What is the difference between an ‘auction’ & ‘private treaty’ negotiation

In over 20 years in real estate, I often get asked, “Which is the best way to sell a property, either by auction or private treaty?” And the best way to explain that would be to show an example of how an auction actually occurs. In most instances, there is a reserve which is set. For this example, there would be a reserve at $1 million. In most cases, there’s multiple buyers, but generally speaking, it always comes down to two buyers who put their best foot forward in an auction scenario.

If buyer number one had their maximum price at $1,020,000, and that’s the highest price they’re willing to pay physically, emotionally, and mathematically, they’re willing to go to that price. And buyer number two had a budget of $1,100.000 in the same circumstances, had their maximum price set at that figure, the auction would occur and the reserve would be met. You would have a scenario where there’s a bid being made and it would go upwards until we got to the highest price at $1,020,000 with buyer number one.

Therefore being a public auction, the auction prices are disclosed openly and buyer number two would only have to go to $1,021,000 to secure the property. In this instance, the property is sold for $21,000 above the reserve, but in actual fact, it’s sold for $79,000 under the price that buyer two was prepared to pay at $1,100,000.

The best way to avoid losing this amount of money would be to have a smart negotiation in a private treaty scenario, where buyers are introduced to the property, contracts, building and pest are supplied to those buyers, and we have a scenario where there’s a timeline drawn, hypothetically, 5:00 on a Tuesday. And all buyers submit their signed contract at their highest price and they’re delivered to their solicitor or the agent.

In this particular scenario, if we had exactly the same buyers with exactly the same reserves and price points, buyer number one would come in and submit their signed contract at $1,020,000. And buyer number two would submit their contract at $1,100,000, this, therefore, guaranteeing the vendor an extra $80,000 in the negotiated sale price.

If you’re looking at getting any real estate advice, being it in buying, selling, or leasing a property, please contact Dignam Real Estate.

Posted on 7 Dec, 2019