One of the most common questions faced by property owners, whether home owners or investors, is what works better when you want to sell -Auctions or Private Treaty? Given that this is your most prized asset, this decision is imperative to get the best return in terms of money and time on the market.
With all property markets in a state of volatility across the nation this decision has never been more important for people wishing to sell. This choice is even more important when markets are either stagnate or in decline as is the current case.
While Auctions and Private Treaty sales are both a process of selling a vendor’s house or investment property the outcomes can produce significantly different results in relation to time and money. Your objective as a vendor is to maximise your return and minimise your exposure to time on the market.
What is an auction?
An Auction is the process of marketing the sale of a property using a fixed term marketing period, usually 4-6 weeks with the outcome of drawing a large pool of interested purchasers to a fixed date location. On that day the property is handed to an Auctioneer, who after reading out the terms and conditions of the sale, puts the property on the market and seeks bids from potential purchasers.
Auctions tend to be heavily targeted to certain areas such as metropolitan areas and even certain states. The eastern states of Australia, being New South Wales, Victoria and Queensland tend to be the major states that focus on auctions. Other states in Australia are less inclined to use this method of sale of a property.
What is a Private Treaty?
Private Treaty selling, while attempting to obtain the sale of the property at the best price also, is a method that is significantly different from that of an auction. The property is put to the open market for sale by offer and acceptance with no expected fixed date for the conclusion of the sale.
What to expect during an auction?
In an auction situation, the marketing is heavily front end focussed during the initial 4-6 week marketing campaign where a vendor and their agent would be looking at a minimum of 2 home open opportunities per week. The agent and vendor should also be open to additional opportunities that meet prospective purchaser’s time frames, to view the property in this 4-6 week marketing campaign.
On the indicative day of the auction, the agent hands the property to a registered Auctioneer to undertake the process of selling. This process starts with ensuring that any potential purchasers are registered correctly pursuant to the state’s legislation.
Once all buyers have been correctly registered the Auctioneer usually begins by reading out a list of terms and conditions that are relevant to the auction that is about to be undertaken. These conditions usually involve items such as the amount of deposit that is required to be paid, when it is to be paid by, when settlement is to occur and any other property specific conditions that the Vendor wants to be included in the sale documentation.
One important thing about the traditional auction process is there is limited scope for any prospective purchaser to seek their “preferred” terms or conditions. An auction effectively gives the vendor the opportunity to dictate all conditions that they wish to sell the property with.
What happens during a private treaty?
A private treaty varies greatly from the auction process. Not only in the fact that there is no set time for marketing and no set date for an attempted sale of the property. By comparison, private treaty sales can shift the power of the negotiation process to the vendor because they can put forward an offer, not only on their preferred price but importantly in relation to the deposit paid, the time for settlement and any other conditions that they may wish to include.
The private treaty sales process effectively levels out the sales process, in terms of control, from the vendor to be a more equitable negotiation process. A vendor will need to be more open to considering the needs and desires of any potential purchaser when using the private treaty strategy. If the vendor wishes to sell the property, under this model, the vendor will not be able to force their expectations as easily onto the purchaser as the purchaser’s negotiation power is much stronger.
Choosing the sale process
One of the most important things to keep in mind when making the decision of which works best – Auction or Private Treaty – is that even with an auction process you can still use the private treaty method as an alternative.
Here is a possible scenario to think about…
Nearly all auction processes will allow for the opportunity of … “if not sold prior to auction”… as part of the marketing campaign, which allows for the opportunity for a potential vendor to use the private treaty method prior to the auction date and put forward an offer based on their price and terms.
This situation puts a vendor, who is using the auction method, in a crossroads position – do they accept and negotiate an offer prior to auction, where they may need to compromise on price and terms but ensure a sale occurs or take the risk of getting, on the day of the auction, a possible better price, and terms or potentially no sale at all.
If the vendor does not accept a private treaty offer prior to the auction date and the property is either passed in (meaning that the bidding does not reach the reserve price set by the vendor for the property) or there are no offers made at all then the vendor can be put in negative negotiation position. It is likely that the previous private treaty offer made, prior to the auction, by a prospective purchaser may be revisited, if they have not purchased elsewhere.
The problem facing the vendor then is that they have handed the power of negotiation to the prospective purchaser and now the vendor is placed in a position of possibly accepting a lower price or terms that they did not want to.
Two important factors to consider
Two of the most important factors any vendor will need to consider are their own personal financial situation and secondly the general market and economic situation.
1. Consider your personal financial situation
The first matter that any vendor will need to consider when deciding whether to use an Auction or Private Treaty in the sale of their property, is their personal financial situation. Do they have stresses such as:
- financial stress
- employment position
- new family
- requirements or needs
- purchased property elsewhere
- financial capacity
These are key matters in deciding whether they have the time to wait for a private treaty sale or an auction sale.
If any of these stresses or “time” factors are present, meaning the vendor is “under some pressure” to sell then they would tend towards an auction to fast track the process and ensure time is saved in the sale process.
If the vendors do not have any of these stresses, they will be more willing to wait for the right price and terms and would be happy to work with a private treaty model.
2. General market and economic situation
The second consideration that will help determine vendors on whether to choose an Auction or Private Treaty sale method for their property is economic conditions.
Economic conditions are quite often the reason why their personal issues are emphasised. If due to a recession, people are forced out of work, which could force a need to sell by auction to fast track a sale. If interest rates rose significantly and mortgage stress occurred then again people may be forced to select an auction method for speed of the sale.
If, however, property prices were rising quickly and demand outstripped supply, maybe due to low interest rates, strong economic activity or global perception of the property market place being a “safe investment” and you have multiple buyers wanting your property, then again, an auction method might be the best way to create a buying frenzy.
Economic situations can change very quickly, even from a day to day basis so this is always a risk the vendor must consider.
If the property market was stagnant or falling with few prospective buyers, and the vendor had no financial pressures, then it could be more beneficial for a vendor to put the property up via private treaty.
Whether to choose to sell your property by Auction or Private Treaty has been a universal issue that every vendor must make a decision on.
While the advantages of an auction strategy tend to work to the benefit of a prospective vendor, in the majority of circumstances – both personal and economic – it is important for any real estate agent and vendor to take time to consider the pro’s and con’s of both strategies – the individual’s circumstances as well as the national and global economic situation, both current and the expected future position before making the decision on which strategy to use.