One of the distinctive features of property auctions is the method used to price properties. Instead of the traditional “asking price” used by estate agents, auctions utilize a “guide price.” But how does this guide price truly relate to the bidding process? Does the auction always commence at the guide price?
Generally, the guide price often acts as the initial bid in an auction, although this isn’t always a strict rule. In scenarios where there are no bids matching the guide price, the auctioneer might lower the starting bid to encourage potential buyers. Conversely, if the auctioneer anticipates significant interest, they might initiate bidding at a higher price to streamline the process.
Once the bidding begins, the price increases progressively until the highest bidder is determined.
Although the bidding process frequently starts at the guide price, it doesn’t necessarily reflect the property’s eventual sale price. The final sale price could significantly exceed the guide price. On rare occasions, it may even be lower. Read on to delve deeper into the process of setting the guide price and what it signifies for your upcoming auction experience.
1. Understanding How the Guide Price is Determined
A frequently asked question revolves around the determination of the guide price. Where does this figure originate? Typically, the guide price is established through three key steps:
1.1. The Auction Appraisal Process
Following the seller’s choice of the best auction house, the auctioneer will conduct a valuation. This valuation provides the seller with an estimated sale price for the property at auction.
Contrasting Auction Appraisals with Estate Agent Valuations
Auction houses prioritize realistic valuations to maintain a strong success rate. After all, if auctions didn’t offer a higher success rate compared to estate agents, sellers wouldn’t choose them.
According to data from EIG, a reputable source for property auction data, approximately 78% of properties listed at auction are successfully sold. In comparison, estate agents successfully sell only about 51% of the properties they handle.
Therefore, the process begins with an accurate and sincere appraisal from the auction house’s valuer. Generally, expect the appraisal for an auction sale to be somewhat lower than what you might achieve through an estate agent. However, this isn’t always the case; many auction houses agree that “problem properties” can actually sell for more at auction than through traditional estate agents.
Recommended: Do houses sell for less at auction?
For many sellers, this compromise on price can be a worthwhile trade-off. Auctions often provide a faster, more reliable, and more convenient selling process compared to using an estate agent. (For buyers, this is a significant advantage of buying at auction: sellers are typically motivated, and properties are competitively priced. Read more pros and cons of buying at auction here).
Ultimately, the purpose of the auction appraisal is to inform the seller about the potential price they can expect to achieve through an auction sale. This helps the seller determine whether auctioning their house is the right decision for their specific circumstances.
1.2. Seller’s Reserve Price
After the auctioneer provides their estimated achievable price, the seller then establishes the reserve price.
The reserve price represents the minimum price at which the property can be sold at auction. If the highest bid falls below the reserve price, the property will not be sold.
A lower reserve price increases the likelihood of a successful sale. The specific reserve price will depend on two primary factors:
- The seller’s motivation to sell (higher motivation leads to a willingness to accept a lower price).
- The minimum price they can afford to accept (considering mortgages and other financial obligations).
Once the seller determines their reserve price, the guide price can be established.
1.3. The Link Between Reserve Price and Guide Price
The guide price is ultimately determined based on the reserve price.
Historically, auction houses had the freedom to set any guide price they desired. For instance, if a property had a reserve of £200,000, the auctioneer could set a guide price as low as £100,000. The advantage for the auction house and seller was that a lower guide price attracted more bidding, leading to greater competition and potentially a higher overall sale price.
However, this practice often resulted in wasted time and frustration for buyers. Imagine viewing a property, obtaining legal advice, and then bidding £80,000 over the guide price, only to find that the property doesn’t sell because your £180,000 bid is still below the £200,000 reserve.
This tactic led to numerous complaints regarding misleading or false advertising.
Auction Guide Price Regulations
In response to these complaints, the Advertising Standards Authority (ASA) established new guidelines for guide prices in 2014.
You can read the ASA’s full report here, but the key passage states:
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.” – Advertising Standards Agency ruling on property auction guide prices
Setting the Guide Price in Practice
Therefore, once the seller has determined their reserve price, the auction house will set the lowest permissible guide price.
According to the ASA’s ruling, the guide price can be up to 10% lower than the reserve price. For example, for a £100,000 property, the guide price must be £90,000 or higher.
2. Addressing Common Questions About “Guide Price”
Auction pricing can be somewhat complex, leading to various questions.
2.1. Do Properties Typically Sell for the Guide Price?
In short, no. On average, properties sold at auction fetch 15-25% more than the guide price. However, this figure varies significantly depending on the specific property and market conditions. Some properties can sell for more than double the guide price, while others might even sell for less. The latter typically occurs 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 a “Guide Price” Always Indicate an Auction?
While all properties sold at auction will have a guide price, not all properties with a guide price are being sold at auction. Estate agents sometimes use guide prices to stimulate interest, similar to how auctions operate.
By setting a lower guide price, they aim to attract more attention and bidding activity, potentially leading to a faster sale for the seller.
If you encounter a property with a guide price and suspect it might be an auction property, you can confirm by:
- Checking the listing agent. If it’s an auction house, it’s likely an auction property!
- Examining the property description. Estate agents may still list properties that are going to auction, particularly in the case of the modern method of auction. The property description should explicitly mention if the property is being sold via auction. If there’s no mention of auction, it’s likely a traditional sale through an estate agent.
