7 Powerful Auction Pricing Strategies for Commercial Real Estate

Auctions can prove incredibly powerful at moving properties, especially if you find yourself with a unique piece of real estate or one that you want to sell in a relatively short time period. But in order to make an auction work for you, you should understand a number of powerful real estate pricing strategies. Accidentally selling significantly below your desired amount or failing to sell at all can cost you more than just money. Opportunities have costs, too. 

In this post, we will discuss real estate pricing psychology, talk about strategies such as real estate price range strategy, and help you decide the best numbers to use when selling a house or commercial property. 

Begin with the Fundamentals of Pricing 

Perhaps the best place to begin when discussing agent-led or for-sale-by-owner pricing strategy is with the fundamentals of pricing. Indeed, your belief about the fair market value of your property will influence virtually every decision that you make about your auction. In brief, the basic steps you should take include: 

• Determining fair-market value for comparable properties 
• Conducting market research to see what purchasers are willing to pay 
• Considering using 30 to 40 percent of fair-market value as a reference point for your starting value 

Although a competent real estate agent can easily find a fair-market value for your property, you can use some half-dozen basic methods for determining it yourself. Remain aware that not every real estate pricing theory functions equally well in every market and for every property. Basic valuation methods are: 

• Cost Approach: How much it would cost to rebuild the property from the proverbial ground up 
• Comparable Sales (aka Comps) Approach: How much other similar properties have sold for 
• Income Capitalization (aka Cap Rate) Approach: How much income the property will yield based on a market-appropriate yield 
• Value Per Gross Rent Multiplier Approach: How much a property is worth based on the ratio of its valuation divided by its rent income 
• Value Per Door: A method used almost exclusively by multi-family structures that involves dividing its value by the number of units (i.e. doors). 
• Cost Per Rentable Square Foot: How much the property is worth denominated as total value divided by the total amount of rentable square footage 

Set Lower Starting Prices to Extend Bidders’ Interaction with Your Auction

Once you’ve determined the market value of your property, it’s time to start thinking about specific strategies. One such strategy involves starting your auction at an intentionally low price. According to a report out of Kellogg School of Management at Northwestern University, many experts recommend the opposite, stating that “a psychological principle known as anchoring … [indicates] that the size of an opening bid is a testament to the item’s value” (i.e., higher starting bids suggests that the auctioned object has a higher intrinsic value). 

The evidence, though, suggests exactly the opposite. In their study of auctions, researchers Adam Galinsky and J. Keith Murnighan found that lower prices encouraged bidders to spend more time with a listing. That time commitment regularly translated into higher prices. “People use the number of bidders to infer value. They think, ‘They must know something that I don’t,’” said Galinsky. “Economically you want to avoid high-traffic auctions, but psychologically you are lured by high traffic.”  

Use Charm Pricing

Do you ever wonder why no one sells consumer products (or much of anything else) for an even number? Most everything you see tends to be rounded down by an incremental amount. For instance, a $10 item gets sold for $9.99. Well, it turns out that there’s a psychological principle behind the practice, which has come to be known as charm pricing. A 2012 study published in Management Science quoted a 2004 study by Thomas and Morwitz, which stated that the leftmost (i.e., largest) value in a number carries more mental weight than numbers to the right, which are less “valuable.” It explained, “Since we read numbers from left to right, while evaluating ‘2.99,’ the magnitude encoding process starts as soon as our eyes encounter the digit ‘2.’ Consequently, the encoded magnitude of $2.99 gets anchored on the left most digit (i.e., $2) and becomes significantly lower than the encoded magnitude of $3.00.” The same can hold true for your real estate auction. 

Use Precise Pricing

Pricing strategies abound in both auction formats and convention real estate sales, and they include everything from making a real estate price reduction announcement to selecting from among optimal range pricing strategies. However, there’s one unusual strategy that research has shown works well: using precise pricing. A study from the Johnson School at Cornell University discovered that “people incorrectly judge precise prices (e.g., $325,425) to be lower than round prices of similar magnitudes (e.g., $325,000). Building on evidence of greater prevalence of precision in smaller numbers and roundedness in larger numbers …, we suggest that representativeness of digit patterns might influence magnitude judgments.” In other words, you can nudge bidding higher by starting at a precise price rather than a round number. 

Consider Setting a High Reserve Price  

If precise pricing makes people think your real estate’s cost is lower, then a high reserve price makes them believe that its inherent value is much, much higher. A study published in Journal of Consumer Research discovered that, “in general, the larger the gap between the sale price and the advertised reference price (e.g., regular price, suggested list price, etc.), the greater the perception of value resulting in an enhanced willingness to buy).” In auctions, “when the seller provided a higher as opposed to lower reference price, the final amount bid for the item significantly increased.” 

Don’t Attempt to Influence the Bidding  

Imagine that you implement all of the above suggestions, and for some reason, it doesn’t look as though you’ll meet your reserve price. Can you bid on your property to nudge it closer to your goal? Well, sometimes, but it’s not a good idea. As auctioneer Mike Brandy explains, “First, almost all state law says that if the seller may only bid at a ‘with reserve’ type auction. Secondly, that if the seller wants to reserve the right to bid, that such must be disclosed to save oneself from the high bidder taking such property at the last good faith bid prior to the seller bidding or voiding the sale altogether.”  

He also states, “Auction bidders detest the seller (the owner) bidding on property in which they (the bidders) are interested. Few things deter bidders from an auction to any larger degree than sellers bidding, or otherwise protecting their property from bidders.” In short, nothing can damp down an auction more than having you start bidding on it. 

Don’t Fret If Your Property Doesn’t Sell at Auction  

Sometimes auctions simply don’t work out. If your property fails to sell, take heart! That doesn’t mean you’ll have to hang on to it forever. Instead, it should prompt a closer examination of the situation, and you might want to ask: 

• Was my pricing correct? 
• Did I market it effectively? 
• Should I try a traditional sale? 
• Do I have the right agent? 

When you sell your property at auction, you want the top talent on your team. With 25 years of experience, Millennium Properties knows how to get you a top-tier sum. Contact us today at (312) 338-3000.