Scott King and I have discussed this at length and I’ve concluded this is a topic worth exploring here.
Some background: We have offered for over 20 years that people go to auctions in search for the “prospect of a deal.”
It is this simple; look at this above $100 bill. If an auctioneer is selling $100 bills and the minimum bid on those bills is $100 (or even slightly less) — nobody responds. But, sell $100 bills with a minimum bid of $60, $55, $25 or no minimum bid at all — and everybody responds.
And once “everyone” chooses to participate (becomes a bidder) the $100 bills sell for about $100. Said another way, in the auction business, “You can’t start where you want to finish.”
Recently, others have countered this prospect-of-a-deal theory in that we as auctioneers must promote value, rather than a discount. Our answer? Yes. Sell the discount, and therefore sell the value.
Such can be demonstrated: “Today, folks we’re selling some new Federal Reserve Notes … and the minimum bid on any of these notes is $20.” Does anyone attend? Any interest? Yes, if these are $100 bills, and almost assuredly — no — if these are $20 bills. In other words, I see the possible deal only if I perceive the greater value.
We sold a home at auction east of Columbus, Ohio on April 2. It was a home in a neighborhood of like properties valued in the $120,000 – $140,000 range. This home required some substantial work and was appraised at $95,000. The minimum bid was 2/3 of that, or $65,000.
Our longstanding theory is that we project a “prospect of a deal” by saying, “You might get a [thought to be] $95,000 home for as little as $65,000.”
Here, the discount ($65,000) is just as important as the value ($95,000;) neither really tells the story without the other. And the fact that this property is surrounded by $120,000 – $140,000 properties also projects value — with some repair, it could be worth the same?
Auction day arrived with about 20 people in attendance, and eleven registered bidders. The bidding started at $65,000 and after some spirited bidding, ended at $109,100.
I spoke to several of the registered bidders before the auction and asked them, “How did you find out about this auction?” “What drew you to this property?” “What do you think this property is worth?”
All replied essentially that they liked the neighborhood and saw this as a chance to get a deal on a home worth maybe $100,000 – $110,000 in this condition in this area. In other words, they saw value in owning a home in this neighborhood and were teased by the possible discount.
As the prospect of a deal is maximized, so is bidder participation and final selling price; the less prospect of a deal, the less bidder participation and the less the final selling price. We have written about this numerous times including here: https://mikebrandlyauctioneer.wordpress.com/2010/09/21/low-starting-prices-higher-sale-prices-at-auction/
And for those who say it’s not about the discount, I would repeat — a discount does no good unless the bidders see value. It takes both as the discount is essentially worthless without the accompanying [perceived] value.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Real Estate Showcase and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.