Selling house tender vs auction, which gives the best price?

Question

If I want to sell my house, what is most likely to give me the best price?

1. A tender (where people submit their offer in writing, which are all compared on the closing date)

2. An auction (where everyone bids against each other on the given auction date)

An auction has the benefits of buyers being played off each other. However more people can submit a tender than attend an auction on a given day, also more people can make a conditional offer than the unconditional offer required for an auction.

Preferably I would like to have an answer based on sales data, (but anecdotal is better than nothing)

Does it make a difference if it's a bull or a bear market, or the general condition of the house?

For what it is worth, where I live, there seems to be a 70/30 split between tenders and auctions

For areas where sales are almost exclusively tenders OR auctions this question doesn't really apply. So I am looking for answers, based on areas where both are relatively common.

Answer 1

For the sake of putting in an answer,

Interestingly,

• real estate sales paradigms are culturally and regionally driven; you can't, really, deviate from those.

For example, in Sydney Australia, it's totally and completely normal to auction a house for sale. In other markets, the practice is totally unknown, and if you did (somehow, the mechanism barely exists) present a house for auction, it would completely confuse that local market. (Perhaps indicating that it was a foreclosure or such - in some markets "auction" signifies "distressed sale" - totally confusing to people in Sydney for which it's the everyday norm!)

Regarding a tender that's quite rarefied; in some markets (say, London) it would seem normal if unusual, but in many/most domestic markets it would just mystify and you'd get no activity at all.

(Residential v. commercial drastically changes the outlook, too, but we're dealing w/ residential here.)

So in fact, when selling your house, you

• don't really get a choice between those modes. It's a matter of the local market norms; interestingly this varies, a lot, around the country, around the world.

Regarding the abstract question of whether tenders or auctions lead to better results, nobody has a clue. If you gathered ten tycoons, as it were, in a room, who had each disposed of many business assets using the various modes, there wouldn't be any consensus on which is better overall; it's one of those basic business puzzles.

Answer 2

Technically, at least given the terminology used in game theory, both are "auctions". What you probably think of a "standard" auction is known in academic circles as an "English auction". If by "tender", you mean sealed envelopes where the highest price is accepted, that is a sealed first-price auction. If the second-place bid is accepted, then that is a sealed-bid second-price auction or Vickrey auction. According to certain assumptions, every auction mode has the same expected sale price. As these conditions depend on the participants engaging in game-theoretically optimal strategy. In practice, psychological effects are an important factor, and different modes can have significantly different results.

The Vickrey auction has several arguments in favor of it. One is that it's in the prospective buyer's interest to be as honest as possible as to what price they would be willing to pay. It is arguably more efficient than an English auction; an English auction effectively is a drawn-out version of a Vickrey auction (the bidding continues as long the price is below the maximum price of at least two bidders, and stops once the price reaches the second highest maximum price). In addition, an English auction generally requires participants to be physically present, or at the least be active within a specific time frame and repeatedly submit bids. For a Vickrey auction, on the other hand, participants need make only one bid. The lower burden may attract more bidders. An English auction does, however, have the possible advantage to the seller of bidders getting caught up in a bidding war and bidding higher than they would if they had calmly evaluated the property's worth. In addition, there may be concerns in Vickrey auction of the seller taking advantage of the knowledge of the private bid.

A cursory search didn't turn up results comparing English versus Vickrey auctions in real estate, but I did find this result comparing English auctions to private negotiation, which found that the former resulting in higher prices, but only when there is significant interest in the property (after all, if only one person shows up to an auction, there isn't going to be much bidding).

Societal norms can also be an important factor. The above article notes that auctions are generally associated with distressed properties, but this is less true in Scotland and Australia.

Another article I found was this, which concludes that

... WTP information elicited through Vickrey auctions is undistorted by strategic behavior such as bid-sniping and incorporates the full range of WTP information, suggesting that it is better suited for estimating realistic price-demand functions for market research purposes.

Answer 3

Will you have a minimum price you will accept? If you don't have a minimum price, you need to be prepared to sell the house no matter what bids are received by the deadline, or by the end of the auction.

Have you considered what you will do to judge the quality of the offers or the quality of the bids? That will be important because you will need a quick way to determine if the bid is backed by a deposit, and that they can get financing quickly. The risk is that they can't get the purchase price in cash or loans in a reasonable amount of time, and you have to start over again.

Does your jurisdiction allow this type of sales? Some might not.

Does it make a difference if it's a bull or a bear market, or the general condition of the house?

Yes. But the market is your house. If somebody that has evaluated the house for you has determined that one of these methods is better than putting it on the market and waiting for buyers, you need them to explain why it would work for you. But in the end there is no way to know which method will get a better result for your house.

In either of the two methods you propose you may be missing out on the buyers who want to see a house, make an offer and give you x days to decide. If you say no they keep looking, if you counter-offer they can decide to counter your counter. Those buyers will not put all activities on hold while you gather offers until a deadline, or wait until auction day and participate in an auction.

The condition of the house could be important. If the future use of the property is a tear down, then the condition makes no difference. But if this method is being done because your house could go for much more than other recent sales in your neighborhood, then condition is everything.