The cost of social proof

Have you ever wondered why a property can sit on the market for weeks, and then all of a sudden when you submit an offer, there is suddenly another offer?

Many buyers believe that the agent is bluffing.

Occasionally they are, but it’s rarer than people imagine. In the majority of cases, the agent does have another buyer. Their buyer(s) have just been sitting on the fence, waiting for validation that someone else is also interested in the property. This is called social proof.

The reluctance to step forward boldly and without validation isn’t just restricted to Private Sale situations. 

It happens at auction too.

I recall an auction I bid at almost ten years ago. In anticipation of other interested parties putting their hands up, I positioned myself where I could face them all, eye to eye in an attempt to read their nerves and bid with gusto in the face of any opponent.

I could identify at least one bidder in the crowd, and I was privy to the knowledge that other building inspections had been conducted. People often ask me, “Did the agent tell you who’s bidding, or can you see them yourself?”

Of course we can spot them. We do this every week, multiple times.

I look for visible nerves. People who aren’t holding brochures. Those clutching their phones and checking their watch for the auction bell time. Fidgeting hands, pacing, smoking… people exhibit nerves in multiple ways and when you take a deep breath and just observe, it does actually become easy to spot.

As the auctioneer’s spiel concluded, I was first to call out a bid… “Nine hundred thousand dollars!”

Surprisingly though, the next bid after a few additional calls and value-reminders, was the auctioneer’s Vendor Bid of $930,000. I was quick to counter with $950,000 and maintain my lead. The auctioneer’s following call was met with a crowd of arms-folded folks.

It was a bit strange, but certainly not uncharted for me. It’s not common for a reasonably popular campaign in a popular area to face a tough auction start. My identified bidder looked nervous.

Buyers don’t love auctions. The fear of being centre stage and under immense pressure is more fearful for some than spiders or snakes. Aside from the public-speaking fear, buyers also loathe heartbreak and wasted due-diigence costs. Last year was particulalry difficult for many home-buyers and in our travels we met some buyers who had invested both emotionally and financially in more than ten properties during the course of the year.  The combination of  run-away sales results spurred on by motivated, cashed-up buyers, and real estate agent underquoting left many feeling disheartened.

So when the auctioneer strolled out and announced to the crowd that was going to pass the property in to me if no further bidding ensued, I glared at my potential opponent, and along the line of attendees carefully watching for a sign of bidder action.

I knew I had a serious conversation to have with my buyers.

They’d stood in the crowd and watched the property they were prepared to fight for pass-in to me on a $950,000 bid. Without social proof, how were they to know that the property was even worth the starting bid of $900,000? After all, nobody else had put their hand up.

It’s an intriguing phenomenon, and it’s caught many a buyer out.

We had what many buyers don’t prepare for; rigorous comparable sales analysis on hand. We knew what past similar properties on blocks this size had sold for and we knew  with pragmatism that this property should have sold in excess of a million dollars, but nobody else in the crowd had fought us for the property.

The pass-in negotiations were tough. Does a buyer agree to pay a price that is less than their auction budget, but more than the pass-in price tag? Or do they risk the chance of timid buyers in the crowd stepping up to the price if the pass-in negotiations fail?

I’ve had countless auctions over the years that have passed in to me, only to find that buyers in the crowd have rushed forward to ask for the reserve. Agents remind them that they didn’t bid for the chance to deal exclusively with the vendor and their disappointment is heartbreaking. In so many cases, the same buyers are standing outside when we walk out some half an hour later clutching a sold sticker….. and they remark that they would have paid above the sale price.

And then we have to consider the possibilities if the property doesn’t sell at auction on auction day.

Could an online private sale ad attract willing buyers who also feel that the new price represents fair market buying?

There are two questions that buyers need to ask themselves in the case of a pass-in.

If the property sold immediately to another buyer for the vendor’s asking price, would they be upset?

And if the agency decided to run an ‘auction after the auction’, would they be prepared to fight for it?

We did ultimately negotiate a good result that day. My client’s willingness to see past the lack of other bidding participants at the auction, and rely on the research and analysis enabled them to secure their home or a price they were very happy with.

Social proof could have cost them a lot more than a few extra thousands, and may have even seen them miss out.

Analysis is paramount and buyers need to prepare for strange auction behaviour during a buyer’s market.

Social proof is interesting and can unravel a good strategy for so many ill-prepared buyers.

The best way to avert the curse of social proof is to have a firm plan. A firm plan involves a criterion set, robust comparable sales analyses, a clear conversation with the agent, due diligence (particularly a contract legal review), and an adherence to price-setting.

Those buyers who have a plan are almost always at an advantage.