What is an auction reserve price?

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How is the reserve price calculated? The staring point for the reserve price is the property’s value and agreed between the auctioneer and the seller. Usually the auctioneer will want to set a reserve price on the low side, to ensure the property successfully sells. And the seller will want to set a higher reserve price to ensure they don’t run the risk of selling too low. As a general rule an auctioneer will only allow a property to be entered into auction if they can agree to a reserve price of around 85% or less of market value. For example, if a property is valued at £300,000 the reserve price would be set at around £250,000.

The reserve price is agreed before the seller agrees to enter the property into auction, but it can be changed (with the seller’s permission) in the run up to auction, depending on the level of interest the property generates.

Considerations for the seller when agreeing a reserve price – it’s worth weighing up the amount the auctioneer has suggested as a reserve price, think about what you want to achieve from the sale, your timescale for selling and the consequences of not selling.

1. Your own circumstances will usually be the biggest influence on how motivated you are to sell. If you need to be sure of a sale, then set a lower reserve price.

2. Find a balance between the certainty of selling and being happy you have sold for a fair price.

3. Properties do very often sell for more than the reserve price. But if you need to achieve more than the reserve price to cover debts, don’t take a gamble.

4. If you are selling a vacant property, take into consideration the cost of owning the property (mortgage repayments, council tax, risk of damage etc) – are you better off cutting your losses?

5. Negotiate with the auctioneer. Ask if you can increase the reserve price by one or two percent.

Reserve price hesitation – Selling at auction doesn’t suit everyone’s circumstances or needs. But even those who are interested in what auction offers can be put off the idea when they hear the auctioneers suggested reserve price. When setting a reserve price, it’s right to be cautious, but equally right to be realistic.

When comparing the reserve price to valuations you have received from estate agents, or prices you have seen similar properties advertised for, remember that the asking prices suggested by estate agents are typically set on the high side to win a sellers’ instruction. Eventual sale prices through estate agents can very often be far lower than the original advertised asking price.

 

What is the guide price?

As with buying or selling anything, it’s always useful to have a starting point to begin negotiations. With the reserve price remaining a confidential number the auctioneer uses a different number, the guide price.  Most auctioneers will set the guide price at around 10% below the reserve price. For example, if the reserve price is £250,000 the guide price would be in the region of £225,000.

It’s a common reaction for sellers to be alarmed at how low the auctioneer has set the guide price, especially when they see the price widely published on the auctioneers website, in the local newspaper, on  Rightmove and Zoopla.  The usual concern from the seller is that the guide price will be viewed as the value of the property and they fear prospective buyers will think there’s something wrong with the property.  This is an understandable reaction, but if you think about it from the perspective of a buyer you will see the advantage it has. Advertising a property with a low guide price attracts the attention of more buyers and generates an overall greater level of interest, and that’s what’s needed to drive up the sale price.  More prospective buyers will view the property, download the legal pack and carry out their research – they will inevitably see the property is worth more than the guide price and they’ll be one of many prospective buyers engaged in the auction process, ready to bid at auction.

In fact, many property dealers are happy to set low guide prices when selling at auction because they know it helps generate more interest in the property.  A low guide price really does generate more interest in a property – to try and counter the issue, in 2014 the Advertising Standards Authority (ASA) set a ruling that the guide price must sit within a 10% range of the reserve price.

So remember, when you see the auctioneer has set a low reserve price, don’t panic. Just remember the more competition there is, the higher the price will be bid up.

Next steps…

Why not request a free pre-auction appraisal for your property? It only takes a few seconds. Or feel free to call us on 020 7183 2623 if you have any questions.