A Consumer Perspective on the Relationship between Advised Minimum Value (AMV) and Selling Price in Dublin Residential Property Auctions

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A Consumer Perspective on the Relationship between Advised Minimum Value (AMV) and Selling Price in Dublin Residential Property Auctions Publica Consulting Occasional Papers No.

1 A Consumer Perspective on the Relationship between Advised Minimum Value (AMV) and Selling Price in Dublin Residential Property Auctions Publica Consulting Occasional Papers No April 2006 Introduction In recent months, auctioneers accounting for the vast majority of auctions of Dublin residential property have introduced the Advised Minimum Value (AMV) as the standard basis for providing prospective purchasers with information regarding the value of residential properties to be auctioned. There has subsequently been media controversy about the AMV, which has focused on a small number of cases where there have been substantial gaps between the AMV and the price achieved at auction. This paper addresses the relationship between AMV and selling price on the basis of an analysis of published information on 195 Dublin properties brought to auction early in Background In its report published in October 2005, the Report of the Auctioneering/Estate Agency Review Group to the Minister for Justice, Equality and Law Reform recommended that the controversial auctioneering practice of issuing guide prices in relation to forthcoming auctions of residential property should be discontinued. It recommended that in future the only price level that (should) be published by an auctioneer in respect of a property being offered for sale by auction, private treaty or tender (should) be the Advised Minimum Value. It described the Advised Minimum Value as the auctioneer s true opinion of value at the commencement of the marketing campaign as given in writing by the auctioneer to the seller on an obligatory basis. The Group indicated a belief that the best way to ensure that the price advised to potential buyers is as realistic as possible is for the Regulatory Authority (proposed by the Group) to monitor discrepancies between prices advised to potential buyers and eventual selling prices and to impose sanctions on those auctioneers who consistently produce discrepancies that are outside certain norms and/or the industry average. The Advised Minimum Value has since been adopted by the Institute of Auctioneers and Valuers of Ireland (IAVI), one of the two main institutes active in the auctioneering industry. IAVI Rules of Conduct now include the following: In cases involving a proposed sale of property, the member shall confirm in writing to the client prior to commencement of the marketing campaign the member s true opinion of the value of the property to be marketed at the commencement of the marketing campaign (the Advised Minimum Value - AMV). No member shall publish to the public a price for any property being marketed lower than the Advised Minimum Value (AMV). This rule will not apply to court or similar sales where the selling agent is not privy to the AMV, or where the market has shown 1

2 that the AMV is unachievable, in which case the member must advise the client in writing to amend the indicated price. Almost all auctioneers active in Dublin now quote the AMV in advertisements for auctions of residential property. They do not generally quote it in the context of private treaty sales, instead quoting an asking price. Meaning of the Term Advised Minimum Value Many people think when they hear talk of the true value of an item or a service or a property that this must refer to a single true amount. In the context of an auction, they may think of the true value as being the best available estimate of what a property will receive at auction. Indeed, much of the media commentary on AMVs focuses on major individual variances between the AMV quoted and the price eventually obtained. However, it is possible for any item, service or property to have multiple values, defined in different ways. For example, the value of a box of washing tablets could be defined in terms of its cost as it leaves the factory, as any of a variety of prices charged to wholesalers and retailers, or as any of a variety of prices charged by different retailers, or even by different branches of the same retailer. A business being placed on the market may be valued on very different bases, such as book value, net asset value or net present value of future projected cash flow, none of which may be close the price eventually obtained. Thus, when the Report of the Review Group and the IAVI describe the AMV as reflecting the auctioneer s true opinion of value at the commencement of the marketing campaign, this does not have to imply that the value should be close to the price eventually obtained in the market, or even that it should have to represent an attempt to most accurately estimate the price that will be obtained. All it has to mean is that it is the auctioneer s true opinion as to the value of the property using a particular definition of value. Approaching the text of the Review Group s report literally, the key word appears to be Minimum. Going both by its literal meaning, and considering also the observable relationship between AMVs and prices attained, the practical meaning of Advised Minimum Value appears to be the minimum value that the auctioneer can envisage being paid for the property in the current market. Rather than being a prediction, it gives guidance as to the worst outcome a vendor is likely to experience. There is apparently substantial uncertainty about the price that will be achieved for most residential properties brought to auction in Dublin. This is not surprising, given that even a very successful marketing campaign may generate only four or five serious bidders, while a less successful campaign may generate none or just one. To a significant degree, moreover, each house brought to auction in Dublin is unique in the market at the time (almost all are second hand, most are at least several decades old, and the few new properties brought to auction are almost invariably one-offs in exceptional locations), and the value potential buyers will place on it depends on their individual appreciation of its merits and defects. As with any other market that operates close to illiquidity, the inherent characteristics of the market make for considerable price uncertainty. 2

