You may have noticed ads in your taxi or on TV for real estate auction services such as Bid on the City, and you may have noticed that starting bids are often quite low, and that someone gets a real steal once in a while. I remember reading last year about how someone bought a 1-bedroom in a new development on the Upper West Side for under $50,000 at an auction. It seems like a great way to buy property at a discount, right? But then why do sellers continue to auction their properties?I was listening recently to a podcast by the Kellogg School of Management at Northwestern University, and it discussed auction pricing strategies in different markets. It's an interesting bit, and I recommend giving it a listen. It made several points, but the key point for me was that, given the right conditions, an auction with a very low starting bid can result in a higher purchase price than if the starting bid were closer to the seller's desired purchase price. However, this is only true when there is sufficient demand, meaning the demand significantly outweighs the supply.
For example, a decade ago in Manhattan apartments were flying off the market because the demand was very strong, and the inventory was finite. A 1-bedroom in the West Village may have benefited greatly from an auction with a low starting bid, because many buyers would see an opportunity to get a great deal, and they would make bids. That's stage one.
Then, other buyers would see the high number of bids on that property and deduce that this property must be something of exceptional value, which would lead them to place bids as well. Soon, you have a large number of bidders. According to studies, competition then becomes a large factor in driving up the purchase price. Winning has value to the buyer, and he or she is subconsciously willing to pay more to win. Also, when a buyer wins an auction, he or she will be more satisfied with the purchase.
In sum, both the buyer and the seller stand to benefit from such a scenario. While the buyer could potentially wind up with a great deal, the seller is actually likely to get a higher price than he or she would have otherwise achieved with standard marketing or a higher starting bid. This is the philosophy behind creating bidding wars as well - even without a typical auction, sellers will often price exceptionally low to encourage multiple offers and increase the ultimate purchase price.
Does this scenario apply in today's market? In most cases, no. Until demand rises again (and I don't think it has to rise very far), auctioning a property with a low starting bid might be a bit too risky for the seller, unless, of course, that seller is very motivated to sell the property very quickly. In my humble opinion, however, higher-end properties might still be able to use this tool, because their potential buyers still have disposable cash, and they are often eager to take advantage of the investment opportunities offered by current market conditions.
As with many real estate questions, the answer is on a case-by-case basis. If you are considering an auction as a possibility for selling your home, feel free to reach out for a free market analysis. Until then, Happy Thanksgiving!Jake Nicholson
| Vice PresidentCharles Rutenberg Realty
127 East 56th Street, 4th Floor
New York, NY 10022
M: 917.280.
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