Auction vs private treaty
Which property selling method can give you the result you want?
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When selling your house, you can put it up for auction or sell by private treaty. Many sellers believe an auction can get them a higher price, but a private sale can be less stressful. Here's our comparison of auction versus private treaty, and how to work out which option you'd prefer.
Private treaty vs public auction
A private treaty sale is when you set the sale price and the real estate agent negotiates with interested buyers to achieve the best possible sale price.
For instance, you list your property for sale at $699,000 and your real estate agent tries to secure a sale contract for as close to that price (or higher) as they can.
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.
For example, you list your property for auction and set a reserve of $700,000. Several bidders make bids from $600,000 upwards, but the bidding stops at $680,000. This is lower than your reserve, so the property doesn't sell, and your agent negotiates with the highest bidder to encourage them to increase their price.
Or, several bidders make bids and the auction reaches $740,000. The property is sold, as the price exceeds your reserve.
The fundamental difference between a private treaty and an auction is that a private treaty has an asking price and an offer can be made, negotiated on and accepted at any time, whereas an auction involves marketing the property without a price, and selling it on a specific day.
Pros and cons of selling via private treaty sale
- Greater negotiation. In a private treaty transaction, the contract can be subject to certain terms and conditions, such as finance approval or specific settlement dates.
- Time. Private sales can provide you with time to consider offers from prospective buyers.
- Flexibility. If you have specific needs, like wanting a longer settlement date, you can negotiate this on a case-by-case basis with prospective buyers.
- Longer to sell. No firm deadline may mean that interested buyers are not compelled to act as quickly as they would at an auction.
- Cooling-off period. The majority of private treaties are subject to a cooling-off period, meaning the buyer could change their mind during this time.
- Subject-to clauses. Buyers can add multiple clauses, such as "subject to a satisfactory building and pest inspection", which can delay the settlement or even prompt them to withdraw from the sale.
Tips for a successful private treaty sale
- Set the best 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 investing in marketing and being flexible about inspection times.
- Choose a good agent. In a private treaty sale, you’ll be working closely with a real estate agent, so it’s worth researching different agencies to understand their fees, their sales strategies and their performance record.
Pros and cons of selling at auction
- 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.
- 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.
- No subject-to clauses. These clauses are not available with an auction, as prospective bidders need to do their searches and inspections before auction day.
- Higher costs. Most auctions require a marketing budget, as well as auctioneer and real estate agent fees.
- Rule out certain buyers. Some buyers are not comfortable bidding at auction, or may not be able to meet the stringent buying conditions.
Tips for a successful public auction
- Setting the reserve. You need to carefully determine the reserve price, 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 you?
Your real estate agent can help you decide which sale method is the most appropriate for you based on location, property type, local market conditions, time frame and strategy.
Arjun Paliwal, founder and head of research at buyer's agency InvestorKit, says you should consider location when deciding which option to use as a seller.
"While buyers in Melbourne and Sydney tend to be familiar with auctions… those in markets like Brisbane, Adelaide and regional areas in the past haven't been traditional auction markets," he says.
Following the most recent property boom, "we will see greater quantities of properties selling under the hammer due to improved vendor confidence", he adds. "But many won't be used to this style of selling or buying."
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 big complex and there are several similar properties on the market for a similar price, a private treaty may be the best option. If this home is unique or recent sales are few and far between, an auction could help you achieve a higher price set by the market.
Auction clearance rates (ACR) are a good indicator of buyer sentiment within a market. Ask your real estate agents for the latest ACR stats in your area. Above 70% is an indication of a strong auction market.
"CoreLogic and SQM Research provide an overview and analysis on the property market, along with recent trends on performance in various areas, suburbs and, sometimes, even streets," Paliwal says. You can often access a lot of this information for free online.
Depending on your personal situation, the urgency with 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”.
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.
Paliwal suggests it's a good idea to attend a few auctions yourself, to get an understanding of local market conditions.
"Visit open homes for private properties and attend auctions in the neighbourhood to get an idea of how much interest there is in the area. You'll be better prepared and less surprised [on auction day]," he says.
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 the area.
- The local market sells more properties via private treaty than auction.
- You don't have a specific deadline to sell the property.
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