Ep 56. How are Auction Reserve prices set?
In this episode, Michelle discusses the process of how sales reserves are set and the common misconceptions surrounding price guides and reserves in property auctions.
Here’s what you’ll learn from today’s episode:
How price guides are determined, and by whom
The legal obligations a sales agent has when offers are made and rejected
How auction reserves are set, and by whom
Why you shouldn’t pay attention to how much a property sells above the reserve price
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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VIEW TRANSCRIPT
Hi and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter property buying decisions. My name is Michelle May and I am the principal of Michelle May Byers Agents here in Sydney. We service the Inner West, the Eastern Suburbs, the Lower North Shore, St. George's River area and the Sutherland Shire. My team and I look after buyers looking to own their first home, their second or third or fourth home, or their investment. So. If you need any help with your property purchase, of course you can always reach out to me directly. But in the meantime I'm here to share tidbits of hacks and property knowledge that might be able to help you get on the property ladder.
So today I want to talk about how sales reserves are set. Because I think there is a bit of a misconception when it comes to the difference between price guides and how there somehow has to be a correlation with then the reserve when it comes to auction day for example. Now, if you don't know already, the price guide is set based on the comparable sales that the agent has provided the vendor with. Generally, that range can be up to 10% and typically they tend to quote the bottom end of that range.
So for example, an apartment with a range of $1,000,000 to $1,100,000 they'll typically guide the property at $1,000,000. Now, I'm leaving undercoding out of the equation at the moment because we all know that goes on, but that's typically how a property will be guided. The vendor and agent have talked about comparable sales and what they think the property is worth and then the agent will market it accordingly. Now, that goes out to the buyers out there who then come and inspect the property and during usually this campaign of say four (4) weeks when the property is going to auction, the agent will provide feedback from the buyers throughout the campaign to the vendor, who will then get an updated report as to where the buyers think the value sits for example, and if there are any other sales during that campaign the agent will also update the vendor with that knowledge and that might mean that the agent may have to adjust the guide up or down based on the level of interest sales etc anything that changes in the market. Particularly if someone makes a genuine offer, then the agent has to take it to the vendor, and if the vendor rejects it then the agent has to change the price guide accordingly.
So say the property is marketed at $1,000,000. Someone makes an offer at $1,050,000. The agent takes it to the vendor. The vendor rejects that offer. The agent by law has to change the guide to $1,050,000. So, any agent who doesn't do that is actually breaching the law. Now when it comes to the reserve, and you very often see on Saturday afternoon or on Monday when you get all the emails from the agents “Sold $300,000 over reserve”. Sometimes that is a lot of smoke and mirrors, and I'll tell you why. The reserve is actually set by the vendor, usually the day before or the day of the auction, and usually that's done in consultation with the agent. They've been given the feedback, then they understand the level of interest. The agent would usually give a recommendation on where they would say it would be a fair place to put the reserve. However, the vendor does not need to listen to this. As you come in to buying a property or selling a property, there can be lots of reasons as to what your motivation is and whether you have lots of time or whether you're under a particular deadline, for example, an impending child or a new job or a move across the country.
So there's lots of reasons why people sell and buy and the sense of urgency can be very different. How motivated they are to sell can be an influence on the reserve that they set for the property. It could be that the bank is selling the property and so they're trying to recoup their costs (the mortgage that hasn't been paid by the current owner.) It could be that the vendor has already bought and so they have to sell on the day. It could be that it's a divorce and one of the people in the partnership does not want to sell so they may set a very unrealistic high reserve.
There's lots of reasons why a vendor may not potentially listen to the agent and they may potentially be doing themselves a disservice. Now, this can go up or down obviously because it's all well and good to say, “the property sold $500K over the reserve”, but if the reserve was ridiculously low and it's a hot market and there's lots of interested buyers, the property is going to sell for its market value if not above that anyway. So setting a low reserve doesn't really matter because it's going to go way beyond that. That's something to be aware of that the reserve might not actually be in line with the property value at all. Or it could also be that you know the vendor is not listening to the agent and sets a ridiculously high reserve.
I came across a property the other day where the vendor literally wanted $1,000.000 over what it was really worth. The property was worth about $2.6m and they wanted $3.6m. That's not going to sell to anybody who is in the right frame of mind really because they know that other properties are not selling for that price. So that vendor is completely unrealistic. And that can be of course incredibly frustrating for the agent as well because if they don't sell, they don't get paid. So sometimes a vendor is completely out of hand and the agent is dealing with a loss leader there where they're probably not going to sell the property or not after a long long term of trying to condition the vendor to bring down this rather outrageous reserve.
Also I wanted to mention that sometimes people are interested when calling a property on the market, that means it has hit the vendor's reserve and of course that is the point at the minimum price that the vendor is prepared to let it go for. Some people call it out at auction, “is the property on the market yet? I'm not going to bid until it's on the market”. It's an indication that yes, someone's going to get the keys today.
The other point I wanted to make is that when you go to auction the vendor has the right to 1 vendor bid and that doesn't have to be at the reserve price. It can be whatever they decide to do, whatever they think is a strategic place to be, again in consultation with the agent. So a couple of things here to understand. The reserve is not the guide. The reserve is set by the vendor, not the agent, and sometimes that can be unrealistically high or misleadingly low so something to bear in mind. As a buyer you just need to make sure that you know the true value of the property and if the vendor is unrealistic about it then be prepared to negotiate, or be prepared to walk away.
That was just a short one today about reserves and price guides, but if you have any questions hit me up with them. Please send me a line at hello@buyerside.com.au. Feel free to reach out. Also follow me on Tiktok buyyourside. Ah, follow me on Instagram. I look forward to sharing another episode with you very shortly. Thanks for listening.