order to “meet the market”.

Many sellers reluctantly succumb to this pressure on the day. Only then do they realise that the apparent protection of having a high reserve price is no protection at all.

Make no mistake, the name of the game on auction day is to sell the property. The clearance rate depends on it.

Clearance Rate

The auction clearance rate is the most irrelevant and over quoted statistic in the real estate market. It’s irrelevant because less than 25% of all sales in capital cities take place by public auction. To assess 100% of the market on less than 25% of sales is flawed logic. Furthermore, agents are notorious for withdrawing and not reporting failed auction campaigns. If the only auction results reported are the properties that have sold, naturally the clearance rate will be high.  When it comes to the clearance rate, agents are effectively cooking the books.

Another reason the auction clearance rate is irrelevant is because it’s general in nature. The clearance rate simply tells you what percentage of buyers were prepared to meet the owners reserve, or better in some cases. There are still specific examples of properties selling for less than they did pre-GFC. These properties sell and form part of the “high clearance rate” yet the actual owners have suffered a devastating loss.

A high clearance rate and achieving a high selling price are separate events that are overlooked in most of the market commentary.

In fairness, 2013 will be recorded as the year the ailing property market turned the corner. It has been a healthy recovery that has some suggesting that the market could go from being under valued to a boom to a bubble.

To sign up for auction exclusively on the back of high auction clearance rates is to suggest that the selling process is responsible for the buoyant market conditions.

The record low interest rates, increased confidence in the property sector, self managed super funds, aggressive Chinese buying, a stock/supply shortage and low unemployment have all combined to put the property market on the front foot.

To make the most of such favourable conditions, it’s imperative that you define apparent success and genuine success prior to selling.

Sign up for a sale whereby your marketing strategy extracts every interested buyers highest possible price and you get to decide whether to sell or not in a considered manner, not a high pressure situation where the agent is simply determined to protect their clearance rate.

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