Auctions are emotionally-charged and designed to use desire to stimulate competition. Strategic negotiation is one of the biggest parts of the real estate industry so let’s look at the psychology of auctions for both buyers and sellers.
Sellers
Auctions are designed to play on people’s emotions and extract the highest price. That’s what we’re meant to believe anyway! From the way we see it, an auction is about marketing, branding and getting a result of the selling agent more than the agent getting the highest price possible.
Think of the auction as a performance. The agent is the producer, you are the performers and house is a prop to amaze the crowd on how “quickly” or how “much they can sell for”.
Have you ever felt the pressure to play a role in an agent’s performance? It’s something we do not condone. After really exploring the psychology of auctions I have learnt that I would rather work with an agent who isn’t trying to draw in a crowd screaming “look at me and look what I can do” but works with me and can help me sell for the price I want.
Vendors typically spend around 1% of a property’s value on marketing an auction. This makes them more committed to selling than if they were to choose a private treaty. Why’s this? Well, if a friend asks me to go on a holiday with them next year, I could half-commit and pull out later. If a friend asks me to go on a holiday with them next year but I had to pay a non-refundable deposit on hotels in 2 days, I would be way more committed and less likely to pull out because now I would lose money. In the same way, sellers may choose to continue to sell the property because they have already invested money in it. Choosing to not sell the property loses them money on services they have already paid for.
Buyers
We’re only human and it’s only normal to feel a little competitive. It’s what makes us strive for better things and give everything our best shot. Sometimes this can put a buyer in a situation where they bid with their heart and not their head, especially when the buyer can’t stand the thought of losing. Buyers need to be mentally prepared to lose.
Auctions are a very public announcement of a buyer’s wealth. Some buyers may feel uncomfortable declaring how much they are worth out loud in the presence of their community, their family and their competition. Buyers may bid more than what they can afford to not be represented as the loser of the auction who is also poor.
Peer Pressure plays a large part of auctions without us even knowing it! Whenever I made a poor decision fuelled by peer pressure as a child, my mother said to me, “If all your friends jumped off a
cliff, would you do it too?”. Humans are social creatures that are highly swayed by what other members of our our flock does. I’m not saying you’ll jump off a cliff for the property but buyers can tend to find comfort when others are bidding because it supports the assumption that the other bidders think the property is worth the same amount. This effect can be faked by the use of dummy bidders who, without even speaking to a buyer, can sway them into thinking the property is worth at least if not more than the dummy bid.
Most buyers don’t like stress with buying a property, so why add more? Not only will you have the normal stress of things like finance and building inspections, but you also have to worry about someone having more money than you at the auction!
Speaking of finance and building inspections, you will need to spend time and money on these BEFORE the auction day. If you don’t win the auction, you may feel like you’ve done these searches for nothing. If you do win the auction, the timeframes may not work for you and your current lease dates or living situation.
You don’t know if the agent has lied about the price guide or if it is a completely honest representation of the property’s value. It can be hard to know who to trust.
Lastly, public speaking is a common dislike for most people. Most people looking to buy a home may not be comfortable with calling out a bid and having all the eyes on them. It would be much less stressful for these kinds of buyers to seek alternative routes like private treaties.
