Auction strategy: stop other people exceeding their limit.

 In Financial decisions, Insights, Life decisions, Negotiating

Today I bid nearly $1.5m for a house. What’s the best auction strategy?

Buying a house is probably the biggest financial decision you’ll ever make. And yet it astounds me that the quality of decisions, and auction strategy, is in general so skewed toward the seller’s benefit. We go into bat against highly experienced real estate agents and auctioneers, and yet most buyers fail to arm themselves with anything more than a price limit for the auction. And we don’t even stick to that.

I write this having bid at an auction today, on behalf of a friend. Leading up to today I had a 100% record in auctions – 2 from 2, when spending my money. So how did I fare with someone else’s money?! And what strategy did we use?

When it comes to the psychology of decision-making, auctions are a powerful case study. They capitalise on weaknesses in people’s emotional, high pressure decision-making to coerce people into spending more than they want to. Several factors are enlisted to make this happen.

Competitiveness. Seeing what other people are bidding makes us reframe what we think the property is worth, and to try and win.

Sales techniques & tricks. The auctioneer and the team of real estate agents will try all sorts of tricks to increase prices, the most famous of which is underquoting to get more bidders there who may drive the price up early. You’ve also got the vendor bid, and maybe even fake bidders to deal with. Plus the no cooling off period just to back it all up.

Sunk cost effect. When you get to your limit, it’s so easy to say, “what’s a few thousand more? we’ve come this far…”

Based on my experience and knowledge of auctions this is what we did today….

First, open with a really low bid, to see if you can reset people’s opinion slightly. This didn’t work today, but it may have some merit. Other people advise you never to open the bidding and to hold off as long as you can. On balance, I think the latter is probably the better strategy.

Second, my major strategy was to try to stop other people bidding. Let me explain: when it gets to the pointy end of the auction and people are reaching, and so often exceeding, their pre-set limit you want to bid in a way which makes people think you have much more left in the tank, you want them to give in and admit defeat in the face of your perceived deep pockets. You don’t want to suddenly start having anxious discussions with your better half, take much longer to bid than your previous bids, or exhibit any other signs of being near your limit.

This strategy can only work in the situation where your opponents reach their limit at a similar amount to you. It’s definitely worth doing in my opinion – the confident bids in consistent (not declining) increments imply I’ve got lots in the tank.

Today it didn’t work. The property sold for $44,000 more than my given budget, so we weren’t close enough for any of our techniques to work.

But funnily enough, the person I was bidding for (who was watching) went up to the winning bidder afterwards and said, “You would have gone higher, wouldn’t you?” to which he replied “Yes”. Whether that is true or not, it was interesting to note the impression he’d given off by coming in late and fairly strong.

In summary, my number 1 auction strategy recommendation is to do everything you can to show confidence as you near your limit, to try to get your opponents to give up bidding and not stretch themselves beyond their limit.

If you think about it, there are only two factors in the auction – the prices people set before they get there, plus how much they go beyond their limit in the heat of battle. You can’t control other people’s original price limit, but your auction strategy can potentially reduce the amount they stretch themselves over it.

Written by Rob Pyne