How to set a reserve price

Determining reserve prices can be tricky when it comes to selling a property at auction, which means you need an auction strategy to maximise your chances of selling.

You need to balance getting a high price to ensure you gain a decent profit while maintaining a fair price to get the bidding going, which can be a difficult balancing act. This makes getting your pricing right, and how the market behaves in response, important. First and foremost you need to be realistic when setting a reserve price and have a finger on the pulse when it comes to current market conditions. 

This is where an experienced local estate agent can help, as they will have a very good idea of prevailing property prices and the latest sale prices in your suburb.

Let’s start by defining what a reserve price is.

What is a reserve price (meaning)?

A reserve price is the minimum amount - or bid at auction - you would be happy to accept for your property. You usually set the reserve price in consultation with your real estate agent, and then inform the auctioneer. Otherwise, it is confidential and is not made public or shared with the bidders at auction. 

Once bidding starts and reaches the reserve price then your property is officially ‘on the market’ - it is just a question of how high bids go. If your reserve price is not met then you don't have to sell.

If your property fails to sell this is called ‘passing in’ in the auctioneers' trade. Sometimes if the reserve is not met, and you still want a sale, then the highest bidder can negotiate a final sale price with you. It is unusual not to have a reserve price, and most vendors choose to set a reserve.

Now let’s look at what you need to take into account when setting your reserve price for an auction.

How to set a reserve price: auction reserve price strategy

Before you set your reserve price you need to get an idea of what is happening in your local market, by developing an auction reserve price strategy using the following resources:

• Feedback from an experienced local real estate agent.
• Final sale prices for properties similar to yours.
• How much interest other similar properties are getting.
• How much pre-auction interest you are getting from interested buyers.

Now let’s look at your pricing strategy and the implications of setting a high or low reserve price.

Setting a reserve price that is too high 

As a seller, you want the best price for your property, but setting a reserve price which is too high can have its own ramifications - bearing in mind that the reserve price is the lowest price you are willing to sell your property for. 

Set a reserve price that is too high and your property is unlikely to sell on the day, and alternative methods of selling your property will be offered. It is all too easy to get carried away in a ‘hot’ market and let your expectations become too unrealistic - but you could be setting yourself up for failure.

When setting your reserve price, it's advisable to take into account your property's current market value and try to find a reserve price which is reasonable. Using a property valuation report as a guide to setting your reserve price can be a good way to ensure your reserve price is not overly ambitious. 

You also don’t want to lowball yourself!

Setting a reserve price that is too low

One of the largest fears by any sellers is the prospect of undervaluing your property and selling it for below market value. 

Whilst a low price can ensure you sell your property on the day, note that buyers are not aware of your reserve price until after it is reached. Your auctioneer will let bidders know once the reserve price has been reached. Notably, this can also work in favour for any sellers as it can drive up competition for your property.

In a scenario where buyers have reached the reserve price, this means the property is truly 'up for grabs' and can result in more fierce and competitive bidding.

Ensuring you make a decision which is fair to both the high and low spectrum of pricing your property can be a significant influence in the overall selling price of your property. Keep in mind that reserve prices are confidential until it is reached within the bidding process.

Understanding underquoting 

In some states - like Victoria - there are strict laws around underquoting. There it is illegal for an agent to advertise or advise prospective buyers of a price that is less than the seller's auction reserve price or asking price; or less than the agent's current estimate of the likely selling price. Agents are also obliged to provide an estimated selling price that is ‘reasonable’, and which is based on the sale prices of at least 3 comparable properties for sale.

If in doubt, ask your real estate agent for advice on navigating the reserve pricing arrangement in order to ensure your decision is the right one. This will ensure you set a reserve price that is fair, reasonable and likely to result in a sale.