Do you get a bargain buying at auction
Do you get a 'bargain' buying at auctions?
Over the past 27 years running Essential Information Group (EIG), this is the question I am most frequently asked, and whilst there is a simple answer it does need explaining.
A 'bargain' as defined in the Oxford Dictionary is "A thing offered or bought much more cheaply than usually expected”.
So, how does this work in the auction environment?
Let's imagine a house in Acacia Avenue is for sale by auction with a guide price of £100,000.
Harry is interested in bidding on it with plans to live in the property, whilst Peter wants to buy it to convert it into two flats. Harry is prepared to bid to £115,000, whilst Peter can see it being worth at least £130,000 to him.
The bidding starts at £90,000 and Peter (the investor) and Harry (the homebuyer) quickly chase each other up with Peter bidding £114,000.
Harry hesitates and makes his final bid at £115,000, hoping that Peter had already reached his limit. Peter, however, with "plenty left in the tank", bids £116,000.
The auctioneer looks at Harry who shakes his head to indicate he has reached his limit.
Peter waits nervously as the Auctioneer says "for the first time, second time, third and final time, SOLD!" Peter is delighted to be buying the house for £116,000.
So how does this relate to getting 'a bargain'!
Clearly, Harry did not think the house was worth more than £115,000 and stopped bidding at that point. Peter on the other hand, was happy to go to £130,000, but bought it for £14,000 less, which is well below what he was prepared to go to, and less than he thought worth.
In this instance, he clearly "bought it more cheaply than he expected or was prepared to pay".
This hopefully demonstrates that whether a sale price is a bargain, is clearly a subjective point of view and that whilst Harry thought it sold for more than it was worth (by £1,000), Peter secured it at a price well below what he thought it was worth (£14,000 lower), making it a 'bargain' to him!
In essence, if you end up buying something for less than you were prepared to pay you've got yourself a bargain!