Auction Guide Price vs Reserve Price

What is an auction guide price?

As its name suggests, an auction guide price gives you a guide on the minimum amount a seller expects to reach for their property. It is different to the property’s market value and is often set lower than this to encourage bidders. It is usually used as the starting price for the bidding but, depending on the level of interest, the property may sell for more or less than the auction guide price. Generally, though, if a guide price is attractive, more interest tends to be generated, resulting in more competitive bidding. This can push the bidding price up much higher than the guide price. In fact, properties often sell for 15–25% more than the guide price.

A guide price is shown as either a set amount or a range on the property listing. For example, a property in Pimlico may have a guide price of £380,000 while a property in Bexleyheath may show a guide price range of £230,000–240,000. Having a guide price helps you to decide if a property is a good fit for your budget and whether or not to bid on it. However, it’s important to understand that a guide price isn’t fixed. It can be changed by the auctioneer or the seller at any time before an auction. Therefore, you need to keep your eye on the guide price before bidding commences.

Another point to note is that the auction fees aren’t included in the guide price. The fees are added to the sold price so you need to include these when budgeting for your auction purchase. When it comes to budgeting, the guide price gives you an indication of what the reserve price is. We’ll explain what this means in more detail below.

What is an auction reserve price?

An auction reserve price is the minimum price authorised by the seller for their property to be sold for. It is confidentially agreed between the seller and the auctioneer. The property cannot be sold by the auctioneer for less than this amount, irrespective of the number of bids received.

A ruling in 2014 by the advertising regulatory body ASA stated how a reserve price must be set in relation to the guide price. If a single guide price figure is given, the reserve price can be up to 10% higher than that figure. If a guide price range is given, the reserve price must fall within that range. Referring to the examples we used earlier:  

• The Pimlico property has a single guide price figure of £380,000, which means the reserve price can be up to £418,000.
• The Bexleyheath property has a guide price range of £230,000–240,000 so the reserve price must also be between £230,000 and £240,000.

These guidelines on setting a reserve price are why knowing the guide price can help you to budget before bidding on a property. You should be aware that a reserve price can be changed before an auction in the same way that a guide price can. Therefore, as mentioned earlier, check the guide price before the auction starts. This gives you a clearer idea of what the reserve price is before bidding.

Setting a reserve price in this way ensures that a seller doesn’t undersell their property if there’s a lack of interest on the day of the auction. It should also be favourable enough to encourage more bidders via the guide price to view it as a good opportunity.

What is the auction sold price?

The sold price is just that — the price the property is actually sold for at the auction. Also called the hammer price, it matches the highest bid reached at the fall of the hammer. That bid must reach or exceed the reserve price to be successful.

Depending on the popularity of the property and competitiveness during the bidding process, the sold price may be considerably higher than the auction guide price. You need to bear this in mind when budgeting and working out your bidding limit. It’s important to note that the sold price doesn’t include any of the fees due for an auction purchase. These can include an administration fee, a Buyer’s Premium, a survey fee and legal fees, for example. These fees are payable in addition to the sold price.

Before buying a property at auction, it’s a good idea to check the sold prices of similar properties. Compare the sold price of each property to its guide price to get a sense of its popularity. This gives you an idea of what to expect and whether you should bid on the property you’re interested in.

How is a guide price determined?

Understanding how an auction guide price is set helps you to work out your bidding strategy. Auctioneers take various factors into consideration when calculating guide prices for properties. These include the:

• Size, age, condition and location of the property
• Property features
• Proximity of the property to amenities
• Modifications/renovations that have already been made
• Potential for refurbishment/development
• Recent sale prices of similar properties in the local area
• Current market trends
• Legal issues relating to the property, such as access disputes

Auctioneers need to allow for all types of bidders when setting the guide price, such as those looking to buy a home for themselves that’s ready to move into with little to no work required and those looking for an investment opportunity where there’s a potential for significant added value after work has been carried out on the property.

When each of these factors has been taken into account, the guide price is set to attract as many bidders as possible while still being in line with the reserve price. If not much interest is shown in the property during the auction marketing period, the guide price may be lowered to appeal to more bidders. On the other hand, if there’s a considerable amount of interest, the guide price may increase before the auction date. Ultimately, setting the right guide price helps to drive up the price that the property eventually sells for with competitive bidding.

How accurate are guide prices at property auctions?

Property auctions provide buyers with the opportunity to purchase in a fast, transparent way at a good price. They also offer properties that are often not sold via estate agents and these can be snapped up for desirable prices. At the same time, auctions provide sellers with a fast way to sell at a price they’re pleased with. As such, the guide price has to be set in a way that makes the auction attractive for both parties.

As mentioned above, a guide price is determined by various factors to ascertain a fair market value. They tend to be set lower, however, than property prices advertised by estate agents. This generates interest in the auction and attracts more potential buyers. The guide price has to be carefully balanced so that it’s not too low or too high, ensuring that the auction doesn’t lose potential buyers. This is where an auctioneer’s experience comes in.

Do your own research

Before bidding on a property, you should also do your own research. Arrange a viewing of the property and if you know it needs work, take a builder with you to get an estimate of the costs involved. Consider having a valuation carried out to ascertain the property’s value, especially if you’re using a mortgage to buy at auction. The lender will require a valuation as part of the mortgage process so it’s recommended to do this in advance. Find out how much similar properties have sold for in the area to use as comparables.

Guide prices vs sold prices

Despite guide prices usually being set lower to encourage more bidders, the sold prices achieved at auctions are often a lot higher. Typically, properties sell for 15–25% more than the guide price although the sold price may be a lot higher if the bidding is competitive. On the other hand, if there’s little interest in a property, it may sell for less than the guide price. Remember that a guide price can change at any time before an auction, just like a reserve price.

What happens if the reserve price isn’t met?

If the reserve price isn’t met during the auction, the auctioneer cannot sell the property to the highest bidder. However, you may still have the opportunity to buy the property after the auction. Some sellers accept post-auction offers so you can put your best offer forward to the auctioneer. The seller can then negotiate on the price with you via the auctioneer. If you agree on a price, the auction terms and conditions will still apply so be ready to act quickly.

Decide on your bidding strategy

Now that you understand the auction pricing terminology and the differences between a guide price vs reserve price, you can work on your bidding strategy. Just remember that an auction guide price is only a guide as to what the property may sell for. It gives you an indication of the seller’s reserve price but you need to base your bidding on the size of your budget and what you’re comfortable that the property is worth to you. You also need to allow for the fees to be added on top of the hammer price.

Arrange your finances

Our auction finance specialists are here to help you arrange your finances, whether you need to secure a mortgage or prefer a short-term loan, such as a bridging loan. As the auction process is fast, this needs to be dealt with ahead of the auction. When applying for a mortgage, we can ensure that you have a mortgage in principle before the auction so that you know what the lender is prepared to offer you. We work with lenders that are used to dealing with auction purchases and, therefore, act quickly to process mortgages to meet the short completion timescale. For short-term finance, we can arrange a bridging loan quickly so that you have the funds in place before attending the auction. That way, you don’t need to worry about missing out on an investment opportunity.

Just give us a call on 01322 907 000 when you’re ready. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our brokers will reply to you as quickly as possible with details of the finance options available. At Trinity Finance, we also offer other services that you may want to take advantage of when buying a property. For example, we can arrange your buildings insurance and put mortgage protection in place.