How to Avoid (And Start) a Property Bidding War

A bidding war is every buyer’s nightmare and seller’s dream. At an auction buyers want to get the lowest price while the seller wants the highest. So how does a bidding war start? This article explains the psychology behind the phenomenon and how you can try to avoid — or start — one.

Every property sold in New Zealand comes with a huge price tag which means a small variation in price can make or break the bank. An extra 3% on the sale of a property could easily mean a difference of more than $30,000 in places such as Auckland and Queenstown. With a little planning in place, you’ll be better placed to maximise the sale of a property and save thousands when you decide to buy.

It’s All Psychology

Bidding wars arise from human emotions. This is visibly at play in the auction room, but it all starts before anyone starts bidding. The psychological games start when prospective buyers first visit a property to inspect the house and imagine it as their own.

The Psychological Allure of Ownership

The desire to win a bidding war often stems from our deep-rooted relationship with ownership. Once we set our heart on something, the fear of missing out (FOMO) on something we believe is ours can become all-consuming.

This psychological principle, known as the endowment effect, causes people to assign greater value to things simply because they've developed a sense of ownership over them. This is why car dealers want customers to take a vehicle for a test drive, they want them to develop a sense of connection. Once a sense of attachment is formed to something, it can fog a buyer’s logic in the auction room.

Real estate agents say bidders begin to imagine the house is already theirs, leading to a reluctance to let go. Loss aversion kicks in, compelling them to bid higher to avoid the pain of losing.

The Role of Scarcity and Competition

Scarcity is a powerful force that can drive bidders to go to war. When there is limited housing in a hot market, buyers feel an urgency to act swiftly so they don’t miss out on their dream home. This pressure can inflate perceived property values and trigger impulsive decisions.

Housing scarcity, bidder rivalry and time pressure can all spark ‘auction fever’, driving the price of the item being sold far beyond its estimated value.

Bidder rivalry and the time pressure of an auction stoke the flames of a bidding war. As multiple buyers elbow bids for the same property, a primal instinct kicks in – the desire to win. Auction wars with several bidders can escalate rapidly, with buyers driven by a competitive spirit to outbid one another. Everyone likes to win, and an auction is no different. Sellers can use this to their advantage.

The Art of Fuelling Bidding Wars (For Sellers)

Savvy sellers and their agents often employ tactics to ignite bidding frenzies, capitalising on buyers' psychological triggers. Here are some common methods:

1. Open Home Strategy

One way to get buyers to pay more is to make them feel like they already own the home. Paying someone to expertly stage a property, matched with a convenient open home scheduling, will let potential buyers imagine themselves owning the property.

Repaint the front door, put cookies in the oven before the open home so the house smells of baking, and do whatever it takes to make the place seem homely.

2. Tidy, Tidy, Tidy

Make the property look its absolute best. Mow the lawns, repaint faded walls and get rid of family photos. A savvy property investor might even mow that neighbour's unkempt lawn if it detracts from the appeal of their property. Don’t force people to imagine or wonder what it could look like at its best – show them the dream house.

3. Promoting Competition

Find an agent who can subtly stoke competition by mentioning other interested parties or past bidding wars, priming buyers for a high-stakes battle. That means getting an agent who is active in the market and up to date with the latest trends.

Real estate agents employ some of these tactics to get the best result for the seller. Their job is to achieve the best possible price for clients. By creating a sense of excitement and competition, agents can leverage buyer psychology to drive up offers.

Learn more: mistakes to avoid when selling your home

Avoiding the Bidding War Trap (For Buyers)

A bidding war can be intoxicating. Anyone who has been in an auction room has witnessed the thrill of buyers bidding hundreds of thousands of dollars on a dream home. However, it can be easy to lose yourself in the excitement. It’s important to stay grounded and avoid succumbing to emotional impulses. Here are some practical tips:

1. Set a Firm Budget

Establish a maximum price you're willing to pay and stick to it, regardless of the heat of the moment. This financial boundary can prevent reckless overbidding.

2. Seek Professional Guidance

Engage a trusted real estate agent or adviser who can provide objective counsel and help navigate the bidding process rationally. A registered valuation is a good option, though you’ll often need one before going to an auction anyway, as it’s a routine condition for obtaining lending.

3. Think About Alternatives

Remember, there are always other properties on the market and will continue to be in the future. If a bidding war escalates beyond your comfort zone, be prepared to walk away and refocus your search. A part of this is avoiding emotional over-attachment to any one property before it is yours!

4. Create an Auction Strategy

Attending auctions with a clear, pre-determined bidding strategy can help you avoid getting caught up in the frenzy and overpaying. Visit a few auctions to get a feel of the process so you aren’t overwhelmed on the day you go to bid.

5. Maintain Perspective

At the end of the day, it's just a property. While emotions may run high, it's crucial to keep a level head and prioritise your long-term financial well-being.

Buying a home is a major financial decision, and it's essential to approach it with a clear, analytical mindset. Don't let the thrill of the chase cloud your judgment. Auctions are designed to put pressure on the unprepared. Don’t be one of them.

Learn more: how to prepare for a home auction

The Bottom Line: Understand the Art of the Bidding War

Failing to plan is planning to fail. When you enter an auction room, either as a buyer or seller, you need to have done your homework to ensure you get a fair price. Understanding the art of the bidding war will empower both buyers and sellers in this aspect of the property market.

Sellers can use psychological triggers to maximise returns, while buyers can protect their bank accounts by staying grounded and informed. By recognising the emotional and competitive dynamics at play, you can get through an auction with confidence.

Whether you aim to ignite a bidding war or avoid being swept up in one, knowledge and preparation are your best allies in the auction room.

It’d be the pleasure of one of our trained professionals to help you work through any of the topics mentioned above, so get in touch today.