One of the distinguishing features of property auctions is their approach to pricing. Unlike traditional real estate transactions that rely on an “asking price” set by estate agents, auctions utilize a “guide price.” But how closely does this guide price reflect the final sale price? Is it a reliable indicator, or simply a starting point?
The guide price serves as a general indication of the seller’s expectations, and bidding typically starts around this figure. However, the final selling price can vary significantly, exceeding or, in rarer cases, falling below the guide price. Let’s delve deeper into how guide prices are determined and what this means for potential buyers and sellers.
1. How is the Guide Price Determined?
Understanding how the guide price is established provides valuable insight into the auction process. The determination of the guide price usually involves these steps:
1.1. Auction Appraisal
After selecting the most suitable auction house, the seller receives a valuation from the auctioneer. This valuation represents the auctioneer’s assessment of the property’s potential selling price at auction.
Auction Appraisals vs. Estate Agent Valuations
Auction houses prioritize realistic valuations to maintain a high success rate. According to data from EIG, a property auction data provider, approximately 78% of properties listed at auction are successfully sold. In contrast, estate agents successfully sell around 51% of the properties they list.
The auction appraisal serves as an honest assessment of the property’s value. While the appraisal may sometimes be slightly lower than what could be achieved through an estate agent, this isn’t always the case. Auction houses often agree that “problem properties” can achieve higher prices at auction compared to traditional sales.
Recommended: Do houses sell for less at auction?
Sellers might accept a slightly lower price for the benefits of speed, certainty, and convenience that auctions offer. Buyers are attracted to auctions by motivated sellers and competitively priced properties.
Overall, the auction appraisal provides the seller with a realistic expectation of the price they can achieve through an auction sale, enabling them to make an informed decision about whether auctioning is the right choice for them.
1.2. Seller Sets Their Reserve Price
Following the auctioneer’s appraisal, the seller establishes the reserve price.
The reserve price represents the minimum price the property can be sold for at auction. If the highest bid falls below the reserve price, the property remains unsold.
A lower reserve price increases the likelihood of a successful sale. The reserve price is influenced by two main factors:
- The seller’s motivation to sell (higher motivation leads to a lower reserve price).
- The seller’s financial requirements (considering mortgages and other costs).
Once the seller sets the reserve price, the guide price can be determined.
1.3. The Reserve Price Determines the Guide Price
The guide price is established based on the reserve price.
Previously, auction houses had the flexibility to set guide prices at their discretion. For instance, a property with a £200,000 reserve could have a guide price of £100,000. A lower guide price could attract more bidding activity, potentially resulting in a higher final sale price.
However, this practice could lead to wasted time and frustration for buyers who might significantly exceed the guide price, only to find that their bid still falls short of the reserve price.
This led to concerns about misleading advertising.
Auction Guide Price Rules
In 2014, the Advertising Standards Authority (ASA) introduced guidelines to regulate guide prices.
According to the ASA’s report, the auctioneer must provide “an explanation that the guide price is an indication of the range within which or, in the case of single figure guide prices, within ten percent of which, the minimum sale price will fall.”
Setting the Guide Price
Following the ASA’s ruling, the guide price can be set up to 10% lower than the reserve price. This means that for a £100,000 property, the guide price must be at least £90,000.
2. Related “Guide Price” Questions
Auction pricing can be complex, leading to several common questions.
2.1. Do Properties Sell for the Guide Price?
Generally, no. Properties sold at auction typically fetch prices 15-25% higher than the guide price. However, this can vary significantly. Some properties may sell for more than double the guide price, while others may even sell for less. This can occur when a property fails to sell at auction and a post-auction sale is negotiated.
For a more detailed explanation, refer to: How accurate are guide prices at property auctions?
2.2. Does “Guide Price” Always Mean Auction?
While properties sold at auction always have a guide price, not all properties with a guide price are being sold at auction. Estate agents sometimes use guide prices to generate interest, similar to auctions.
By setting a lower guide price, they aim to attract more attention and bidding activity, which can lead to a faster sale for the seller.
If you encounter a property with a guide price and suspect it may be in auction, you can confirm by:
- Checking the listing agent. If it’s an auction house, it’s likely an auction property!
- Reviewing the property description. Estate agents often list properties that are headed to auction, particularly through the modern method of auction. The description should mention the auction if it is indeed an auction property. If there’s no mention of an auction, it’s likely a traditional sale through an estate agent.
In conclusion, while the guide price is an important indicator in property auctions, it’s crucial to understand its relationship to the reserve price and the potential for the final selling price to fluctuate significantly.
