Auction strategy

Winners are grinners

Originally uploaded by 4ndrewScott.

There are plenty of house-buying strategies out there, but the one I used on the weekend is supported by some common sense theory, is not illegal, but most importantly can actually work: we are now house-owners! I figure I won’t be needing to use this one again soon, so I’m happy to share it with anyone else who is bidding at auction.

Firstly, there are two possible auction outcomes: either the property sells at auction, or it doesn’t. If it doesn’t, then any bids you’ve made simply provide the vendor with a position to negotiate the price up from. So, it’s better if you haven’t made any bids in that case, and you can simply begin negotiations directly when the auction finishes.

In the case it’s going to sell, the property will go on the market at some point, and the auctioneer will indicate this by saying it’s “on the market”, it “will sell”, or something like that. After this has happened, you should begin to bid.

As auctions are a painful thing, pretty much anyone prepared to bid at one will have rationally thought out what their limit is, before they go. If your limit is below anyone else’s, you aren’t going to win. However, auctions aren’t a completely rational environment.

Auctioneers are very good at putting on a show, pressuring bidders, and otherwise channelling PT Barnum. Most people have an “emotional limit” that is higher than their “rational limit”. If they used their credit cards, sold some shares, restricted their lifestyle, borrowed a bit from a mate, or did something else that they don’t really want to do, then they could go beyond their rational limit. The auctioneer’s goal is to have people bid well above their rational limit, up to their emotional limit. Even if you have the highest rational limit, you will lose the auction if anyone’s emotional limit is higher than your rational limit.

The mechanics of auction are such that the winner is the one that’s prepared to pay the most, but they only need pay as much as the loser would pay. For example, if a person who is willing to pay up to $200,000 is bidding against another who is willing to pay up to $300,000, then the latter can win by paying $200,001. So, even if your rational limit is higher than everyone’s emotional limit and you win, you will pay a price equivalent to the loser’s emotional limit.

No legal auction strategy can lower people’s rational limit, but a good auction strategy can keep people’s emotional limit to close to their rational limit. This can save you money and may even win you the auction. Unfortunately, the auctioneer is trying to do the opposite, and push the emotional limits of the bidders.

So to beat the auctioneer, you need to join them. They power dress to impress, they stand at the front like a teacher at a class, and they whoop and shout to whip up the emotions. To counter this, you need to dress as a real-estate agent in a dark suit, stand at the front near the auctioneer, and every time the bid increased by someone else, calmly but immediately increase it yourself. You should look like someone with infinite patience and a infinite limit, and who is there to buy.

I felt a little silly, standing up there alone in my suit near the auctioneer. The auctioneer knew what I was up to and started to ignore me. When someone else bid me up, he wouldn’t come back to me straight away, so I had to shout out my bids in order to regain the lead. I think we would’ve won anyway, but this strategy probably saved us a few thousand dollars.

11 thoughts on “Auction strategy”

  1. How exciting!!! Congratulations on being property owners and on outfoxing the auctioneers. It really is a terrifying process. I want all the details of your new house though!

  2. Afterwards one of the agents said it was good to see someone doing back to them what they do to others. :)

    It’s a three bedroom, weatherboard house. Not the nicest house, but on a pretty nice street. Still, this means we can have plants in the ground (not in pots), somewhere to store bikes, and potentially even keep a dog. Although, not sure if we’re ready for pet ownership yet.

  3. As an auctioneer and real estate agent I say, “You’re welcome to do that at my auction anytime!”

  4. One point worth making here.. if there are going to be dummy (a.k.a. vendor) bids at the auction, then you will need to adopt some additional tactics or you could pay too much. Happily, in many areas, it is now difficult for the vendor/auctioneer to employ dummy bidding.

  5. I am currently bidding for one domain which I am interested in and this post helped me to understand what to do :) . Currently I don’t want to spend more than $1000 on it (that domain), but the seller wants $4000 at this point. So, a rational expectation is somewhere about $2500. Although I am not willing to pay such amount. The money is not a problem, I have rational limits which equal to my emotional limits :) .

    A house is just like a domain… It’s a property. One is real, another is virtual. But both can be of good quality and can represent the owner. In addition, owning a domain is something like having a business inside of your house; it makes money ;) .

    Cross your fingers for me :) . I called another guy to bid and to help me to lower the price in the seller’s eyes. It isn’t very ethical, but I have a goal. And I don’t want to overpay.

  6. this is all very interesting but what about online auctions? anyone have any suggestions for me? i have been looking for a condo and found the perfect one for me and then found out that it was at auction. the realtor says its an online auction. now what?

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