3 This uncertainty means that there is quite a wide range of prices over which any of the properties actually brought to auction may sell. An auctioneer, interpreting Advised Minimum Value in the way set out above, is likely to quote an AMV at or around their estimate of the bottom end of that range. The likelihood, therefore, if the system works as described, is that the actual selling price will exceed a truly-stated AMV in the vast majority of cases, and will frequently exceed it by a significant margin. Key Information Requirements of Buyers The knowledge that a truly-stated AMV is likely to be at the bottom of the range of prices at which a property brought to auction may sell is useful to a potential buyer. Of greater use would be information allowing the prospective buyer to evaluate the probability that they will be successful in winning the property, given what they are willing and able to pay. There would be three key components to this information: 1. Statistical information as to the general distribution of actual prices achieved relative to quoted AMVs; 2. Information allowing the buyer to evaluate the likelihood that the AMV has been set in an atypical way, whether because of unusual property characteristics or because the auctioneer, in the words of the Auctioneering/Estate Agency Review Group, consistently produce(s) discrepancies that are outside certain norms and/or the industry average. 3. Information as to the apparent success of the marketing campaign that might allow the prospective buyer to evaluate whether the price eventually achieved is likely to be towards the upper end, mid point or lower end of the range of prices suggested by the AMV and past statistics. Auctioneers are privy this information, intuitively or because they have easy access to it should they wish to extract it from their records. While some prospective buyers may understand it from taking a particular interest in property matters, it seems likely that a very substantial proportion have at best a hazy appreciation of patterns of relationships between AMVs and prices achieved. Their appreciation of the success of the marketing campaign is likely to depend in large part on conversations with representatives of the auctioneer. Thus, there is likely to be a significant information asymmetry between vendors and their agents, on the one hand, and typical buyers, on the other. The likelihood, given that auctioneers do not appear to be falling over each other to provide information on the relationship between AMV and price achieved in an easily digested form, is that the asymmetry might benefit vendors (for whom they act) at the expense of prospective buyers. An obvious mechanism through which this might occur is as follows. If some prospective buyers overestimate their probability of success, this may lead them to invest in the auction process through commissioning surveys and bidding, where an accurate assessment of their likelihood of success might dissuade them from participating. 3

4 This would benefit vendors through boosting the number of prospective buyers participating at auction. While the additional bidders attracted would be unlikely to be prepared to bid to very high levels, they would at least boost competition around and somewhat above the AMV price. Given that almost half of properties brought to auction are withdrawn (at least over the period studied for this paper), ensuring that there is a number of bidders must be an important consideration for auctioneers, even if none of those bidders are likely to go very substantially higher than the AMV. Statistical Analysis of Relationship Between AMV and Selling Price One way to redress the information asymmetry would be to make statistical analyses of the relationship between AMV and price achieved available to prospective buyers. The diagram that follows presents the main points from such an analysis, based on data for auctions of Dublin residential properties published weekly in the Irish Times Property Supplement between the start of 2006 and 30 March 2006, and on AMVs published in advertisements in the same newspaper. The analysis is based on reports on 195 properties, for which both an AMV and a post-auction report could be identified. These appear to represent the vast majority of Dublin residential properties brought to auction over the period. While the period is far too short to produce robust conclusions about relationships between AMVs and selling prices over the medium or long term, it can at least provide some insights into these relationships under current market conditions, and while the AMV system is still bedding in. Of the 195 properties for which data was found: 49% were sold at auction. 48% were withdrawn from auction, with just over half of these (26%) being on the market afterwards quoting a stated price. A little over a third were stated to be sold, with a price being mentioned, either an approximate price (3%) or a price above which the transaction had taken place (12%) typically the price at which the property had been withdrawn, but sometimes a higher figure. In other cases (8%), the property was stated to be under negotiation or no information was given on the post-auction position 1. 3% were stated to be sold prior to auction. Of the properties sold at auction (or for which approximate selling prices after auction were quoted), none were sold at the AMV or a lower price, and only a tiny minority were sold for a price within 5% of the AMV. However, significant numbers were sold between 5% and above the AMV. Significant numbers were also sold at levels very substantially higher than the AMV, with the greatest premium achieved over the AMV being 94%. The average (mean) premium achieved over the AMV was 34%. Of the properties withdrawn and on the market afterwards with a price quoted, in 24% of cases the quoted price was identical to the AMV. Only in four cases (8%, correcting for rounding errors), was the price quoted 20% or more above the AMV. 1 The numbers here fail to add to 48% because of rounding errors. 4

