The Cost of a Vendor Bid

Written by Paul Kounnas Thursday, 07 April 2011

From the reported number of properties passed in on vendor bids every weekend, it appears that there are growing numbers of buyers who refuse to bid at auction after the auctioneer has made a vendor bid.

A vendor bid is an attempt by the auctioneer to push the buyer(s) up on price, by pretending the vendor is another interested buyer. But in the absence of genuine competition, would any astute buyer fall for this?

The only reason the bidding starts so low with so many auctions is because the agent deliberately advertised the property for less than the reserve price to attract more buyers. Then, on the day of the auction the auctioneer is forced to make vendor bids, as they try to push the price back up to the reserve. Wouldn’t it make more sense to be honest about the price and start the bidding at the vendor’s reserve? How much more efficient would this be? All genuine buyers would then be forced to compete, because if they don’t bid, the property will be sold and they will miss out. This will create real competition with positive results for vendors.

If there are no buyers prepared to bid at the reserve price, it simply means that no one is willing to pay that price. It’s a sign that the market price for the property is not as high as the vendor’s expectations. If the vendors want to sell they would then have to adjust their price.

With the current process as it is, when the auctioneer is forced to make a vendor bid, they are announcing to everyone that there are no buyers for the property at that price except the vendors. Alternatively genuine buyers could be waiting for the property to be declared on the market before they start bidding.

How much more efficient and transparent would it be if the auction process started at the reserve and the property was immediately on the market. This will go a long way in eliminating much of the dishonesty on price given by many agents to buyers and sellers.

Vendors don’t realise how much they can lose using the current auction process. When buyers refuse to bid against a vendor bid it puts pressure on the vendors to lower their reserve. When it’s finally passed in, again there’s pressure on the vendors because buyers can now negotiate a lower price knowing that the last bid was the vendors and not a competing buyer. Either way, the vendors lose.

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