Setting Reserve auction prices and auctioneer strategies on sale day

[signoff icon=”icon-help-circled”]QUESTION: “Christine from Pottsville asks What on earth happened with The Block,  the reserves were a joke. How do you set a reserve and why?[/signoff]

The results of The Block this week were really interesting from a real estate agent’s point of view on several levels.

There has been a lot of comment about the upcoming changes to the Real Estate laws in Queensland concerning price guides for auctions, If price guides had been used based on those reserves it is highly likely that an agent would have been subject to an investigation for bait advertising, the reserves were so far off the mark.


Clearly there were no bidding guides for the show based on the reactions of the contestants and the hosts. Considering that the profit from each sale, $2,000,000 in total went to the contestants there must be some producers at the moment asking what went wrong with the reserves.

The controversy about whether or not agents should disclose bidding guides to buyers is a two-edged sword as this exercise has clearly demonstrated.

In the everyday world of real estate before you can bid at an Auction you should have had a Pest and Building Inspection which will cost you $500 or $600 and if you don’t have the entire purchase price you must have arranged finance with your bank to put you in a position to bid. All of this costs time and money and leads to consumer complaints which the State government is trying to avoid with their decision to not allow the practice.

In Victoria just a few years ago bidding guides led to secret shopping by the Department of Consumer Affairs and raids on offices to see  how the bidding guides were worked out.

So, a lot of people who have not been through the process must wonder how reserves are set.

Essentially there are three ways that a reserve can be set.

The seller can simply set a reserve he can say “I will not sell under this price” and the auctioneer will follow his instructions.

For mortgagee sales and the like, and some ordinary auctions a valuation is obtained from a Licensed Valuer.

In most cases the reserve is not set until just before the Auction and when it is set it is based on recent comparable sales, the opinions of people who have inspected the property and the agents opinion of what he or she believes the property will fetch. Agents tend to take buyers opinions during the open houses with a grain of salt simply because they want to buy the property and they would like to buy it as cheaply as possible.

If there is strong bidding for a property and it reaches reserve normally the Auctioneer will not disclose that it has gone through the reserve at that point he or she will wait until bidding slows and then use those magic words “it’s on the market” to get the bidding going again.

If bidding stops short of the reserve it’s not unusual for  the Auction to be paused and there to be some private negotiations with the highest bidder, in that case the buyer increases the offer, reserve may be reduced to a price where the property can go on the market or a bit of both.

If you see that happening the auctioneer will usually ask the highest bidder to either confirm their bid will confirm a new bid and will then call for further bids and if there are no further bids the property will be either passed in to the highest bidder for negotiation or if the negotiated price exceeds the reserve then the property will be sold to that buyer.

If you’re interested in a property and you see this kind of situation developing and you’re not the highest bidder you should pay attention because it is very possible that the property will come on and will be sold.