In July 2014, the Advertising Standards Authority upheld a complaint brought against Auction House Ltd (“AH”) whereby the complainant argued that several properties sold at auction by AH had had reserve prices higher than the guide prices and so could not have been bought at the guide price.
The ruling is not legally enforceable – the Advertising Standards Authority (“ASA”) is a non-statutory body and does not have the power to fine or take advertisers to court – but the ASA is the UK’s independent regulator of advertising across all media so is likely to be followed by all advertisers. (The ASA was established in 1962 by the advertising industry in order to adjudicate on complaints about non-broadcast advertising.)
According to my understanding, guide prices came into existence so as to cater for inexperienced (armchair) investors. Before guide prices, auctioneers were obliged to deal with a stream of enquiries from inexperienced prospective buyers asking what the auctioneers thought a property would go for. It’s only difficult to work that out for yourself if you’ve little or no idea how to go about it. As a service to buyers, providing a rough idea is not unreasonable and to go one stage further by including guide prices in catalogue and auction promotion material saves time and the cost of dealing with casual callers.
The difference between guide price and reserve price is straightforward. The reserve is the price the seller would sell the property for. The reserve doesn’t have to be lowest price, simply the price the seller would accept if the final bid at that figure were confirmed by the fall of the auctioneer’s hammer (gavel). The reserve price is nothing whatsoever to do with buyers: it’s a confidential agreement between seller and auctioneer. It is not necessary to have any reserve price, that’s a decision for the seller. Sometimes, the reserve price is disclosed, but again that’s a decision for the seller.
Apart from an indication to prospective buyers of what the property might fetch, which could act as a deterrent or an attraction depending upon one’s viewpoint, guide prices have become a marketing ploy for stimulating demand for the proposition by giving the impression that it would be worthwhile for buyers to attend the auction.
We are accustomed to seeing crowds of people at auctions, but attracting a crowd is part of the auctioneer’s job. It’s all very well having telephone bidding but physical presence is important. Getting enough people to come along on the day to make the experience interesting and the atmosphere in the room stimulating for everyone present is challenging. Quite apart from the number of auctions competing for attention, most buyers do not have unlimited funds. It’s a question of what and when to buy and through whom. Auctioneers have a reputation and over time develop a following. The contents of a catalogue is the auctioneer’s stock in trade. Some auctioneers are better if you’re selling, others if you’re buying. Amongst the influencing factors are the calibre of sellers that the auctioneers act for, the type of properties, typical lot sizes, realistic guide prices, and the geographical coverage and whereabouts of the auctioneer.
For sellers, the decision whether to offer a property for sale by auction, rather than by private treaty or tender, is not one to be taken lightly. It is an expensive step to take. With sale by private treaty, the selling agent’s commission is normally payable only after exchange of contracts and/or completion, the legal costs depend upon whether the property is actually sold, which means the bulk of the seller’s costs are not incurred until the sale is completed; moreover the cost of searches is normally the buyer’s outlay. With auction, however, the commitment to the auctioneer is a sole-selling arrangement, binding whether or not the property is sold prior, at the auction, or up to 14-28 days thereafter, even if the seller sells the property privately or through another agent. The seller is liable for the auctioneer’s commission* plus catalogue fee, plus costs for the legal pack, even if sometimes the conditions of sale require the buyer to pay or contribute an amount towards the seller’s legal costs.
(*Apart from an offer accepted prior-to-auction in which case the binding stage is signing of an auction contract, commission is payable the moment the auctioneer’s hammer (gavel) falls to confirm the successful bid and convert the offer into a legally-binding contract. Shortly after fall of the hammer, an auction contract (memorandum of sale) would be signed and the deposit paid. If the successful bidder does a runner or the buyer doesn’t complete – where the buyer has paid a deposit but fails to complete commission might still be payable – or the property doesn’t sell then usually only the catalogue fee and the costs for the legal pack would be payable. In practice, the actual arrangements are a matter of agreement between seller and auctioneer. I have enough experience of auction to know that when something goes wrong it’s a matter of resolving the situation in a mutually-acceptable way. Nowadays, it’s rare that my name appears in an auction catalogue, ever since it was pointed out to me that with my views on shop property investment potential buyers might be deterred because they could think the proposition not worth buying! For clients, I have sold a few residential properties at auction, as joint auctioneer I hasten to add, not in the rostrum; also my own home, a thatched cottage in NW London where the buyer without realising was bidding against herself.
In the past, the sort of property offered for sale at auction tended to be properties that were harder to value, unusual properties, properties with problems, and so on. Most bidders would’ve been cash buyers or with loan facilities that did not require a separate mortgage for each purchase. Nowadays, auctions are so popular that they’ve have taken over from private treaty as the number 1 method of selling. (Tender is mainly used for development sites and where private treaty has resulted in numerous offers)
For sellers, the main advantage of sale by auction is speed and certainty. Unlike private treaty, which is subject to contract (in England and Wales), a seller wanting to send out more than one contract at a time to different buyers is often frowned upon and buyers are not keen on contract-races. Transactions that are ‘subject to contract’ incur costs and expenses that are usually non-recoverable should the sale fall through. “Subject to contract” is also more difficult to plan with certainty; delays before exchange of contracts are frequent, particularly when sellers and buyers are in inter-linked transactions and the whole chain has to be synchronised.
For buyers, auctions provide a stimulant that is quite probably impossible to replicate. There are many ways of getting a ‘high’. but where auctions score is in combining the spending of substantial amounts of money with thrill and excitement and a sense of urgency. It is not only the consequence of auction fever, a state of exhilaration that can lead to buyers ending up overpaying, auctions have also become so popular because demand for property opportunities is not confined to a relatively small number of professional buyers but a vast number of amateurs as well as overseas buyers who wouldn’t get a look in otherwise.
Amongst leading auctioneers, a typical database comprises more than 100,000 names which means that the contents of every single auction catalogue is exposed to a massive readership. Contact your local estate agent to sell a 3 bed semi and I’d bet their mailing list is segregated to buyer-applicant particular requirements which is sensible in the context of mailing costs and specific requirements but when you stop and think about it also means that applicants with different requirements but who might be interested are unlikely to be told about your property.
In the AH case, the properties had reserve prices that were higher than the guide prices which meant that at the time of enquiring re the guide price there was no way the prospective bidder could have bought because the seller wouldn’t have sold. Any bidder would have wasted time and money without realising no certainty of ever succeeding.
An auction catalogue is only as good as the properties that appear in it (or in my case and others similarly informed also as interesting as who is selling: why a particular seller is selling can tell you a lot about the direction in which the investment potential for the property is heading.) Guide prices are discussed and agreed with sellers before the catalogue is published but thereafter guide prices vary depending upon interest shown in the particular lot before the auction. The same applies to the reserve price which may not be agreed until the last minute so as to gauge the response including any offers prior between publication of the catalogue and the date of the auction.
How leading auctioneers will respond to the ASA’s adjudication and the RICS follow-up remains to be seen. They might follow the RICS suggestions and make it clear how guide prices are arrived at, but it still doesn’t solve the problem of variables in both the guide price and reserve unless the guide prices are updated every second. An alternative as happens already is to state ‘reserve below £x” so that buyers know where they are at the outset.
The obvious solution is to do away with guide prices and any other indications all together, but that would leave buyers to fend for themselves and likely mean a return to the old days when auctioneers were continually being asked what the property would be likely to fetch. The question is not in the same league as if you have to ask the price then you can’t afford it, but perhaps it might be better for all concerned if buyers were to be encouraged to obtain professional advice beforehand from someone other than the seller’s agents?