The High Price of Auctions

Have you ever considered the high price of auctions?  How much does it really costs to use an auction?  When you are a seller, depending on the type of auction, it can vary a great deal.  Usually there is a nominal adminstration fee to be paid, though more importantly a percentage of the sale price is deducted for “auction services”.  Even more surprising is the opportunity cost paid as a buyer, when choosing to purchase something by way of auction.

Auction Houses are Recession Proof

If there is one indicator that should provide enough information to realize the odds are stacked against you as a buyer/seller at an auction, consider for a moment that auction houses are recession proof.  When do people buy?  When they are experiencing a financial peak and have money to expend on goods which aren’t a necessity.  When do people sell?  When they are experiencing a financial valley and economic hardship forces their hand.  What is the variable constant throughout these peaks and valleys?  The auction houses.

Considering The High Price of Auctions – Why do People Sell?

Depending on the situation, auction houses may be a necessary evil.  With big ticket or niche items, the pool of potential buyers is considerably less than it would be for everyday, all-purpose items, such as office or small construction equipment.  The other issue may be that a seller has enormous quantities and has neither the time or money to sell the goods piecemeal.  In these instances using an auction house can provide an avenue to sell the goods in one fell swoop.  That is, provided the goods actually sell.  From a risk versus reward standpoint, as a seller with a large quantity of a single item to sell, the odds of recouping your money drops significantly.  Unless a potential buyer sees a tremendous discount (i.e – enough that they could afford to make no money on a significant portion of the product and still come out ahead) it isn’t worth it to the buyer to commit to such a purchase.  In these instances, the owner has already made the commitment by way of logistical costs to get the goods to the auction.  In essence, the seller is already committed.  Often what you will see happen is a seller who clearly has a predetermined “bottom dollar reserve” sale price, remove the reserve if it looks like the goods aren’t going to sell – in the vain hope that it will spike interest.  In many cases this will happen, though typically the final sale price will not reach the reserve price originally hoped for after the reserve has been lifted.  In such scenarios, the seller loses out twice, as now they are obligated to pay a percentage of the sale price, which has already been discounted from their predetermined “walk away” price.  This could be considered the worst case scenario, although depending on the costs of getting the goods to auction, if they don’t sell at all, then the seller has invested significant costs which they’ll realize no return on investment for and are now obligated to pay for taking the items back home. Considering the high price of auctions as a seller, it is a big risk to sell large quantity and niche goods.

The High Price of Auctions

The High Price of Auctions as a Buyer

If there is occasion for a profit to be made at auctions, it will most often favor the buyer.  The caveat is  that any profit is influenced by economic cycles.  In a hot economy, new buyers begin to pop-up daily.  Such opportunists will overpay for items regularly and in such occasions, remove chances for a seasoned auction buyer to make purchases.  Why do they overpay?  Inexperience and emotion.  If they haven’t experieced buyer’s remorse up to that point in their life, a new buyer soon will.  When an individual buys at the highest-high, they are leaving no option for exit strategy.  In other words, the purchase is a loser, no matter how they slice it up.  The high price of auctions becomes a factor in economic upturns as you will have more than one new buyer who will undoubtedly enter into a “battle of wills” with another buyer, where it no longer becomes about the purchase price.  Rather in these cases (which are by no means isolated) it is more about the psychological win.  In the instances of luxury items, there is nothing more costly to a person’s financial well-being than a powerful ego.

The High Price of Auctions In Services

Consider for a moment you’re a small business owner in trade services, or construction.  Perhaps the times are lean and you have not had work for a long spell.  Given such a consideration, there is internal pressure to have your employees working so they aren’t lured away, as well as financial overhead in the form of operating costs like leased spaced or equipment.  Clients who demand work be done through bid force companies to make decisions which may mean their financial ruin, all in the name of “buying business”.  In Rolf Dobelli’s book, “The Art of Thinking Clearly” the author discusses the issue, coining the term “Winner’s Curse”.  Dobelli suggests the causes for the winner’s curse taking place is twofold: 1) “The real value of many things is uncertain” and 2) “We want to outdo competitors”.  Dobelli lists the winner’s curse amongst a number of lapses in critical judgement which can have significant impact in our lives.

The High Price of Auctions Where Not Warranted

In my own experience, I witnessed neighbours sell their home during a peak in an already hot real estate market.  The real estate agent purposely “underlisted” the property to create an auction environment.  The tactic worked.  The owner received 25 offers in the first twenty four hour period it was listed, all to be reviewed at the same time, effectively an auction scenario.  The home eventually sold for 20% over the asking price.  As the home had been underlisted by 10%, let’s say in the bidding frenzy the buyers paid 10% too much (I realize this number is arbitrary, though given the current sales data of the time, was accurate).  The home was also sold “unconditionally”, which means the buyers opted to forego any chance to have an inspector look at the home and if financing was an issue and fell through, the new owners were in serious trouble.  These were unecessary risks to take based on the emotion created by an auction environment.  If you doubt this emotion, ask any person you know who has ever been involve in a “multiple offer situation” when trying to purchase a home.  Three months after the new owners took possession, the local market took a nosedive to the tune of 10%.  Now the buyers were 20% “offside” in their investment.  While I believe there has to be a level of “buyer beware” strategy practiced, I question the business sense and morals of any agent who would create such a situation.  Again, the only variable constant is the “auction house”, or in this case real estate agent.  The style of selling used arguably wasn’t good practice, though it would’ve fattened the agent’s wallet.  If you disagree with this line of thinking that’s understandable.  However, ask anybody forced to sell something they’d rather not during a down market and they will agree, “it’s not what you sell it for, rather what you originally paid for it that matters.”  Anytime an item is overvalued at time of purchase, all options for selling the same item in the near future can only be done so at a loss.

The last idea I will leave you with is the how many online auctions have come into being in the last decade.  Even with a competitive business model, there is still profit for online auction sites.  Auction sites also remove obligation from the auction house and place the responsibility for shipping back on either the buyer or seller.  Without such overhead for management costs in acting as go-between and the number of electronic auctions which can be running at any given time, it’s no wonder new auctions sites are born each day.

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