5 195 Dublin Residential Auction Reports from January 2006 to 30 March 2006 Matched Against Published AMVs Sold at Auction - 49% Withdrawn - 48% Sold Prior to Auction - 3% Sold After for Disclosed Approximate Price - 3% Other Withdrawn 8% Sold After for Amount Stated to be Above a Specific Price 12% Not Sold; on Market Quoting a Price 26% 20% 15% 5% 0% 0% 0% 1% 9% 16% 13% 11% 9% 6% 6% 5% 3% 3% 2% 2% 2% 2% 0% 0% 0% 90-95% 85-90% 80-85% 75-80% 70-75% 65-70% 60-65% 55-60% 50-55% 45-50% 40-45% 35-40% 30-35% 25-30% 20-25% 15-20% 10-15% 5-0-5% AMV Below AMV On average, selling price was 35% above AMV quoted 30% 25% 20% 15% 24% 22% 14% 16% 5% 0% 2% 6% 2% 2% 2% 0-5% under AMV AMV 0-5% % 15-20% On averages prices quoted post-auction were 9% above AMV (excluding the 75-80% outlier) 20-25% 25-30% 45-50% 75-80% 5

6 While most prices achieved from post-auction negotiation were not published, the data on prices quoted when the property was still on the market post-auction suggest that most vendors will settle for a price within 20% of the AMV, and that some will settle for the AMV in the event of failure to sell at auction. Disaggregating the analysis of the data into a number of AMV bands demonstrates that the relationship between AMV and selling price varies between different values of property. The chart below shows that properties with higher AMVs selling at auction 2 achieved a bigger average percentage premium over the period analysed. This may possibly reflect a greater spread of possible outcomes at the top end of the auction market than at the lower end of this market. Average % by which Auction Selling Prices Exceeded AMV for Various AMV Bands 45% 40% 35% 30% 25% 20% 15% 5% 0% 38% 34% 41% 28% 28% Under 500k 500k to 999k 1m to 1.49m 1.5m to 1.95m 2m plus There was also a tendency for a greater premium over the AMV to be sought for higher value properties stated to be on the market after being withdrawn from auction, than for lower value properties. This can be seen in the chart below. Average % by which Prices for Unsold Properties Quoted Post-Auction Exceeded AMV for Various AMV Bands 15% 8% 12% 5% 4% 0% Under 500k* 500k to 999k 1m to 1.49m 1.5m to 1.95m 2m plus ** * No data ** One outlier omitted - would raise the average to 19% if it was included. 2 Properties sold after auction for which an approximate price was quoted are included in the analysis. 6

7 Differences between Auctioneers As well as being interested in the general relationship between AMV and selling price, a prospective buyer may also have an interest in variations in practice between different auctioneers. Such variations may also be of interest to the Regulatory Authority proposed by the Auctioneering/Estate Agency Review Group. It would be wrong to highlight the record of any individual auctioneering firm based only on a few weeks data, and without a detailed consideration of reasons why there might quite reasonably be such discrepancies in its record. However, as the record shows quite significant differences between auctioneering firms, there is a value in providing an anonymised analysis. In the analysis set out below, firms have been divided into three groups, with each group having sold roughly similar numbers of properties at auction. Premium Over AMV for Properties Sold at Auction* Premium Over AMV Quoted for Properties on Market After Auction** Average Standard Deviation Average Standard Deviation Group A 32% 19% 5% 5% Group B 41% 20% 12% 12% Group C 31% 15% 8% 7% * This includes 95 properties actually sold at auction plus 5 sold after auction for which an approximate price was quoted in the auction report. ** One outlier has been excluded from this analysis. The difference in average outcomes between Group B and the other two groups suggests that there are significant inter-firm differences in their approaches to estimating and quoting AMVs. Variability in outcomes for properties sold at auction (as measured by standard deviation) is lowest for Group C. Sources of Variability in Relationship between AMV and Selling Price The unpredictability of what prospective purchasers will be prepared to pay is clearly one of the major sources of variability in the relationship between AMV and selling price. However, approaching the matter from first principles, it is unlikely to be the only source of variability. Variations in auctioneering behaviour in setting AMVs may also contribute. Different auctioneering firms, and indeed different auctioneers within firms, may operate to different standards when assessing what Minimum may mean in practical terms. 7

