Properties selling via auction are priced differently to properties selling through estate agents. They’re listed with a “Guide Price”. When you analyse the guide price it’s often a bargain compared with other houses on the market.
But do houses actually sell for the guide price at auction? How accurate are guide prices?
Guide prices do not usually reflect what a property will actually sell for at auction. They are usually set far below a property’s real value to entice interest and create competition between bidders. Properties will typically sell for 15-25% above the guide price, but they can sell for drastically more (and sometimes less) than that.
There are several factors that determine how the guide price is set. Understanding these can help you estimate how accurate the guide price may be on the property you’re looking at.
1. Why are guide prices so different from sales prices?
The idea of an auction is to give a property seller a quick and certain way to sell. Price is one of the major tools an auctioneer has to help with this.
Let’s quickly recap how properties are priced when selling through an estate agent, then tie that back to auction pricing.
1.1. How estate agents price properties
This is how estate agents typically price properties:
- Asking prices are set higher than the expected sale price
- Buyers submit offers much lower than that
- The price is negotiated until a mid-point is reached.
What are the benefits of pricing a property this way?
High asking prices are used as a sales tool by estate agents to help them win business. By giving the seller a high “expected sale price” they give themselves a better chance of winning the instruction.
This tactic of overvaluing became so widespread that it’s just what we all expect now. Buyers and sellers both expect a property to be sold for less than the asking price (except for during exceptionally busy times in the market).
Downsides with high asking prices
The downsides with selling this way are quite significant though.
- By setting a high price on a property, fewer buyers will express interest.
- This means fewer viewings will take place
- Which means the seller has a lower chance of receiving offers.
This is why asking price reductions are so commonplace. The price needs to be reduced (sometimes repeatedly) until viewings start to take place regularly. Offers follow shortly afterwards, and a sale is tied up.
Not only does this process take a long time, but it could result in a lower sale price too.
Properties can become less attractive if they’ve been on the market for some time without some snatching them up. Fewer viewings also means less competition between buyers. Competition can result in bidding wars, which are a great way to get a high price, quickly.
Sellers completely forego this when setting a high asking price though!
This is where auction comes in again.
1.2. How auctions price properties
Auctions do the exact opposite. The idea is to get their seller a good price, quickly.
- Auctions set a very low initial price (the guide price).
- This generates a lot of interest in the property very quickly.
- Having multiple buyers interested leads to competition.
- Competition creates “bidding wars”, which lead to good sale prices, fast.
This explains why auction guide prices are so much less than they eventually sell for. They’re there to entice buyers and generate competition.
Guide prices can be increased before an auction
If things work a little too well then guide price may actually be increased before the auction.
This happens when there’s a lot of interest, and the auctioneer knows the final selling price is going to far exceed the guide price. They do this to manage how long the auction lasts, and prevent wasted time and effort for buyers.
As we’ve covered, it’s heavily in the auctioneer’s interest to set a low guide price. But there is a limit to how low guide prices can be.
1.3. What are auction guide price rules?
Low guide prices can be a great tool for getting a good price for a property very quickly. But it can result in a lot of wasted time, effort and money for the buyers.
Well, in 2014 the buyers bit back.
In 2014 a number of complaints were made to the Advertising Standards Authority about false and misleading guide prices in property auctions.
The ASA were established in 1962 to keep UK advertising “legal, decent, honest and truthful”. In short, they didn’t feel that auction guide prices met those standards.
They upheld the complaints and issued new guidance on auction guide prices, which have been followed ever since.
The 10% rule
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."
When they say “minimum sale price”, they mean the reserve price. The reserve price is the minimum price the vendor is willing to accept for the property.
So the rules meant two things for auction guide prices:
- When giving a range (such as “Guide Price £150,000-£160,000”) the seller’s reserve price must be within that range.
- When giving a single figure (such as “Guide Price £150,000”) the seller’s reserve price must be no more than 10% higher.
Most guide prices are single figures, so let’s focus on those for now.
1.4. Guide prices vs Reserve prices
Auction houses now follow the ASA’s 2014 guidance on guide prices.
This means that when you see a property listed at “Guide Price £100,000”, you know the reserve price is no more than £110,000. That's the difference between guide prices and reserve prices.
So if you see a property with a guide price of £100,000 and there’s no one bidding against you, then £110,000 is the price you’ll be able to secure the property for.
"Bids off the wall"
This presents a little issue: If the bid starts at £100,000 with a reserve price of £110,000 and no one bids against you… Then how does the bid get from £100,000 up to £110,000?
Surprisingly, the auctioneer is actually allowed to “run you up” to the reserve price. This is also called “taking bids off the wall”. It’s basically making up other bids to get your offer up to the reserve price. Without this, your bid would simply be £100,000 and the property wouldn’t sell.
So, now we know that the reserve price needs to be within 10% of the guide price. But that still doesn't tell us what properties actually sell for compared with the guide price.
Let’s check out the data.
2. The Data: Sale price vs Guide price
This is what you came here for. Do auction houses sell for the guide price? When you see a property with a guide price of £100,000, what is it actually likely to sell for?
We’ve done the hard work and the data is in. A property will typically sell for 15-20% higher than the guide price. This is just an average, and the figure can vary wildly on a case-by-case basis.
2.1. From the auctions themselves
SDL Auctions are one of the biggest auction houses in the UK. They partner with estate agents as their main source of incoming business, so they share a lot of internal data as part of their training.
Here are the key figures:
This should give a good indication of other auction house’s results too.
In 2018 there was another complaint made to the Advertising Standards Agency about auction guide prices. The complainant alleged that properties sold for 25% more than the guide price in a Cottons property auction he attended. The ASA proceeded with the complaint on that basis.
But remember, this is just an average. The actual figures will vary drastically on a case-by-case basis, and there are certainly more extreme examples.
2.2. A case study: Bond Wolfe
Bond Wolfe are one of the largest regional auctioneers in the West Midlands.
As of the time of writing, we’re one day removed from their September 2021 auction.
We followed the first 15 lots, and compared their eventual selling price with the initial guide price. The results were quite stunning!
On average, these first 15 lots sold for more than twice the guide price! (129% higher!).
It's worth noting that Bond Wolfe have built up a reputation as one of the auction houses with the biggest discrepancy between reserve and guide prices. (Read this discussion on PropertyTribes.co.uk, one of the largest property investor communities in the UK, for some opinions). But the same pattern can be expected across all auction houses to one extent or another.
You'll hear and find anecdotes mirroring the same thing too. For example, during our research we came across this thread on mumsnet.com. Here, a user called “AndWhat” shared their personal experience:
"The house across the road from us was recently sold at auction. It's guide was £140,000 which was very surprising as they don't go for less than £200,000 on our stretch. It was in a good condition though and actually sold for £220,000 on the day.
This is 56% more than the guide price. So when you look at individual properties it's common for properties to sell for drastically more than their guide price (regardless of the auction house).
Although properties tend to sell for 15%-25% more than the guide price, it varies drastically on individual properties.
Some properties sell several times higher than the guide price!
These are only counting the properties that sold though. Other properties will not reach the reserve price at all, leaving them unsold. The auction house will try and agree a post-auction sale between parties. This is where deals do sometimes happen much closer to the guide price, or even below it in some instances.
It really is a case-by-case basis.
We’ll be writing more articles soon, including how to work out how much to bid on auction properties, and how to get the best deals. Subscribe for regular updates so you don’t miss out: Email us on firstname.lastname@example.org.
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By Matthew Cooper, Founder of Home Selling Expert