One of the unique things about property auctions is how they price properties.
Instead of a normal “asking price” like estate agents set, auctions set a “guide price”. But how does this guide price relate to bidding? Do auctions start at the guide price?
The guide price is usually the “starting bid” for the auction, but not always. If there are no bids at the guide price then the auctioneer may reduce the starting bid to tempt offers. Likewise, if the auctioneer expect a lot of interest they may start the bidding higher in order to save time.
Once bidding commences the price rises from there until the highest bidder is found.
Although bidding usually starts at the guide price, it does not reflect what the property will eventually sell for. It could sell for much more than the guide price. On some rare occasions it can even sell for less. Read on to learn more about how the guide price is set, and what this could mean for your upcoming auction.
1. How is the guide price set?
A common question is how the guide price is actually set. Where does this number come from? There are usually three steps that determine what the guide price will be:
1.1. Auction appraisal
After the seller chooses the best auction house, the auctioneer will give the seller a valuation. This tells the seller what they think the property will sell for at auction.
Auction appraisals vs Estate agent valuations
Auction houses give realistic valuations because they want to maintain a high success rate. (After all, if auctions didn't have a higher success rate than estate agents, why would sellers choose them?).
According to data from EIG, the industry standard for property auction data, 78% of properties taken to auction sell successfully. By comparison, estate agents successfully sell only 51% of the properties they take on.
So the process starts with an accurate, good-faith appraisal from the auction house's valuer. You should usually expect the appraisal for an auction sale to be a bit less than you could get selling through an estate agent. This isn't always the case though, with many auction houses agreeing that "problem properties" will actually sell for more at auction than via an estate agent.
Recommended: Do houses sell for less at auction?
For many sellers this compromise on price can be more than worth it though. This is because auctions generally offer a faster, more certain and more convenient to sell, compared with going through an estate agent.
All in all, the idea of the auction appraisal is to let the seller know what price they should expect to achieve via an auction sale. This helps the seller decide whether or not auctioning their house is the right decision for them.
1.2. Seller sets their reserve price
Once the auctioneer sets out the price they expect to achieve, the seller sets the reserve price.
The reserve price is the minimum price the property can sell for at auction. If the highest bid ends up being less than the reserve price, then the property simply doesn't sell.
The lower the reserve price the seller sets, the more likely they are to achieve a sale. So the exact reserve price will depend on two main things:
- How motivated the seller is to achieve a sale (the more motivated they are, the lower the price they'll be willing to set),
- What they can afford to accept (taking their mortgages and other costs into consideration).
Once the seller's decided on their reserve price, the guide price can then be set.
1.3. The reserve price determines the guide price
The guide price is then set based on the reserve price.
In the past, auction houses were allowed to set any guide price. For example is a property had a reserve of £200,000, the auctioneer could set a guide price like £100,000. The benefit for the auction house and the seller is that by setting a lower guide price they entice more bidding. More bidding leads to more competition, which can result in a higher sale price overall.
However, this can result in a huge amount of wasted time for buyers. Imagine the frustration of viewing a property, taking legal advice, and then bidding maybe £80,000 over the guide price... Only to have the property not sell. This this case your £180,000 bid would still less than the £200,000 reserve, meaning the property remains unsold.
This exact tactic led to a number of complaints about false or misleading advertising.
Auction guide price rules
In 2014 the Advertising Standards Authority responded by setting out new guidelines for guide prices.
You can read the ASA's full report here, but the key paragraph is as follows:
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
So, once the seller has decided on their reserve price the auction house will set the lowest guide price allowed.
2. Related "guide price" questions
Auction pricing is a little confusing, and there are plenty of other questions that crop up around them.
2.1. Do properties sell for the guide price?
In short, no. On average properties in auction sell for 15-25% more than the guide price. However this figure varies on a case-by-case basis. Some properties can sell for more than double the guide prices. Some houses may even end up selling for less than the guide price. This is usually when a property fails to sell at auction, and a post-auction sale is tied up.
Check out a more detailed answer here: How accurate are guide prices at property auctions?
2.2. Does "guide price" always mean auction?
Although all properties being sold at auction will have a guide price, not all properties with a guide price are being sold at auction. Estate agents sometimes set a guide price on properties if they're trying to stimulate interest the way auctions do.
By setting a lower guide price they get more attention and bidding activity, which can result in a faster sale for the seller.
If you see a property with a guide price and think it may be in auction, there are two things you can do to confirm:
- Check who has listed the property. If it's an auction house, you know it's being sold in auction!
- Check the property description. Estate agents may still list properties that are going to auction. This is particularly common with the modern method of auction. Check the property description and the estate agent will have outlined if it's been entered into an auction. If there's no mention of auction, you know it's just a traditional sale through an estate agent.
By Matthew Cooper, Founder of Home Selling Expert