A Seller’s Guide to Effective Online Auctions

Strategies for Optimizing the Sale Price

Most people understand the importance of attracting potential bidders to online auctions. What many do not realize, however, is that choosing an optimal pricing strategy is just as important. If the asking price is unrealistic given current market conditions, the auction will not produce a successful sale. If the minimum bid is set too high, buyers may avoid participating in the auction. If the minimum bid is set too low, the auctions may attract bidders who do not have the funds to reach the reserve price. The reserve price is the minimum amount the seller will accept for his or her property.

There are essentially three different ways to set up the terms for your auction. Finding the right strategy is crucial to maximizing bidding activity and, therefore, maximizing sale price.

The first strategy is to use an “absolute auction” format. In an absolute auction, the minimum bid is set low and there is no reserve price. This method is advantageous for a couple of reasons. First, the property is guaranteed to sell. Second, bidding wars often occur, because buyers see an item priced low with no reserve, so they know that someone will definitely win the auction. The risk of an absolute auction is that the property owner may wind up receiving a lower price than he or she had hoped. This strategy is effective for sellers who need to sell a property quickly or have properties in a neighborhood with an oversupply of inventory.
The second strategy is to set the minimum bid low and use a reserve price. The low minimum bid attracts many potential bidders. This method is also risk-free for the seller, because a sale does not occur unless the reserve price is met. While this strategy may be attractive to many bidders, the reserve price may deter some potential buyers from participating. If the gap between the minimum bid and reserve price is too large, bidding may not reach the reserve price. This strategy is one of the most common approaches to online auctions and works for a variety of properties. A breakdown of how to optimize this strategy appears below.
The final pricing strategy is to set the minimum bid at the asking price and remove the reserve price. This method can be appealing to buyers, because they know exactly what the property’s asking price is. It also appeals to sellers, because they can set the price wherever they desire and only need one bid to ensure a successful sale. A limitation of this strategy is that the high minimum bid may cause some buyer hesitation. Buyers may be reluctant to be the first bidder on a property, thus reducing the number of bidders. This strategy can be a good approach in a stable market with predictable selling prices.

For sellers who prefer to use the most traditional pricing strategy (strategy #2), we recommend the following approach:

Determine the property’s approximate market value, either through an appraisal or a BPO.
Set the reserve price around 85% of market value. This may fluctuate up or down, based on the performance of the property’s local real estate market.
Set the minimum bid equal to 50% of the market price.
Subtract the minimum bid from the reserve price and divide that number by ten to calculate the bid increment. This strategy ensures that the property will sell if it receives 11 bids.
Set the pre-bid deposit equal to 10% of the minimum bid.

Auction Pricing Example

Condo’s market price is $450,000

1. Minimum Bid	= ($450,000 x .5) = $225,000

2. Reserve Price	= ($450,000 x .85) = $382,500

3. Bid Increment	= $382,500 – $225,000 / 10 = $15,700

4. Deposit	= ($225,000 x .1) = $22,500

While there is no perfect pricing strategy, determining the optimal method for each property is crucial for maximizing revenues. Experiment with different pricing strategies to find the most effective way to get top dollar for your assets. Remember, Bid4Homes’ staff of real estate auction professionals is always here to help!

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Strategies for Optimizing the Sale Price