The Psychology of Auction Sales

As valuers, it is our responsibility to arrive at an informed and justifiable opinion of the value of an asset. A myriad of factors need to be considered, such as the new cost, age, condition, current level of demand and scarcity of the asset in question. Once these factors have been accounted for, the value of the asset should be ascertainable. Unfortunately, however, things are not always that simple.

When valuing an asset on the basis of Market Value, we utilise the definition given in the RICS Valuation Global Standards: ‘The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’. The word ‘should’ in this definition, is key.

In reality, sales of assets, particularly at auction, can find themselves straying from this definition. Proper marketing is always conducted, unless there is an unusual time constraint, but not all parties can be counted on to act knowledgeably, prudently and without compulsion. In one case recently, vigorous research suggested that a particular asset was abundant in the used marketplace and could be purchased for approximately £100 each. When these items were auctioned, they achieved a realisation of over £260 each. Perhaps the buyer was not acting knowledgably.

Sometimes, ‘auction fever’ can play a role, whereby bidders are willing to pay more than they would ordinarily, or even more than an asset is worth, motivated by competition. During a recent sale, I asked a buyer what he planned to do with the numerous items he had purchased, to which he replied that he had no idea and didn’t even need the items. Perhaps he had been caught up in the excitement of the auction.

At another sale, I spoke to a buyer who claimed that he had bought some lots not because he wanted them, but because he wanted that particular area of the site clear of other parties, in order to make his egress simpler.

The nature of the overall sale can also have a significant bearing on the realisation of an individual asset. For instance, it could be argued that it is prudent to place a higher value on an asset if it is to be sold in a large, attractive auction with many high value assets, than if it is in a smaller, less attractive auction. Sometimes assets may seem more attractive to buyers when placed in stark comparison with other, more expensive ones. For instance, Rolls Royce famously pivoted from marketing their high-end vehicles at car shows, where they seemed an expensive extravagance, to aeroplane and boat shows, where they seemed almost like an impulse purchase in comparison.

When arriving at a valuation, the valuer must try to be objective, use diligent research and a wealth of experience to predict what an item might sell for in a given scenario. However, as the examples above show, some factors are often difficult to predict. This nuance is what leads many to the opinion that valuation is as much an art as it is a science.

Rich Cheeseman, Marriott & Co. Valuation Surveyor