Auction v private treaty: How should you sell your property?

If choosing between auction or treaty sounds like a minefield to you, don’t worry! We’ll unpack all the benefits and downsides of both selling methods and discuss the factors that can help you decide which method is the right fit for you and your property. 

What is a private treaty?

In a private treaty sale, the seller or the real estate owner sets the price that they want for their property. Afterward, the real estate agent privately negotiates with potential buyers to get the best possible sale price. 

To give interested buyers an indication of the price the vendor or seller is expecting to get or willing to sell for, a guide price is usually indicated in a private treaty listing. 

Private treaty sales are not always transparent, because the number of other people placing offers for a home is not disclosed. 

Pros and cons of private treaty

Pros

• Greater control. In a private treaty deal, sellers enjoy greater control over the sales process. Certain terms and conditions, such as financial approval, can also be set by the seller.  
• Time. Private sales offer sellers more time to consider all offers from potential buyers. You also have the ability to extend the time for which your home is up for sale if needed. 
• Privacy. Auctions can be an uncomfortable affair; some buyers are not built for the pressure and the competitive nature of these events, even those that are held online. A private treaty allows potential buyers to make private offers without knowing what other buyers think. It also gives you time to negotiate price and settlement conditions. Additionally, because negotiations are the bread and butter of private treaties, you will have greater control over sensitive information from the public sphere. 
• Lower costs. Unlike an auction, advertising campaigns are not needed to promote the property and the selected auction date when you choose to sell your property through a private treaty. And while you will still need to have a marketing campaign, private treaty campaign costs tend to be lower than auction campaigns, as long as the campaign doesn’t go on for an extended amount of time. This means you can save a substantial amount of money. 

Cons

• Difficulty in getting the right price. Getting a listing price right on the money from the outset is most important, as the fluctuating prices can drive away potential buyers. This entails a careful balancing act that requires considerable thought. If the asking price is set too high, buyers might be put off and your property won’t sell. On the other hand, if it is set too low, you may miss out on getting the best price for your property and consequently, your profit is not maximised. 
• Time. Yes, we’ve mentioned that time is your friend when it comes to selling your property by a private treaty. But it can also be your enemy. Sometimes properties can be on the market for a lengthy period of time, which runs the risk of looking stale to potential buyers. Additionally, because this selling method does not provide a fixed date the same way as auctions do, interested buyers are not compelled to act as quickly as they would at an auction.
• Cooling off period. Most private treaties are subject to a cooling-off period during which buyers can change their minds and withdraw their offer. 
• Inconvenience. A lengthy selling period may also mean you are more likely to be inconvenienced by opening the property regularly for inspection, which could be logistically challenging.

What is an auction?

Auctions are public events in which potential buyers bid on a property at a specified location and time. The seller and their agent will set a reserve price for the property, which is the minimum price that a seller would be willing to accept from a buyer. 

The property is sold to the highest bidder, as long as the bid matches or surpasses the reserve price. If the reserve price is not met, the seller is not obliged to sell the property (even to the highest bidder). 

Due to the pandemic, there has been an increase in the number of auctions being held virtually. If you’re unfamiliar with how online auctions work, we’ve got you covered. Here’s all you need to know about how online auctions work and tips on how you can win them. 

Pros and cons of auctions 

 Pros 

• Competitive selling scenario. Because auctions have an end date, it can create a sense of urgency that can pit buyers against other buyers. This can induce a bidding war that can result in a higher selling price for your property. 
• Protection from underselling. In auctions, sellers are protected by their set reserve price. This means that your property will not sell unless a bid is equal to or greater than the reserve price. And because there is no ceiling price, you have a chance to get the highest possible price that a bidder is willing to pay. 
• No cooling-off period. Unlike private treaties, auctions have no cool-off period. The highest bidder is obliged to purchase the property and to provide a minimum of usually 10 per cent of the sale price as a deposit, resulting in a quick and definitive sale.
• Increased control over contract terms. As the property owner, you have the flexibility to set the settlement date and terms to suit your preferences. 

