When you’re ready to sell your home, there’s a number of big decisions you need to make that your real estate agent will walk through with you. Today we want to talk about one such decision, which is whether you should sell via a private treaty or through an auction. Depending on your situation, both have pros and cons that could make them the right choice for you at the time. To get a basic understanding, lets first define what each one is.
What Is a Private Treaty?
A private treaty is a fairly standard real estate transaction. Your property is listed and either marketed for a set price, within a price range, or with no price. Interested buyers then make offers in line with your price, and your real estate agent negotiates you the best deal possible. Negotiations are done behind closed doors, so buyers cannot gauge the interest of other buyers or what they’re offering.
A contract with the price and conditions is drawn up and signed by both parties. Once signed, the contract is binding.
What Is an Auction?
An auction is a method of sale where a deadline, or auction day, is set for a specific date. A reserve price is also set, which is the minimum price a seller accepts. This can be changed by the seller at any point in time, right until the moment the hammer goes down. With an auction the contract entered into by the successful bidder is unconditional. This means no finance settlement, no building and pest inspection or cooling off period. The highest bidder is legally obligated to buy the property.
Auctions are growing in popularity as a way to sell a home, and for good reason. Let’s have a look at some of the advantages and disadvantages of both these methods of sale, and then you can decide which one suits your own situation best.
The Advantages of Selling By Private Treaty
- Flexibility is the main bonus, for both buyers
and sellers. This comes in two forms:
- Time flexibility: there is no exact date set for the end of the sale. This can take the pressure off, especially if have a lot of other things going on in your life. Deadlines can be extended at will.
- Negotiating flexibility: the contract can be negotiated to include various conditions.
- A buyer making an offer is unaware of what other buyers are offering. This encourages them to put in their highest offer for fear of missing out.
The Disadvantages of Selling By Private Treaty
- Buyers will always think along the lines of trying to negotiate the price down.
- It could take longer to sell your house by private treaty than at an auction.
- Because there is no deadline, buyers may not feel the incentive to move fast on a deal.
- A lot of research needs to go into ensuring your listing price is accurate. The wrong price can either lose you potential sales or lose you a lot of money.
- Private treaties have conditions of sale. These
can sometimes lead to a reduction in price. They include:
- Subject to Finance: This applies to most private treaties. If a buyer can’t find finance, the deal falls through and you start looking for a new buyer.
- Building and pest inspections: These can cause a lot of to-ing and fro-ing. In some instances you can have two different building and pest inspectors giving two different outcomes.
- Special conditions: For example ‘subject to sale’ of the buyers property.
- Cooling-off period: Buyers can choose to waive this, but generally they keep it. It means that within five business days of the contract date, they can change their mind without a reason.
The Advantages of Selling by Auction
- By having a deadline on the sale buyers feel compelled into making a decision.
- You have the flexibility to sell your property before auction, or after the auction if it doesn’t meet your reserve.
- Knowing when the sales date is gives you the ability to plan your lives around that.
- The atmosphere of an auction creates an urgency amongst bidders, which can have positive effects on the final price. There is no barrier to that price, as long as people are bidding the price will go up.
- If you sell at auction, there are no conditions in the sale, so the price you sell at is the price you get. This is different to a private treaty, which generally has conditions which can allow buyers to back out of the deal or request a price reduction if there’s a building and pest or similar concern.
- Auctions can push buyers into an early sale, because they don’t want to go into the competitive atmosphere of auction day. This is beneficial for sellers seeking a fast sale.
- With auctions, a buyers line of thinking is “how much more do I have to pay?” unlike in a private treaty where they think “how much less should I negotiate?”
The Disadvantages of Selling By Auction
- Some people won’t look at an auction or even a private treaty if it doesn’t have a price attached. Saying that, we’ve never met a buyer where a property ticks all their boxes and choose not to go to an auction.
- Some conditions can prevent buyers from bidding at an auction. These can include finance conditions or ‘subject to sale’ conditions. These buyers are still able to make an offer on a home prior to auction though, even with those conditions.
So there you go, there’s a lot to think about as to whether an auction or a private treaty is best for you. We want to leave you with one example for your consideration:
Say you have a property, that you need to be sold after four weeks, with an unconditional contract. With an auction, you set your auction day for four weeks in the future, and you market towards that. Now in Brisbane auction clearance rates at this point in time are around 44%, meaning you have a 44% chance of selling your home on the day of the auction (remember sales at an auction are always unconditional). This figure doesn’t take into account homes that sell before the auction.
With a private treaty, most sales are subject to finance. Most banks require three weeks to sort out the finance on a sale. This means, in order to settle your home sale unconditionally after four weeks, you need go under contract within the first week of listing it. Now only a small percentage of homes sell within the first week, from just a few per cent to 10% at best.
So with private treaties, your chances of an unconditional sale after four weeks are at best 10%. With an auction, they’re 44% or higher. Food for thought.
This table below might it a bit easier to understand the concept of auction vs private treaty. In order for your home to be sold, that is have an unconditional contract in the fourth week, here’s what must happen in a private treaty and auction:
Week Private Treaty Auction
1 contract signed
4 SOLD SOLD – contract signed
With private treaty, working backwards, we need a contract signed in the first week as most banks need three weeks to process the finance. With auctions, you basically have four weeks to get a contract.
As always, please get in touch with the Henry Wong Team for all your real estate questions. We’re here to help.