Property sale methods: Private treaty or auction?
One of the toughest decisions when selling your home is determining the most appropriate sale method to maximise your return. Private treaties and public auctions each have their own drawcards and setbacks. Find out how to decide between the two.
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As each have their own merits, private treaties and auctions are the most common sale methods for residential real estate in Australia.
Should you let the skill of a tongue-rolling auctioneer decide your property’s fate at auction, or should you market your property privately with a "for sale" price tag?
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Private treaty vs public auction
A private treaty sale occurs when the property owner sets the sale price and the real estate agent negotiates with interested buyers to achieve the best possible sale price.
On the other hand, a public auction involves prospective buyers bidding on the property at a specified location and time. The highest bidder purchases the property, as long as the bid matches or exceeds the reserve price, and 10% of the property price is normally required as a deposit.
The fundamental difference between a private treaty and an auction is that the former has an asking price whereas the latter involves marketing the property without a price.
Pros and cons of private treaty
- Greater negotiation. In a private treaty transaction, the contract can be subject to certain terms and conditions, such as finance approval.
- Time. Private sales can be beneficial as they provide you with more time to consider offers from prospective buyers.
- Lower costs. Unlike an auction, you do not need to invest in a marketing campaign to promote your property and the auction date, which means you can save a considerable amount of money.
- Privacy. As a private treaty takes place through negotiation, it provides you with greater privacy and enables you to withhold sensitive information, such as the sale price, from the public sphere.
- Longer to sell. A property that is sold via a private treaty may take longer to sell compared to a property that is being sold by auction. No deadline may mean that interested buyers are not compelled to act as quickly as they would at an auction.
- Inconvenience. You may need to make your property available to interested buyers for separate inspections, which could be logistically challenging.
- Cooling-off period. The majority of private treaties are subject to a cooling-off period, which means that the buyer could change their mind during this time.
Tips for a successful private treaty
- Setting the price. This is a careful balancing act that requires considerable thought. A price too low may lead to a disappointing sales result, and a price too high may deter interested buyers.
- Create interest in the property. If you want to speed up the sale process and generate interest in the property, you may want to consider marketing options, setting a lower asking price or being flexible about inspection times.
- Pricing. Although your real estate agent will help you set the asking price, you must ensure that the asking price is marginally above what you would like to sell the property for as this will boost your chances of being satisfied with the offers made. Without a deadline, there’s less pressure to accept low options at auction.
- Choosing an agent. In a private treaty, you’ll be working closely with a real estate agent, so it’s worth researching different agencies to understand their fees and how they operate.
Pros and cons of public auction
- Flexibility. As the property owner, you have the flexibility to set the settlement date and terms to suit you, such as ensuring that it yields an unconditional sale.
- Competition. Auctions create a sense of urgency based on a set ‘end date’ for the property, and this competition can often lead to higher bids and a higher sale price.
- Protected by the reserve. If you decide to sell your property via auction, you are protected by the set reserve price, which represents the lowest offer that you’re willing to accept. This means that your property will not sell unless a bid is equal to or greater than the reserve price. In addition, there is no ceiling price, which means that you have the opportunity to achieve the highest possible price that a registered bidder is willing to pay.
- No cooling-off period. The highest bidder that makes an offer above the reserve is obliged to purchase the property, resulting in a quick and definitive sale.
- Higher costs. Most auctions require a $8,000-$12,000 marketing budget, and you are responsible for covering these costs, even if the property doesn’t sell. You’ll also need to pay an auctioneer and real estate agent to facilitate the transaction.
- Rule out buyers. Due to the public and intimidating nature of auctions, many buyers may favour a private treaty over an auction. As bids are typically unconditional, auctions may also eliminate prospective buyers who are unable to obtain pre-approved finance to complete the deposit.
Tips for a successful public auction
- Setting the reserve. You need to carefully determine the reserve price – or the lowest offer that you're willing to accept – prior to the auction. This is important because you don’t want to change your mind “in the heat of the moment” in a competitive auction atmosphere.
- Contracts. Ensure that you have the necessary paperwork and contract prepared in advance specifying the details of the transaction and transfer of ownership. For example, whether or not it is an unconditional sale and how much of a deposit you require from the highest bidder.
- Choosing an auctioneer. An auctioneer can play a fundamental role in the outcome of the auction, so it’s important that you research and compare several auctioneers in the lead up to auction day. Ask about their strategies, their knowledge of the local property market and their experience within the industry.
- Sticking to the budget. A general budget for a property sale by auction is around 0.5-1% of the expected sale price, so ensure that you set out your marketing and agent fees in advance to make sure that you stay on track.
Which is the right option for me?
Your real estate agent will be able to help you decide which sale method is the most appropriate for you based on location, property type, local market conditions, timeframe and strategy.
What should I consider?
If your property is based in Sydney or Melbourne and within close vicinity to the central business district (CBD), your agent may recommend that you sell your property via auction, as buyers are more familiar with this sale method.
The type of property as well as property features will help determine which sale method is suitable. For instance, if you are selling a ‘stock standard’ apartment within a housing commission and its value is widely known due to the surrounding similar properties, then a private treaty may be the best option.
Auction clearance rates (ACR) are a good indicator of buyer sentiment within a market. Property owners in Melbourne and Sydney should be mindful of low ACRs, which have dipped below 65% for both capital cities in recent months.
Metrics such as number of days on market (DOM), demand-to-supply ratio (DTS), rental yields and vacancy rates are also important factors to consider, which may help you decide whether a private treaty or auction would be most effective.
Depending on your personal situation, the urgency in which you need to secure a sale may also help you decide whether a private treaty or public auction would be more suitable. For example, if you are in a hurry to sell the asset, an auction may be more suitable since it has a “deadline”.
The following points may also help you reach an informed decision about your sale method.
A public auction may be appropriate when...
- The property has unique or high-end features that are difficult to value
- There are few comparable property sales in the market
- The property has strong emotional appeal
- You want to sell the property quickly
A private treaty may be appropriate when…
- There are lots of similar properties in area
- You would like privacy and discretion about the sale outcome
- There is a lack of urgency to sell the property
Different frames of mind
As a strategic seller, you should try to understand the buyer’s way of thinking when marketing the property.
When a property is sold through private treaty, interested buyers will automatically think about how they can negotiate and lower the asking price.
On the other hand, in an auction, the agent will normally provide a price guide. As auctions are emotionally charged events, buyers are normally prepared to bid higher to secure the sale.
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