Cons

• Higher costs. Auctions are generally more expensive than private treaty sales in terms of costs. This is because auctions require a substantial marketing budget. Extensive advertising campaigns are needed for auctions in order to ensure that you will have a pool of genuinely interested buyers come auction day. Additionally, if your property fails to reach its reserve price during bidding (resulting in what is called a “no sale”), you will need to re-start the process and shoulder all the costs associated with the process once more (marketing, professional fees, etc). 
• Bidding may not reach your reserve price. In some cases, a no-sale can be offered for sale by private treaty. The highest bid (which is below your reserve price) may be used by potential buyers by potential purchases to negotiate a lower price.
• Potentially rule out buyers. The competitive nature of auctions can be off-putting for some serious buyers who prefer to transact by private treaty, effectively ruling them out as prospective purchasers if they don’t choose to participate in auctions. Because bids are also usually unconditional, auctions may also eliminate prospective buyers who were not able to get pre-approved finance to complete the required deposit.

Auction v private treaty: Which is the right option for me?

To help you decide which sale method is most appropriate, here are some of the factors that your real estate agent will evaluate.  

Location

If your property is located in the biggest property markets (such as Sydney and Melbourne) or within close proximity to a central business district (CBD), most agents would typically recommend selling by auction, due to the high demand for these areas and because buyers are more familiar with this sale method.

If your property is not in any of these areas, your agent may still recommend an auction if your property has unique or high-end features that may attract interested potential buyers.

The type of property 

The suitable sale method for your property will also depend on its type and its features. For example, if you are selling a standard apartment with a widely known value due to similar properties in the area, a private treaty may be the best option for you. 

Current market conditions

One way to determine buyer sentiment within a property market is by the auction clearance rates (ACR). ACR refers to the percentage of properties sold at auction on a particular period (weekly or monthly). 

To calculate the auction clearance rate, you divide the total number of properties sold at auction by the total number of properties listed for auction. High clearance rates can indicate strong demand in the market, which increases your chance of selling your property. 

Other metrics to account for include days on market (DOM), the current demand to supply ratio (DTS), rental yields, and vacancy rates. These can help you decide whether a private treaty or an auction will be the most effective selling method. 

On that note, don’t forget to check out our website’s News Section to make sure you’re up to date on the latest property market reports, insights, news about Australia’s real estate market.

Smart Property Investment reports on the capital city auction clearance rates each week. 

If you want to check the market conditions on a particular suburb, head on over to our Best Suburbs page to get an insight on vital market info, including growth rates, vacancy rates, median house prices, time on market, and key demographic data.

Timeframe

Your expected selling timeline may also help you decide whether a private treaty or public auction would be more suitable. For example, if you are in a hurry to sell the property, an auction may be more suitable since it has a “deadline”.

To summarise, here are basic points to help you reach an informed decision about what selling method to use. 

An auction may be the right option if: 

• Your property is in a major capital city or in the vicinity of a CBD. 
• Your property has unique or high-end features that are difficult to value.
• The property type is unique and there are few comparable property sales in the market.
• You want to sell the property quickly.
• It is located in a hot property market where demand is strong.

Choosing a public auction may be more appropriate if: 

• There are plenty of similar properties in the surrounding area.
• If you value privacy and discretion regarding the sale outcome.
• You are not in a hurry to sell your property. 

Just remember that these are just general recommendations, and it’s still best to consult your real estate agent and do your due diligence when choosing the selling method for your property.

Smart Property Investment provides Australian property investors with must-have insight, strategies and real-life experiences to help guide successful buying and selling decisions in the Australian property market. Tune in to our podcasts covering a variety of topics related to the real estate market. You can also follow Smart Property Investment on social media: Facebook, Twitter and LinkedIn.

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