by Gus Zogolovitch
I know the feeling of seeing a fantastic opportunity in an auction catalogue. Your heart starts to beat more quickly. You start to daydream and mentally work out where the money will be coming from to buy the site or building. And if you’re an architect, you’ll also start sketching in the margins.
However, I’m here to tell you to slow down and remember that the guide price is actually a marketing measure – it’s there to tempt as many buyers into the ‘room’ as possible.
The auctioneers rely on auction fever and the room bidding up the prices. Having been to many property auctions, I have seen this happen time and time again.
This led me to ask myself the question: how much extra do people pay over and above the guide price?
So I’ve done some analysis to see whether there’s any kind of science about it and whether it’s possible to spot a pattern. The short answer is no, but the analysis does reveal a few interesting things.
First, I’ll explain my methodology. I took all the guide prices from Allsop’s residential auction in December 2020 and compared them to the sold prices. The difference between the two is what I call the auction ‘premium’. This is both an actual number – what I call the ‘absolute’ premium and a percentage increase – what I call the ‘relative premium’.
So if something sold for £200,000 and had a guide of £150,000 it would have an ‘absolute’ premium of £50,000 and a ‘relative’ premium of 33%
Below is a chart of my results. The red line shows the ‘sold’ prices and sits above the ‘guide prices’ and the gap between them is the ‘absolute premium’. These are plotted against the left hand scale and, very generally, the gap ‘narrows’ as the guide price drops. In general then, a lot with a guide of £1.3m will generally have a larger ‘absolute premium’ (on average) than one with a guide of £100,000. The same can’t be said of the ‘relative premium’ which shows no pattern. The relative premium goes from a whopping 2620% (on a lot with a guide price of £5k which sold for £136k) to a chilly -16% (where the guide price was £25k but it sold for £21k). So, spotting a pattern in the relative premiums has proved hard.
I averaged out all the relative premiums to see if we could establish some kind of rule of thumb but got an average of over 90%. I then used the median – which if you remember our school maths is a bit like the average, but ignores outliers. The median came in at 33%. I also took the total sum of the sold prices and the total sum of the guide prices and looked at the relative premium – and that came up with an answer of 32%.
However, when you delve a little deeper land and sites are the most unpredictable – with relative premiums fluctuating wildly. This makes sense because land is valued at what you think you can build on it – so everyone’s view will be different.
My conclusion is that if you are looking for a rule of thumb – then the ‘average’ lot sold for ‘on average’ about 30% higher than the guide, but be careful if you are buying land as it can go much higher than this. And, as always when it comes to auctions remember Caveat Emptor – Buyer Beware.
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* The median is defined as the middle point of a set of number if you line them all up from small to large. So take 1,5,6,7,8,1000. The average = 205.4 and median = 6.5 which is probably a more useful number!