by Carly Susic, Melbourne Property Advocate
When selling your home, one of the biggest decisions you’ll make is setting the reserve price at auction. And it can be really tricky to get right. Set your reserve too high, and you send potential buyers looking elsewhere. Set your reserve too low, and you’ll regret not holding on for a better price.
And while you can always get expert advice from your agent, some may push you to sell without considering your needs and circumstances. Because agents generally prefer to sell your home on the day of the auction and move on, they will likely want you to be setting your reserve price as low as possible so it will sell at auction.
What is the reserve?
The reserve is the minimum amount you, the vendor, will accept for the property. The reserve is usually a conservative amount, and hopefully, when the auctioneer declares the home on the market a fresh round of bidding occurs. So it’s important to never set the reserve at a price you are not happy with.
At a typical auction, the bidding begins under the reserve and the auctioneer will manage the bidding at a slower pace until interest progresses closer to the reserve. If the bids reach the agreed reserve, the auctioneer will declare the property on the market at some point afterwards, depending upon the Auctioneer and the number of interested parties, they may take a break to discuss how things are progressing with you. If bidding is hearty and spirited, the auctioneer may let the momentum continue without declaring the home on the market. Whereas if bidding is stalling, the auctioneer will make the decision to pass the property into the highest bidder even if the bidding has reached the reserve price..
At the point that the property is declared “on the market”, the reserve has been met and you will sell your home at auction. The property may sell for at or just above the reserve or bidding may continue and the property sells far above the reserve. It all depends on the level of competition from interested bidders on auction day.
What impacts the reserve price
When agents recommend the reserve to you, it’s usually due to by a variety of factors. Agents will look at recent sale prices of comparable properties in your area. They will also consider the level of buyer interest. Let’s say interested buyers have turned up at multiple inspections, conducted building inspections and discussed their settlement terms. Then agents can be more confident of bidding competition on auction day. Whereas if buyer interest has been lacklustre, agents may worry about the property failing to sell at auction. This lack of interest may influence their recommendations for your reserve.
How to set the reserve price at auction
In the days leading up to the auction, your agent will discuss with you the potential reserve price. Keep in mind the reserve is not your ideal desired price, but the price at which you won’t sell below. For example you may really hope to sell your home for $1.2 million. But you accept it’s a long shot and you are willing to sell for $1.1 million or beyond. But you are absolutely not willing to sell for anything below $1.1 million, making that the reserve price.
When the agent recommends a lower reserve price at auction
Sometimes your agent might promise you a great price in order to secure your listing. And then once your signature is on the dotted line and the campaign is underway, suddenly they are suggesting a lower reserve. This can be upsetting and confusing for you the vendor, as you may have your heart (and finances) set on selling for a higher price. It’s important to stand firm with your agent and never sell at a price you’d be unhappy with. However you do also need to listen to the market and be clear that you are not setting unrealistic price expectations.
Beware of the vendor rose-tinted glasses
Often, because you have an emotional attachment to your home, you think it should be worth more than the average sale prices in your area. When you look at comparable properties to yours, you can’t see the comparison realistically, so you’re prone to think your home is worth more.
This is a risky position to take. Buyers don’t care that you love your home and have many happy memories there. They may like your home and be very interested, but that doesn’t mean they will go above the market rates just to secure the keys. Buyers don’t want to risk overpaying for a home and know they can easily walk away and purchase a different property. Whereas you only have the one home to sell. You can never guarantee someone falling in love with your home and paying top dollar, even if your home is truly unique.
The risk of a high reserve
If you set the reserve too high, the auction will fail to gain momentum and will struggle, perhaps with vendor bids to get traction. The property may be passed in on a vendor bid or to the highest bidder. In which case, the market has spoken and your home has potentially been deemed overpriced. Often it is a struggle to negotiate after the auction, as buyers realise they can’t negotiate fairly and turn their interest elsewhere. Your home can then be listed on the market as a private sale. But if buyers know it struggled to sell at auction they consider the home is compromised or the campaign was a failure. This can dampen any levels of prior interest.
Case study: the high reserve that cost a vendor dearly
I was once working with a buyer with interest in a deceased estate where the owners wanted $2 million. However the agent had advised me he had recommended that $1.8-1.9million was a more realistic price. So he set the reserve at $2 million, and the auction stalled with two bidders interested at the $1.85 million level. The property passed in to us as the highest bidder, and we went inside to negotiate. We increased our offer to $1.9 million, but the vendor stalled again, saying he really wanted $2.1 million. Of course we then walked away. The home was put on the market for $2.1 million, where it stayed without interest for two months. Finally, after three long months, the home was sold for $1.875. This was far less than the $2 million that was offered earlier. Not to mention the costs of keeping the home presentable with ongoing styling and furniture rental. This potentially cost the vendor thousands of dollars, all in the hopes of getting an unrealistic sale price.
The risk of a low reserve
On the other hand, if you set your reserve too low, it’s risky. If the auctioneer doesn’t handle the momentum of the bidding well, the bidding may stall around the reserve price. This risks you only getting a few thousand dollars above your reserve. And you’ll be bitterly disappointed with the outcome of the auction. You may set a low reserve with the idea of your home selling for far beyond that agreed price. But this is a risky move that is by no means guaranteed.
Ultimately, It’s not up to you to set the price
It’s the buyers and the market who indicate the price they’re willing to pay for their property. If that price is acceptable, great – you will sell your home, and hopefully for more than your reserve. If you are unwilling to sell below a certain price, then you need to consider your options. You can withdraw the home from sale and wait till circumstances change. Be mindful of costs associated with not selling the home. This could be continued mortgage payments, wasted styling/furniture rental and marketing fees. Not to mention the lifestyle implications of not being able to move on from a home to want to sell. But if you can afford to do so, choosing to wait might be the best option. But if you are keen to sell, be ready to accepting a more realistic reserve.
How to set your reserve price at auction: a quick recap:
- The reserve is always the price at which you will not sell below
- Hopefully the auction bids will sail past the reserve, but that is not a guaranteed outcome
- Don’t allow the agent to pressure you into a reserve that is too low
- Don’t set a low reserve in the hope of selling well above it
- But also, don’t set your reserve too high and risk overpricing your property
- Don’t let bias towards the quality of your home impact your decision on the reserve
- Listen to the advice of your agent on the reserve and ensure the auctioneer knows the final agreed reserve price before the auction
If you are selling your home, you may like to secure us as your vendor advocates. We can help you manage the process of selling your home including setting the reserve price at auction. Vendor advocates come at no cost to you, as our fees come from the real estate agent commission. Read more about our vendor advocacy service or contact us to learn more.
