Are NZ house auctions illegal?

Over on 200Square Grant Wakelin wonders whether some house auctions are illegal:

..real estate sales and auctions are governed by among other things the Real Estate Agents Act 2008. Under those rules there is a case to argue that property auctions run the way they are today are not in compliance with the Act and Code of Conduct in two related areas – specifically do auctions:

1. Apply undue pressure on the seller and/or buyer (rule 9.2)?
2. Allow the opportunity for seller/buyer to take adequate (legal and/or technical) advice (new rule 9.7)?

Lets be clear, auctions are designed to create pressure on buyers and sellers..”

It’s a fascinating insight, and makes sense once we look twice.

Auctions are wonderful mechanisms for pushing up the price of the item being sold, with much of the action happening as a result of validation from other buyers. But auction theory tells us that the price paid is always that of the second highest bidder, generally no matter what the method used.

However in practise auctions can occur in a crowd late at night, with plenty of noise and excitement, incitement from the auctioneer and criers, along with vendor bids and other agents contributing to the energy. Combine that with a lack of timely advice and we can not unreasonably argue that prices paid are above the intended reserve price for the buyers.

That’s fine for sellers – but what if just one auction sale was deemed later to be invalid by the Real Estate Agents Authority (REAA) due to either or both reasons (pressure, advice). If so then that could conceivably place a large number of sales under the threat of similar action.

I do think it’s worth looking into by the REAA, and perhaps it needs a test case.

In defense of auctions, it’s good to hear that alcohol is never served, at least not before they end. I also hope and trust that steps are taken to ensure buyers and sellers do not drink beforehand, and understand that it is up to the auctioneer to not accept bids from people who are not capable of making one.

For buyers or sellers going to an auction my advice would be to either make sure you have your (non-excitable) advisors on hand, or put yourself under an unbreakable price mandate. Alternatively you could ask someone else to appear and bid on your behalf.

Finally as an outsider I always wonder about shill bidding, which is bidding from non-genuine buyers. In New Zealand so-called Vendor Bidding is allowed, but it must be identified as such – as bids on the vendor’s behalf. A Shill bid on the other hand is a bid that is on the vendor or agent’s behalf, but not identified as such. I have no idea whether this is an issue or not here, but it’s always been a concern  for me in any live auction. It’s very hard to prove or disprove as an outsider, but ultimately we are in the hands of the accredited auctioneers, and I suspect (or is it hope) that they have strict processes in place to avoid the possibility of non-official bids coming from other than genuine buyers.

About Lance Wiggs

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4 Responses to Are NZ house auctions illegal?

  1. Theory says that the winner pays the second price, but theory also says that each bidder’s valuation can be a function of what other people are observed willing to pay. Those ones are called “Common Value Auctions” – where the buyers gain information about others’ valuations through the bidding process, and update their bids accordingly. So it isn’t that practice differs from theory. Rather, you just need to check a bit deeper into the theory.

    You suggest decent strategies for avoiding the winner’s curse for those who think they might otherwise be too influenced by others’ bids. Same kinda deal on TradeMe, for me anyway. I just set an autobid up to my true reservation price, then never look at it again. If somebody snipes it, they’re paying more than I’m willing to pay, so I wouldn’t have wanted to outbid them anyway.

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    • Lance Wiggs says:

      I’m rusty on the theory Eric, and I’ll defer to you. In my defense I was assuming that information was excellent and/or there were a large number of bidders. So yes – an auction does serve to surface competing prices and push buyer expectations higher. This is what makes shill bidding, and vendor bidding for those who don’t discount it entirely, so dangerous.

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  2. It must be a positive for Barfoot & Thompson (Auckland’s biggest real estate firm) that they are the only company in NZ that took a stand many years ago against shill (dummy) and/or vendor bidding. At least the public have one company they can go to where all auction bids are genuine.

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  3. Chris says:

    The idea that auctions don’t allow for adequate legal advice is silly. An auction sale is a whole programme, consisting of marketing, consultation and registration. Auctions aren’t just about that one 15 minute moment when bids are made – buyers have ample opportunity to seek legal guidance prior to the sale, and certify such when they make their bid.

    On the matter of “undue pressure”, that’s rather a vague statement and is contextual. I wouldn’t consider the pressure at an auction to be “undue” because both buyer and seller willingly enter the auction programme knowing it’s likely to be a high pressure environment. In fact that’s the point of selling by auction.

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