The power of a home auction

In a slow market determined by poor economic growth, the volatility of the rand, and political sentiment, it can be very difficult to keep up with the ups and downs of property values.

If, for example, the market is realising a loss of even just a quarter of a percent every month, but a home seller insists on sticking steadfastly to a market value figure dictated to by either the high municipal valuation as was revised in 2018, or sales in the area that were achieved even just a month prior, the consequence can easily be a house that stays on the market indefinitely because it will likely never catch up with the pricing trajectory.

This is a lag that can be contained by auctioning a home property, and furthermore, it also addresses the issue of true market value, which as we know is a very different picture to that of even as little as six months ago.

True market value realised

One of the foremost names in the home property auction industry is that of Paul Winterstein, who over the past three decades has either performed directorship or CEO roles. He explains that ‘true’ market value from an auctioneering perspective is achieved by bringing a seller a genuine offer on day of auction dependent on, among others: the extent to which an auction house has marketed the property, which in turn brings a sufficient number of buyers to the auction; and an active bidding process that results in the offer presented with no strings attached, i.e. not dependent on a bond being raised, or subject to selling a house.

“There is a misnomer that an auction doesn’t bring good market value. This is not necessarily true. A lovely home in a good area will always attract good value in the same way that an undesirable home in an undesirable area won’t realise a seller’s overly-optimistic valuation,” says Winterstein.

Investor confidence

Winterstein also talks to the issue of difficulty in selling a home in a depressed economy, and it’s not, he says, that there isn’t a market, but that there is no investor confidence. “There are markets, even for properties worth more than R25-million, but in not being sure where the economy is headed, savvy investors don’t want to spend that kind of money right now, which does limit the buyer pool, particularly at the high end of the market.

“Auctioning a property is a solution; if an auction house understands market conditions accurately they will find the buyers that are willing to purchase a home in the R20-millions. For instance there are cultural groups like high-end professionals and Muslim families that are looking for extensive homes. Auctioneers know how to respond to that demographic and entice them into an auction. What a luxury home then sells for at the auction, is a case of true market value, which in the real estate industry, has always been determined by what a buyer is prepared to pay.”

21-days

One of the sureties of an auction is that they only attract serious buyers and the bidding process creates a sense of urgency, which is an advantage for those who need to sell a home quickly, for example when immigrating or under pressure to take occupation of another home.

Winterstein explains that at auction, after the hammer falls, a deposit is required within 24 hours, following which are three days of confirmation and guarantee follow-ups, and if there is a financial house already on board, conveyancing can start immediately thereafter; all in all around 21 days from the date the seller confirms the sale. “It’s a very quick process,” he says, “and you know the exact date your house will sell.”

This is an enormous money-saver from the perspective of carrying costs – rates and taxes, maintenance – while a home is on the market. Sellers can budget better because they have an exact sell-by date.

Viewing an auctioned property

All auction properties are available to view but only on the day of the auction, and usually only a few hours are granted before bidding starts. The only, and rare, exception to this is relative to upmarket properties, where an auction house may consider a view-by-appointment request. However interested parties can access a marketing pack either from the auction house itself or downloadable from its website.

Commissions and auction costs

Auctioneers charge a buyer’s commission, not a seller’s commission. Winterstein unpacks this.

“The mandated price (the opening minimum bid) set by the auction house, in the past known as a reserve price, does not include the auctioneer’s commission; this is paid by the successful buyer on top of their winning bid, and is usually a percentage of the sale. In the case of a realtor selling a house, the commission is included in the accepted offer so the seller has to calculate what commissions will be deducted from that offer to purchase.

Generally there are few to no cost pre-qualifications for bidding on a home. The exception is when entering the high-end luxury market, in which case an auction house may require a property registration deposit. This is usually handled on site at the auction, with serious buyers required to either swipe a credit card, by EFT, or a providing a guaranteed bankers cheque. If a bid is not successful, such a deposit is refunded within three to seven days, as per regulation.

If a bid is successful, the deposit, which has been put into a trust account, is transferred to the conveyancing attorney.

Sellers, and this applies to the majority of home auctions, are usually asked to pay a contribution to the marketing/advertising of the property.

Bidding conditions

The first thing any potential bidder must do before going to an auction, is to understand their affordability power, either with a finance house, or by having legitimate access to funds enough to cover their bids. A bidder must, also be aware that affordability considerations should include transfer and conveyancing fees and the auctioneer’s commission, as mentioned earlier.

If a bid is being done on behalf of a third party, the auction house will advise what proxies and resolution compliances are required, which must be presented and verified at registration on the day of the auction.

The bidding process

Auctioneers love a bidding war, says Winterstein but it doesn’t happen very often, and is usually ego related. “South Africans are actually becoming au fait with auctions. Educated bidders who feel they may be caught up in a bidding war, tend to stop and step aside when bidding becomes overly energetic, and may approach the auction house at a later stage to make a counter offer, should the original winning bid fail in the subsequent registration processes. However the successful bidder always has the first right of refusal.”

Novices need not fear the bidding process, no matter how fierce it gets. Auction houses tend to go to great lengths if, when registering, a novice declares their naivety of the process. Auction houses will, confirms Winterstein, work with such an individual even during the bidding activity, and advise on regulatory frameworks such as the Consumer Protection Act, and terms and conditions of sale.

To conclude..

Nobody can really predict with any accuracy where the market is going and the longer a property stays on the market, the more demand diminishes. Going to auction creates a new sense of interest around a For Sale home; it targets and guarantees a market that is ready to buy. It is therefore no surprise that auctions are becoming more prevalent, and is a powerful tool in any economic environment.