Could open auctions make Toronto’s real estate market more fair?
If open bids are good enough for other commodities, why not property? says former Australian realtor.
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Ray Wood comes from a family with a long history of selling real estate in Australia. He gave up the game himself about nine years ago when he moved to the Toronto area for family reasons. He now focuses on his real estate related marketing business.
But the 56-year-old maintains some strong opinions about real estate practices, particularly the blind bidding wars that have Toronto-area buyers competing with no idea what others are offering on the same property.
Wood says the Australian system which is based on open auctions is more transparent and less susceptible to ethical breaches.
Torstar News Service spoke to Wood about the differences in the two systems. What follows is an edited conversation.
Q: How does an Australian auction work?
A: Agents work more at marketing a property than directly selling it. The home is advertised and shown for three weeks with the auction occurring on the fourth weekend after notice is given. At that point, the auctioneer has worked with the property seller to set a starting price. On the appointed time and date, interested buyers gather, usually at the address that is being sold but sometimes in an auction room.
Q: Can you put the home on the market without an auction date?
A: No. You’re giving the market an ultimatum. The auctioneer will summarize the contract, talk a little bit about the property and in about 20 minutes it’s over.
Q: So what do real estate agents really do in this system?
A: The seller pays the agent a percentage – usually 0.5 per cent to 1 per cent — of the anticipated price of the home to market and stage the property and hold open houses. But open houses last 30 minutes – none of this standing around for hours. They also help potential buyers compare comparable sales and answer any questions.
Q: Why do you think Canada hasn’t moved to a more open auction system?
A: It’s a bit of head-stretch for people here. It’s agents that don’t get it as much as anything. Canada is a very conservative place, more conservative than the U.S., more conservative than Australia.
Q: What’s the advantage of an open auction system versus our sealed-offer practices – apart from being able to see what the competition is offering? Some agents here say that the winning offers in bidding wars are frequently so far above competing bids that the lack of transparency has helped drive up prices. What do you think the effect on housing prices would be under an Australian-type system?
A: I think the auction system would have the potential to move the market up even higher. I believe that every day properties are being undersold here because they’re not letting the market take its course. If bidding is good enough to set the price of oil and most other commodities, why can’t we use that for property? If one buyer is prepared to go an extra $10,000, $50,000 or $100,000 over the starting or list price, I reckon there would be a good chance others would be willing to go with there too.
Q: How does pricing get set in an auction in Australia?
A: Traditional marketing works from a top price down. With a traditional sale (in Ontario), a property might be listed at $865,000. At auction, the same property might be priced between $780,000 to $800,000. That’s because if you’ve got two properties on the market – one at $865,000 and one at $780,000-plus, the latter will attract more interest, prompting more potential buyers to have a look prior to the auction date. At the auction, the auctioneer drives the price up incrementally toward the $865,000 or beyond.
Q: What happens if nobody bids on the set price?
A: The property is “passed in.” That’s when it doesn’t sell or it doesn’t reach a seller’s reserved price. At that point, the seller negotiates with the highest bidder privately after the auction to see if a deal can be reached.
Sometimes the seller is sitting in the background and tells the auctioneer that when the price reaches an acceptable level, it’s time to sell. At that point the auctioneer looks for another $5,000 and calls for a final bid. This is when it usually gets exciting. It’s like a toy that has been sitting in a sandpit unused: suddenly two kids will start fighting over it.
There is nothing more powerful or attractive than wanting something somebody else wants. That’s the magic of auction marketing. Subconsciously, the buyer’s saying, “If it’s worth it to that couple, it’s worth it to us so let’s offer another $5,000.”
Q: Some people have suggested that open auctions infringe on a seller’s privacy by making the purchase price public.
A: That’s the last card realtors (in Ontario) have to play. In Australia you don’t need an agent to find out what a property sold for. It’s public knowledge. Why wouldn’t you want people to know? The main reason buyers need an agent here is find out the price of other properties.
Q: What if a buyer makes a mistake, over-paying or buying a lemon?
A: When you turn up at an auction you’re buying unconditionally. You’ve got to have a 10 per cent deposit and sign a contract. That’s cast iron.
Q: What about a home inspection?
A: You’ve got to do that before you bid and quite often the selling agent will provide that. You’ve got to do all your due diligence before the event because you’re buying unconditionally. Why would you sell to a bidder with conditions when the next guy will buy the property as is for $1,000 less?
Q: Do buyers have to attend an auction themselves or can they send an agent?
A: They can send a representative and that often happens. But sooner or later there must be a signature. We call that “ink.” The things you need to sell a property here are no different than in Australia. You need consideration, which is money, and you need a contract.