8 It seems plausible that the truest, most professional assessment of an AMV could potentially result in a modest range of possible valuations, and that various practical considerations (even just a desire to quote a round number) could result in the AMV quoted being a percent or two above or below the mid-point in that range. It is possible that there could genuinely be greater uncertainty about outcomes for one firm than for another, arising from differences of approach to marketing, differences in the management of the auction process, or differences in the management of post-auction negotiation processes. Greater uncertainty would mean that a truly-estimated minimum price would be further away from the most likely price, thus widening the likely average premium over a truly-stated AMV. There may be variations in the competence of auctioneers in valuing properties. While it would presumably be professionally improper for auctioneers to allow commercial considerations to materially influence their assessment of an AMV, up or down, it would not necessarily be obvious if this was happening, so it cannot be ruled out as a contributor to variability. It is possible that different firms apply different strategies after failure to sell at auction, and that this affects patterns of prices quoted after auction. Assessing Significance of Auctioneer Related Sources of Variability Small, but significant, numbers of properties sell at prices close to the quoted AMV, and significant numbers of properties are put on the market quoting prices equivalent to the AMV after failing to sell at auction. In a market in which it is clear that there can be substantial uncertainty about what prospective purchasers will be prepared to pay, this suggests strongly that AMVs quoted for many properties must be at, or close to, the true minimum prices likely to be achievable. For these truly-priced properties, the variability in outcomes relative to AMV at auction is likely to be mainly market related, more than being rooted in differences between auctioneers in the estimating of AMVs. However, there is evidence in the data which suggests that AMVs quoted for some properties are influenced by variations in auctioneering behaviour. Differences between auctioneering firms in terms of the average premium over AMV for properties sold at auction, and the average premium over AMV quoted for properties on the market after auction, seem likely to be attributable mainly to auctioneer-related sources of variability. (Differences between auctioneers in the profile of properties marketed could also contribute.) It seems reasonable to hypothesise that variability in outcomes attributable to the unpredictability of the market is likely to be less than or equal to the lowest level of variability associated with any of the groups of firms in the analysis (i.e. standard deviation of 15%). If this is the case, then a significant part of the variability in the relationship between AMV and price for two of the groups of auctioneers in the analysis (Groups A and B) must be attributable to auctioneerrelated sources of variability. 8

9 Most properties on the market after an auction have prices quoted that are more than a few percent above the AMV, frequently between 15% and 20% above. This could be explained by vendors being determined not to sell without achieving a premium over the AMV, by auctioneers being encouraged by the market response to the property despite it s failing to sell at auction, or by auctioneers adopting aggressive post-auction marketing strategies. However it could plausibly also reflect some AMVs being set below the auctioneers true pre-marketing assessment of minimum prices likely to be achievable. Conclusions The analysis undertaken is consistent with Advised Minimum Values being set in line with the literal meaning of the term for many properties. In principle, if the AMV is the minimum value likely to be achieved in a market in which selling prices are very uncertain, then a small number of sales should occur at or close to the quoted AMV, with the remainder of sales occurring over a significant range above the AMV level. This is what the analysis shows. A small number of sales at auction take place within 5% of the AMV level, and a significant proportion of those failing to sell at auction are put on the market quoting a price equal to the AMV. This suggests that AMVs on, at very least, a substantial minority of properties brought to auction are properly set. However, the analysis also indicates that AMVs on a proportion of properties may be set at an unduly low level. It is apparent from the analysis that an AMV does not by itself provide prospective buyers with sufficient information to evaluate properly whether it is worth their while to invest in participating in the auction process. Their likelihood of success in buying at the AMV is low. They need a basis for discounting the AMV in a way that allows them to evaluate the likelihood that they will be successful in purchasing the property given what they are willing and able to pay. The publication of analyses similar to those provided in this paper would be one way in which this could be addressed. As the relationship between AMV and price achieved may evolve over time, it would be desirable if such analyses were published periodically. The paper demonstrates that there are apparent discrepancies in the operation of AMVs between auctioneers. It may be that these will disappear, whether because the period reviewed is unrepresentative, through competitive pressures, or through some other mechanism. However, if they persist, there may ultimately be grounds for an investigation by the Regulatory Authority proposed by the Auctioneering/Estate Agency Review Group, if such an Authority is created. Failing this, it might be desirable that separate statistical analyses of the relationship between AMV and selling price be published for different auctioneering firms, so as to assist potential purchasers in discounting for these apparent discrepancies. This Paper While reasonable care has been taken to avoid errors, the paper may not be error-free. It should not be relied upon for advice. We may revise the paper so as to correct any errors found. 9

10 About Publica Consulting Publica Consulting is a Dublin-based company, which provides management and public policy consulting services. It commenced business in 2005, founded by Con Gregg, who has a long record in consulting for the Irish public service, and for private sector clients. More information is available at 10

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