Why buying at an auction could cost you a pretty penny
With all of the talk of bidding wars, along with actual auctions seemingly on the rise (think the up-coming m157 auction and Bid on the City), we thought it would be worthwhile to share some buyer tips on how to prevent losing your marbles in the bidding process. We mention bidding wars because they basically aim to create what we call a synthetic auction environment. What does this mean?
We found this apt description of the psychological shift on a professional auction site:
There is a deep, fundamental, psychological difference between a private sale and a sale at auction. The psychology of a private sale is: “What is the least I can give and still buy the horse.” Isn’t every potential buyer you talk to trying to “horse trade” you down on the price?
The psychology of an auction is: “What is the highest price I am willing to pay to buy it?” Every buyer is thinking about their upper limit. “How much more can I give?” They are not thinking about trying to get your price down, but theirs up!
Further, we finally found some sound proof that the strategy of pricing lower not higher at first makes sense, as a Kellogg Business School article points out:
In the Journal of Personality and Social Psychology, the researchers show that low rather than high opening bids—for a variety of products from shirts to fancy rugs in online auctions—generate high selling prices, demonstrating a reversal of the anchoring effect.
For buyers, this means you should look to the following strategies to maximize your results: 1) be disciplined and know the maximum price you are willing to pay for your property BEFORE you bid, 2) find a low-traffic, little publicized auction or property on which to bid, because high volume means higher prices, 3) when all else is equal, choose to bid on the property with the higher reserve price or the higher starting bid (as per the article above).