Do tenders distort the property market?

by Alistair Helm in

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This ‘letter’ to the Dominion Post headlined 'Closed tenders a disaster for buyers' was sighted this week on Twitter. It is, I judge from a member of the public, as I am sure that no real estate agent would make such a statement in the media.

I was taken somewhat aback by the statement within the letter that "tenders inevitably distorts the residential housing market". I disagree with this letter writers opinion, especially when I personally believe that tenders are in fact a much more preferable marketing strategy for a property than the much more favoured Auction.

At this time there are 283 properties for tender on the market nationally as compared to 1,820 for auction. that from among 37,443 properties on the market across the country as marketed on Within the Wellington region (as the home of the Dominion Post and the likely home of the author) the number of tenders is 89 with just 44 auctions. Put in context Tenders represent 4% of all property on the market in Wellington and just 0.7% nationally.

The letter claims that in a tender buyers will “offer as much as they can to ensure they beat everyone else” – well that is also true in auctions. In auctions however the pressure of the event (the theatrical event) adds even more impetus for buyers to act irrationally and bid more to beat everyone else. It goes on to say “the more desperate they are the crazier the price they’ll offer” – well in my view the heat of the auction adds to craziness precisely because the bid is public and the auctioneer constantly reminds bidders that “it's only an extra $1,000” to secure the house of your dreams”.

The letter makes the claim that “a few properties sold by this method in an area will upwardly distort price signals for all other properties in the area” – the fact is any sale that is legal and is between a willing seller and a willing buyer is a signal of the property market, regardless of the marketing process. To believe that tenders (or for that matter auctions) are distorted is naïve.

The statement that the winning tender has “no idea how much more they’ve paid than their nearest rival offered” is true whereas with an auction their is public knowledge, however in the most popular form of property sale being negotiated sale, there is no such public knowledge in the case where there may be multiple eager buyers. Further to this point I would contend that a tender actually does provide the seller with a price truly reflective of the true value that a buyer places on the property, entirely based on their belief of what that house represents to them. Whereas an auction only realizes at best, a thousand dollars more than the loosing bidder was prepared to pay.

The letter states that tenders are a “disaster for buyers”. I find this statement hard to wear. The property process is all about selling properties, as the reality is that buyers have to accept that they can only buy from the selection of property available for sale at that one moment in time, not from a choice of all properties. That being the case, buyers have to accept that the property market is and always will be focused on the sellers. They naturally want to get the best result, the highest price, the fastest sale, the least conditions. Tenders are thereby a great solution. They set a timeline, they allow all potential buyers to show their ‘hand’ when it comes to what they value the house at and to present their best and final offer. It affords them the patient time to consider and reflect on the offer, not be potentially ‘harassed’ and pressured at an auction room.

As a final comment to the writer of this letter I would draw their attention to the Scottish process for selling property. In that market all properties are sold by closed tender and have been for many decades. Properties are advertised (without traditional real estate agents) as being 'for offers over £X,ooo' - that system works very efficiently, I can attest as I have in the past bought and sold property in Scotland.