In Australia, it seems like a substantial fraction of home sales, maybe even the majority happen via auction. Because there are multiple buyers directly competing with each other, auctions are considered a good way to get the highest price for the house. In the US on the other hand, auctions seem like a relatively rare way to sell a house.
Which is the outlier in this case? In other developed countries, are auctions popular? What accounts for the difference in popularity between these two countries and other countries around the world?
It depends on demand. In the US, in periods of high demand, there can be de facto auctions when potential buyers compete in bidding wars for desirable properties. In periods of low demand, properties may only get one offer for less than the asking price, and the seller will negotiate a lower price. I think the reason there are fewer auctions here is sellers are always hopeful they will get their asking price, and are reluctant to offer it at a low opening price and risk few bids that would increase the selling price. Houses will stay on the market for months with unrealistic prices. I’m not sure why this is not also true in Australia.
It is a substantial fraction varying from 25 to 38% but certainly never a majority and varies greatly from suburb to suburb. The media coverage makes it seem as though virtually all homes are sold this way. This impression is so common that I have lost count of the number of times I have informed statisticians, most recently one from the Australian Bureau of Statistics, that auction clearance rates are useless as a proxy for total sales volumes.
According to the in-laws, auctions are rare, bordering on unheard-of in the UK. It’s something they found weird when they came to live in Australia (circa 10 years ago).
The difference may be tradition or just different perspectives on “how things are done”.
I go to auctions quite frequently, sometimes the house is sold as well. IMHO, most real estate auctions in the US happen to settle an estate quickly and it may held in an adversarial atmosphere among the heirs.
The upside is that’s it’s quick and -probably- sells at a fair (but not great) price.
The downside I’ve seen is that US property auctions usually come down to 2-3 older property investors that know the market bidding against each other, have cash or immediate financing, and are looking for bargains. The casual buyer has to go through some hassle to compete plus when searching for properties, U.S. auction listings do not spell out nearly as much property detail as real estate listings.
From a selling side, a real estate listing lets the seller hold out for what they think is the right price until the “right” buyer comes along. That doesn’t mean a stupid buyer but one for which the price, location, style, neighbors, are a good fit.
I once listened to a family of real estate agents arguing over what was best, auction or standard one on one sales. Their points seemed to boil down to this. On the against side, they felt that an auction only ever gets you the second best price. The auction is won once there is one bidder, we never find out what that bidder was willing to pay, we only know that it is slightly more than what the previous bidder was willing to pay. On the for side, they felt that regardless of the above point they still got a better price. Both sides were intending to get the most money for the seller.
I’ve seen a few estate auctions, in which the house and land is also sold after all the belongings are disposed of. But they are very rare. In nearly every case, the bidders are real estate speculators, not people who wish to buy a house for their own residence.
However, real estate that has been foreclosed owing to tax arrears is always sold at a public auction, which are usually attended by the same bidders, who travel from auction to auction and specialized in buying and reselling properties that have been foreclosed by tax collectors. These auctions take place on periodic scheduled dates, with a long list of properties up for bids. Such sales are provisional and not binding, the original owner retaining the right for a period of time to redeem the deed by paying the tax arrears. The winning bidder merely acquires the right, at some future deadline, to pay the back taxes and claim the deed. It is possible to buy a parcel of land, albeit somewhat useless, for nothing more than the unpaid taxes on it. Even livable urban houses, in cities like Detroit and Toledo, can be bought in this fashion, for a few thousand dollars.
But what percentage of houses are never put up for auction at all? Put up, passed in, then sold later, is a common pattern too.
ISTM that auctions are more common in the city than rural areas (don’t know about smaller towns). And one thing you are likely to get a lot more of in an Australian city compared to UK or US is a bunch of people looking for a house who already live close to where they want to buy. Moving from one city to another is pretty uncommon, so if you do put your house up for auction, certainly anywhere in Melbourne, you can be sure the bulk of the people who would be interested in it can actually get to your auction fairly easily. I’m not sure how common that is in places where people shift about more.
The remainder of those that I mentioned - at least 62 to 75% of houses in metropolitan areas are just sold by private treaty. It’s on the market for $X, people come and look at it make offers and a deal is struck. As you say some of the passed in properties at auction also then sell by treaty.
There are about 200,000 residential property sales a year (about 4,000 per week) in NSW but this weekend the Real Estate industry are talking about the 75% clearance rate for the 419 properties that went to auction. I assume the industry love plugging the importance of the clearance rates because only they have data about the method of sale. Any other data about sales volumes and values is available publicly from government bodies.
I think auctions are rarer for three reasons. Logistics dictate that live auctions are going to freeze out many buyers. Obviously this can be overcome somewhat by the use of technology, but it changes the process greatly.
Two, the traditional process of using realtors on both sides often increased prices because people are being sold a story and asked to become emotionally invested in a property in a way that objects. Which are typically auctioned aren’t invested in.
