Auction or Tender?

Which method of selling should I use?  Auction or Tender?

Auction
This is a method of selling the property where the seller, either privately or through the real estate agent, invites all interested buyers to meet on one nominated day to bid to purchase the property in a public auction process. Auctions are also used by certain parties to force the sale of property where the owner is no longer able to meet their obligation. The most common is the mortgagee sale but auctions are also used to recover unpaid rates, as a consequence of the confiscation of property pursuant to the proceeds of crime legislation, and pursuant to various Court Orders.

An auction is underpinned by the Auction Terms and Conditions/Particulars and Conditions of Sale. Auction Terms are now reasonably standardised as a result of good levels of co-operation between the NZ Real Estate Institute and the NZ Law Society. Auction Terms do however still vary from agency to agency. When the sale is a forced sale situation, a significantly different set of Conditions apply. Care must be taken in these cases.

The seller should set a reserve price below which they will refuse to sell the property. Once the reserve is met the property is sold on the fall of the hammer. Good auctioneers make it clear when the reserve is met and the property is “on the market”. If the property does not reach the reserve, the property is “passed in” to enable negotiation, or the auction paused to see if the highest bidder and seller can reach a compromise on the day of the auction. The latter is the more preferred approach in the current market to enable the Real Estate profession to promote the success of the auction process.

Auctions by their nature lift the intensity of the sale process. This lift in intensity can be of value irrespective of the market. The intent of the auction is to promote competition to secure the highest price on an unconditional basis. Most often Auction Terms set the auction conduct and process out clearly. A thorough reading of these Conditions will provide a clear understanding of the auction process. Auctions should be treated with caution by both prospective sellers and buyers.

 

Disadvantages of Auctions

Cost
The seller will usually incur significant costs whether the sale succeeds or not. These include advertising and the provision of good supporting documentation to encourage a buyer. With auctions where the marketing lead-in time is short, this could extend to the provision of a LIM, builders report or other documentation. Legal costs will be (and should be) incurred in ensuring all detail is correct. This is not the Agent’s job.

For the buyer, similar costs can be incurred as any offer needs to be unconditional so all homework must be done in advance, including finance approval and deposit availability. Regular complaints are heard about the costs incurred by sellers and buyers when the sale does not proceed.

The Market
In an active market or with multiple interested parties, the intensity of the auction may push the price higher than its market value to the seller’s advantage. In a depressed market, no bids, or low bids, may significantly condition the price down or be discouraging. In the recent past there have been many sellers disappointed after incurring considerable costs and still no sale.

 

Advantages of Auctions

There is an old Real Estate adage that auctions are always successful because the property will either sell before the auction, at the auction or after the auction. There is some truth in this. Intensity is built over a short timeline and a good auctioneer can be invaluable to manage the sale process.

Auctions can condition sellers to the current market in a short, sharp manner which may result in disappointment.

Luck
Because of the auction process, bargains can be had or higher prices obtained by sheer good luck and timing.

Forced Sales/Mortgagee Sales
In any forced sale situation a buyer should be very careful as the owner is not selling the property. There are no guarantees possession will be available without Court action, that damage to the property might occur or chattels be removed. Insurance too can be an issue. Mortgagee sales and other forced sales are often at a discount to market for these reasons.

 

Our Advice

Whether a seller or buyer, investigate the auction process, attend auctions and see how they work and select people you can work with. Undertake in advance as much preparation as you can. Appreciate that there may be significant cost in a failed attempt.

We recommend good legal advice is obtained even before committing to the process. While there is a generally accepted set of auction conditions and process, there are options to apply separate rules for separate people in some circumstances.

Tenders
Tenders are similar to auctions but from the buyer’s perspective are completed in the dark. The sale process is similar in that there is an opening and closing date.

Tenders have the option of providing more flexibility to enable a buyer to set their own terms for the seller to review.

With a tender however, much of the negotiation is done after the closing date. For a buyer the process is not transparent, and can in certain circumstances be manipulated and a “Dutch auction” result. The lack of transparency for the buyer is offset by the flexibility in terms.

With a tender it is a lot harder to understand where the market value lies.
Sellers need to be aware buyers are often uncomfortable with the tender process.
Many of the other advantages and disadvantages with tenders are the same as with auctions.