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January 2019

Psychology of Auction: Social Proof!

Psychology of Auction: Social Proof!

We are often asked about how auctions work, and what makes a good auction so thought we would share the following article that we wrote for another publication:

Have you ever wondered about the psychology of auctions? Have you heard of “social proof? If you understand it you can use it to your advantage.

If you attend any auction across Auckland there’s a good chance you’ll see the following scenario play out –

Auctioneer: “Who wants to open the bidding?”

Crowd: silence

Auctioneer: “Who wants to start it off!”

Crowd: silence

Auctioneer: “Surely you haven’t all come just to see me!”

Finally someone calls out a bid, or the auctioneer makes a vendor bid, and all of a sudden there’s a flurry of hands in the air.

Auctions are a great example of ‘social proof’ – a psychological phenomenon where other people’s actions reinforce one’s own decisions. Imagine you’re heading out for breakfast and there’s two café’s side by side – one is empty, and the one next door is full. You are more likely to choose the busy one, because the assumption is made that something must be wrong with the empty cafe. It’s the same at an auction – if nobody is bidding, it can sometimes (often subconsciously) make people question their own judgement. As soon as someone else has put their hand up, it provides validation that no: there’s nothing wrong with the property, and yes: other people do see value at that price thereby triggering the other potential buyers in the crowd to join in.

Social proof can go both ways. If there’s active bidding it can signal to others that the property must be desirable and it’s worth fighting for, often encouraging people to stretch beyond their original budget. But if there’s no bidding, it can sometimes result in a property being passed in, even though there are people in the crowd who have every intention of buying it. Without the social proof of competition they freeze up, second guess themselves and begin to have doubts. We’ve seen many properties pass in on a vendors bid, only to have multiple parties then go inside to negotiate against each other.

The moral of the story is don’t let other people’s lack of interest in a property put you off. If you like the property, you can afford it and you’ve done your due diligence, then go ahead and buy it!

Questions? We have lots of information on our website at www.thestones.co.nz/property-tips

Building Inspection: Standard Clause or Additional Clause?

Building Inspection: Standard Clause or Additional Clause?

Q: What is the difference between using the Building Inspection clause on the front of the standard sale and purchase agreement, and inserting a building clause in the “additional clauses” section? Which would you recommend to a purchaser? 

Raewyn T.

Good question Raewyn. Firstly, there is no obligation to use the standard clause rather than your own ‘custom’ clause (which you can insert under Further Terms of Sale). Formerly your agent or solicitor would draft a clause to go in the further terms of the agreement and the terms of the clause could vary. The new standard clause (clause 9.3 in the agreement) is designed to protect both vendor and purchaser from possible misuse of a custom written clause. The main points are:

    • Written report required: The report must be in writing and must be provided to the vendor immediately should the purchaser decide to void the contract on the basis of the inspection. Note, however, that the new clause does not give the vendor the option of rectifying any defects.
    • Suitably qualified builder: The clause states that the inspector must be suitably qualified, so no getting your mate to have a look over the property if they are not a qualified builder or building inspector.
    • Ability to cancel (objective test): The clause also states that the purchaser must decide whether the report is unsatisfactory on an objective assessment – that is, would any reasonable purchaser, on reading that report, have found it unsatisfactory? The answer must be yes to cancel validly.

So those are the main elements of the clause. Of course, as a purchaser, you may want to have any minor defects found to be rectified by the vendor, or even negotiate a price reduction, and you will still have that right. However, as a seller, you need to be aware that this clause does not give YOU the right to rectify unless the purchaser agrees.

If the above points don’t suit, you are still at liberty to have clause 9.3 deleted and have your lawyer insert your own building inspection clause under Further Terms of Sale. You may want to do this because you have a friend who you feel is qualified to look over the property, rather than paying for a full building inspection. Or if you are a seller and you want the option to rectify any defects identified rather than having the purchaser being able to cancel the agreement automatically.

Whether you are buying or selling, as with all contracts, it is best to get your lawyer to check and explain the agreement to you to ensure you understand what you are signing and that your interests are protected.

Who’s Looking after Whom?

Who’s Looking after Whom?

Q: We have recently sold our house and bought another. Dealing with different sides of these two real estate transactions has been a little confusing. When we sold we dealt exclusively with the agent we were selling with, but when we bought we used a buyer’s agent and yet we still had dealings with the seller’s agent? I’m interested in whose best interest’s agents are meant to represent.

Danny Y.

A: Great question Danny. Real estate salespeople tend to operate in three ways:

  • Representing only you.
  • Representing another party (a prospective buyer) involved in your sale.
  • Representing both sides – the buyer and seller.

Also called a listing agent, the seller’s agent works for the person selling the home. The agent will list the home, hence the name, and will work to find buyers and eventually sell the home. The owner of the home typically pays the seller’s agent a commission in the form of a portion of the sales price.

In this case, the agent owes the seller undivided loyalty, reasonable care, obedience to lawful instruction, disclosure, confidentiality, and accountability. A seller’s agent must put the seller’s interest first. They must attempt to negotiate the best price and terms acceptable to the seller. While doing this they must treat all potential buyers fairly: They cannot be dishonest or misleading in their dealings with prospective buyers.

Kiwis tend not to use true buyers agents: A buyer’s agent works exclusively for the buyer, not for the seller, and most importantly, is paid a commission or fee by the buyer. Buyer’s agents can be quite helpful for buyers who are out of town, or not resident in NZ.

What often happens in NZ is that a buyer will see a house they like and will ask a real estate salesperson who they know and trust if they can show them the property. The salesperson will then contact the listing agent to see if they can do a conjunctional (i.e. split the listing agent’s commission). This is usually at the discretion of the listing agent, but in the interests of getting their client’s home sold most will agree. If successful the agent representing the buyer will then be paid a portion of the listing agent’s fee. They have a responsibility to both buyer and seller but will obviously be focused on making your purchase of the property as simple as possible.

I hope that helps – the main thing is that all agents have a responsibility to treat everyone in a real estate transaction fairly and honestly, whatever their role in the transaction.