Guide price vs reserve price – what does it all really mean?

Analysis from My Auction shows that the majority of buyers have very little understanding when it comes to the difference between the guide price, and the reserve price of a property listed for sale at auction - so what are the differences and what does it all mean if you’re buying or selling property at auction?

Related topics:  Auctions,  Finance,  Property
Property | Reporter
26th January 2023
Question 901

The guide price is just that, an indication to buyers of what figure the seller would accept and what they think the property is worth. This is just a guide price and when it comes to property auctions there is no telling if the property will go for more or less than this. It just depends on the interest when it comes to auction day.

Whereas the reserve price is the seller’s minimum acceptable price at auction, meaning that the auctioneer cannot accept a price lower than this. Even if the property lot receives multiple bids, if it doesn’t reach the reserve price which was agreed upon between the seller and the auctioneer prior to the auction starting, then it doesn’t sell.

Current guidelines state that reserve prices need to be set within 10% of the published guide price. The idea is that by putting a guide price in place, we can give buyers some assistance when working out figures and finances to know how far they are willing to go.

One of the most challenging parts of the auction process is that the benefits to the seller are not always the same benefits a buyer is looking for. Ideally, the seller and the auctioneer want to encourage competitive bidding with multiple buyers all vying for the same property. Ultimately, when the gavel falls, both parties want the sold amount to be in excess of both seller and auctioneer’s expectations. I have seen some unbelievable results for sellers in auctions where the figure paid makes no logical sense to us, but the buyer was happy. The market value of the property is whatever someone is willing to pay on the day.

On the other side, we have buyers who don’t really want to be competing with multiple people to buy a property. In an ideal world, they would probably want to agree on a price out of the auction. In doing so, they feel like they secured a good deal on the property they want without having to compete with other buyers who will be driving the price up.

This has been the way of doing things for a long time, and it feels like it’s time for a change. With new modern methods of auction coming into play, now is the time to introduce a better way of doing things, with greater results for both buyer and seller. If the industry adopted a more transparent method of guiding buyers as to what the client’s expectations are for selling, it would build far more trust in the auction process amongst buyers and ultimately help the sector grow in the future.

The issue we see time and time again is when a property is given a highly attractive guide price to generate interest while still being in line with advertising regulations, i.e. within 10% of the reserve price. But because of what the property is (sometimes in need of full modernisation) the bidding goes crazy and, in some instances, can hit six figures higher than the original guide price.

While setting a low guide price might sometimes appear to be a strategic move to drive interest, when this happens it's often the case that the amount the property sells for makes no sense and may not be far away from the actual resale value of the house once the buyer has spent the money to renovate it. But this is what happens when someone really wants the property.

When it comes to pricing to sell, we must consider who will buy it. If we take a property in need of £100,000 worth of modernisation, with an end value of around £500,000, we can price this with a developer in mind.

The likelihood is that we would set a guide price of around £275,000, with a reserve of £300,000 – this allows a further 20% in profit to make it worth their while. If the property is bought by an owner-occupier who wants to live in the property, the profit margin becomes null and void.

They may also decide to do some of the modernisation work themselves which again saves in costs. In this example, the margins change completely and we could expect to reach £460,000 for the same property. The market (ie, buyers) will decide how much a property is ultimately worth. Our job as auctioneers is to appeal to as many different types of buyers as we can to generate competitive bidding to maximise the price for our client.

A guide price should be a figure to guide a buyer on where the client’s minimum expectations are when they go to market. A buyer can then work up from there. Ninety-seven per cent of properties in the UK are bought and sold in the traditional private treaty way where offers tend to be made below what the asking price. In this method, the general assumption is that the price the property is marketed at is higher than what the seller will actually take. If we are going to tackle this issue, we need to start with an education so that buyers understand the difference.

One way of doing this could be to disclose all reserve prices to the public so that buyers know exactly what the property can be bought at. This of course reduces the ability of some auction houses to use their artistic license when it comes to setting guide prices low to generate as much interest as possible.

But it does feel like this is a much fairer way of advertising auction lots. Buyers are then under no illusions as to where their top bid needs to be to buy the property.

When it comes to property auctions, it doesn’t matter what the guide price is set at, or even what the buyer's top limit is. If someone else is interested in that property and wants it more or can afford to pay more, that person is walking away with the keys. Right now, property auctions only account for 3% of total property transactions in the UK. As the industry moves forward, auction houses and auctioneers want to build trust and encourage more to go down this route.

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