How To Set Reserve Price For House Auction

Auction-gavel — There'due south a lot to auction pricing strategy. Stock photo.

Setting the reserve cost is the angst of every seller
The laws of supply and need come into play
Adding genuine bidders has more touch on than increasing the reserve toll

Selling your belongings via auction can be a smash-biting and exciting procedure. There is nothing similar the excitement of watching a bidding frenzy unfold. Merely, there is too nothing more disappointing than an sale that fizzles.

One of the key elements is the reserve price as most experienced bidders often continue their powder dry until they know that the property is actually "on the market". Setting this reserve cost is therefore the angst of every seller. They are wondering: "if I set it too loftier, will it go passed in? If I set information technology likewise low, will I leave money on the tabular array?".

So, is there an optimal strategy for setting the reserve?

What the science says

Studies have shown that a reserve price is important when in that location are multiple like items in an auction. In a real estate instance, bidders for a new development of as-congenital townhouses or apartments know that if they don't win the first auction, they can wait for the next one. So, many bidders volition "wait and meet".

However, the typical home sale is different considering the bidders are competing for only ane property. In this case, the studies indicate that the reserve price is disquisitional when there are few bidders. Information technology then drops away in importance for every additional bidder added. One study showed that, once in that location are six genuine bidders, the reserve price becomes lilliputian and no more optimal than setting no reserve at all.

In fact, models and data testify that just adding one extra bidder is always more constructive than increasing the reserve price. A reserve price that is too high can stifle a potential behest state of war. Bidders may keep their own powder dry until they know the property will definitely sell.

These findings seem obvious on face value from the elementary laws of supply & demand where prices will maximise when both the competition and the rarity of the particular for sale are high.

Just, what other factors come into play?

What a practitioner says

Grant Penrose from RE/MAX Profile in the inner-Brisbane suburb of Bardon is an experienced auctioneer who has presided over hundreds of auctions in his xx+ yr career. He points out that, regardless of the theory, there is an inescapable human factor to contend with.

"Sellers are oftentimes concerned that the auctioneer wants a depression reserve toll just to get the holding to sell," explains Penrose.

"This tin can cause tension and a combative mental attitude which isn't helpful to producing an optimal issue. I prefer to take this tension out of the equation by setting the reserve price to whatever the seller prefers.

In our coming together 48 hours prior to the sale, I explicate to them that the reserve cost is their safety net. It's a figure whereby I can sell the holding at or above, but tin can't sell one cent below.

And, importantly, they have the correct to better their written reserve price at any time during the auction. This simple explanation diffuses the tension immediately every bit they know that the command is in their hands and information technology builds trust between us. This trust is disquisitional one time we become to the pointy end."

Grant Penrose from RE/MAX Profile

Penrose goes on to explain:

"Apart from attracting the maximum bidders, if the sales amanuensis has done his or her job properly, and so the seller should have a good idea of what their property could sell for.

"The agent should take elicited regular cost feedback and offers all throughout the entrada. Then, the seller can experience comfortable that they have all the information to be able to sell their belongings or non. But, near sellers will set the reserve price above the marketplace's perception. Considering they desire the chance of that premium cost."

Maximising competition

The big challenge with an auction is that contest is express to those that tin meet auction requirements on the day. Primarily, bidders must be able to sign an unconditional contract on the fall of the hammer. This knocks outs anyone who can not secure finance in time. Further complicating matters is the current delay in loan approvals which has blown out.

One alternative is Openn Negotiation which allows a seller to accept conditional bids in an auction environment. Bids are attracted over a entrada period and and then culminate in a terminal sale. Using an online bidding platform, buyers can easily participate from any location around the world. Openn Negotiation boasts that these factors drive maximum contest and higher selling prices.

An optimal reserve price?

The science indicates that, for a typical habitation auction, the reserve price's importance is mostly influenced by the number of genuine bidders. If there are six or more, the seller could set no reserve and expect a bidding state of war to achieve their best cost. In theory.

In existent life, it is impossible to guarantee that many bidders or to know how genuine each bidder is. And so, the seller needs to argue with a safety internet they are comfortable with. This is where the trust in a adept sales agent and an experienced auctioneer comes in.

References

Bulow & Klemperer, (1996) "Auctions Versus Negotiations", The American Economic Review, Vol. 86, No. ane., pp. 180-194.
Ostrovsky, M. & Schwarz, M. (2016) "Reserve Prices in Net Advertising Auctions: A Field Experiment", Stanford