Three, auctions usually require people to have cash or the funds to settle quickly. Banks typically will not give a buyer a blank check to buy any house sight unseen, so buyers who need to finance would be greatly limited in there ability to bid.
In France, the perception is that in an auction, your house will be sold for a ludicrously low price (I don’t know what the reality is), so people don’t use auctions to sell unless forced to (difficult estate settlement, debts, etc…). I think it’s even rarer to buy one’s house at an auction (never knew someone who had done so). I think (not sure) you need to put down a significant deposit to participate in the auction and must pay cash if you win it, while people usually take a loan and a mortgage.
jtur88 described the most common process of housing auctions in the United States, but another difference, possibly, vis-a-vis the United States and Australia may be the ease of installing new housing and the availability of arable space. Here in Texas I see a new neighborhood go up every month, every week. In San Antonio alone we are expected to install up to a quarter million housing units over the next 30 years. Why auction existing when you can just buy new?
In Toronto (Canada), it’s not uncommon to have a bidding war for a house, where there are multiple offers and counter-offers until all but one bidder drops out. That’s similar to an auction except it takes place of a period of several days instead of a few minutes.
I suspect you need a pretty hot property market before auctions start to make sense.
All of those are good points, but I would make one issue first and foremost:
Houses are not commodities.
That is, we usually adopt auctions, or functional equivalents for mass markets, for quantities which are known and where there price is the price is the price. But houses are homes. They have a value to individuals and families beyond the purely economic descriptors, and the attributes which make a house more valuable as a home are not usually quantified, or in many cases quantifiable.
You can put a pretty clear price on a car. There will be many cars of the same model and features in a similar condition except a handful of extremely rare models. Even then, after a quick inspection a buyer can adjust their ideas accordingly. If you know a lot about the market, you can find good deals on furniture or estate jewelry or whatever. But there’s not much an edge on a house. You’re unlikely to be the only guy in the room who notices that THIS house has a solid foundation and stands in a neighborhood with good schools. Even if so, people put a lot of thought into their choice of housing, and won’t consider even another, identical house if it’s too far away from work, or the neighborhood is too noisy, or whatever.
House auctions are also inconvenient since you need to gather lots of potential buyers at once. Most public auctions involve dozens of potential buyers, or at least a fair number of regulars, who might all be interested in the items on sale. With a house auction, even if the buyers are interested, they’re still probably only looking for maybe one or two items at a time.
So, the basic answer is that an auction doesn’t serve either buyers or sellers, so why would they go out of their way to do it? I could imagine a kind of bid system, where interested buyers put up their offers on a house or whatever, but that also gets awkward since buyers might want to bid on several houses (because they might not win any of them) but would and could only afford one. All in all, it would be a lot of hassle for no real gain, which is generally a good answer for why people don’t want to do something.
At least in the US there are many contingencies which can cause the sale to fall through or at least not be completed on time, after the terms have been agreed.
In our last home sale, we rejected the highest offer, because we didn’t think the buyers were sure to get the loan needed. The offer we did accept, the buyers inspector found some issue we thought was cosmetic, but they thought was structural.
How do auctions address these issues. Is it cash on the barrel-head and delivery on a known, fixed, date? Does every potential bidder closely inspect the house before the auction? What about defects in the title?
Usually when you are buying a house at auction, you are buying it as is. There may be an open day for walk through, and if you know what you are looking for you can spot the potential problems. The flippers and investors have an advantage there.
All the auctions I know of, if you win, you are locked in to buying the house. It’s not like you can give it back and say never mind, let somebody else have it. It’s a big risk if you have to get financing.
For most of us though, buying a house includes a contingency on the results of a home inspection which lets us back out of the deal if the house has too many issues.
There is also a contingency on getting financing, which allows the buyer out if the mortgage company won’t approve the mortgage. Buyers are usually pre-qualified before submitting a contract, but the house could appraise too low, or not pass a HUD or insurance inspection.
In that case it just goes back on the market, or somebody may have made an offer on it in case the first offer falls through. All the buyer stands to lose is the cost of the inspection and appraisal.
There were several houses I put bids on when I was buying, houses that had been foreclosed on. There was a dead line for everybody to get their bids in. Even if somebody bid lower, if they could pay cash often their bid will be accepted first. Unlike an auction, you could still back out based on the results of the inspection or lack of financing.
Like an auction though, you are usually up against the flippers and investors.
One time I was contacted when the highest bid fell through, but by then I’d already made an offer on another house.
The house across the street from me was sold at auction, but it had been seized for nonpayment of taxes. It was a mess (the owner was a hoarder and had some issues – it was dilapidated. He thought he could avoid it being sold by taking down the notice on his lawn) so a speculator bought it and then pumped enough money into to it basically gut it and improve everything.
Australia has been in a housing construction boom that seems to have peaked in 2014, with around 190,000 dwellings commencing construction that year; a new record. New housing estates are sprawling every which way in my part of the country.