“I used to save all my rejection slips because I told myself, one day I’m going to autograph these and auction them. And then I lost the box.”
–James Lee Burke
I love an auction.
The first auction I ever went to in person was for some old abandoned houses near Fort Knox, Kentucky. I was going to buy a couple, fix them up, rent them out, and start my path to real estate millions.
There were a LOT of people at the auction. They came out of the woodwork. The area I lived in didn’t have a large population, and most of them were at work in Fort Knox during the auction. I had no idea where the rest of these people had come from.
There were a couple of properties that I really wanted. Unfortunately, I wasn’t the only one who wanted them, and pretty soon we got into a bidding war. Monkey Brain, my limbic system, kicked in. This was no longer about what made economic sense, or, even, what I could afford to pay. It became much more primal. It was mano y mano. Monkey Brain needed to prove that he was the alpha.
I won both auctions, and in doing so, I’d become a poster child for the definition of pyrrhic victory.
Unfortunately, I’d not gotten preapproval or financing for these properties beforehand. This was back in the days when I was just out of the Army and waiting to go to law school. I had time on my hands, but not a lot of money. The earnest money deposit took a significant amount of my readily available liquid assets.
…and since I didn’t have a job…financing was problematic. The 30 days to close elapsed, and POOF! Down the drain went my deposit.
Why do I like auctions now and why did I fail so miserably at my first one?
Why I love buying at an auction (except for eBay)
Nowadays, I limit my auction attendance to a couple of categories: furniture and household goods (if we need them) and investment real estate. There are a few primary reasons why I prefer this method of purchasing for larger items:
- I know what I need and how much I’m willing to spend. When making these purchases, I have established beforehand how much money I’m willing to put into purchasing something. If I only bring $X to the table, then I can only spend $X. I also know pretty much exactly what I’m looking for to purchase. It’s the same reason I don’t go to a car auction to buy a different car. I don’t know the first thing about cars except that you put a key in (most of) them, and they go. Take it in every 5,000 miles for an oil change, do what the mechanics say, and voila! Magic. I’m probably an easy mark for unscrupulous mechanics. I’ll never stop finding irony in the fact that one of my positions in the Army was to be responsible for the maintenance and logistics for 14 tanks. It’s a wonder any of them ran. Therefore, I don’t go to auctions to purchase items that I don’t have strong confidence in my ability to inspect and appraise the quality of what I’m buying.
- The items will be on sale, figuratively and literally. People put items up for auction, in most cases, because they just want to get rid of them. Estate sales are a perfect example of this. The executor doesn’t want to deal with the hassle of getting the highest price for each and every item that was in someone’s house, so he or she will hire an estate auctioneer to get rid of it all in one fell swoop. They’re not concerned about getting top dollar; they’re more concerned about convenience.
- There isn’t much competition. Unlike eBay, where you could be bidding against hundreds or thousands of people, most auctions aren’t going to be heavily attended. Most of the people who do show up are going to be tire kickers, not really interested in actually buying anything, but, rather, interested in the spectacle. Chances are that you’re going to truly be competing against one or two people for almost anything. Even in well-attended auctions like the Tarrant County Tax Sale, I only saw two or three people involved in active bidding.
- Most of the people bidding are looking for an absolute steal. I’ve been that person many times. I used to go to the University of Virginia surplus auctions when I was in graduate school in order to get beer money. I had a list of items which I knew I could sell on eBay for a profit and my highest amount that I was willing to pay for each. There were many items, like pallets of printers, that I had no idea what the value was, since any, all, or none of them could be in working condition. Since the auction was an absolute auction, I’d bid $1. If I won, great. If someone else wanted to bid $2, then so be it. If you know what you want and have a solid foundation for why you’re willing to pay what you’re willing to pay for it, you can quickly shake out the low ballers.
But, as I related in my quick story above, auctions aren’t just about numbers. They’re about emotions and psychology. It’s the auctioneer’s job to get the crowd riled up and excited about the process that they’re going to participate in so that they get emotional and competitive. Auctioneers secretly want fights in their auctions. They don’t want the fisticuff type of fight. They want a fight through numbers. When you get into a fight, the auctioneer wins.
That’s why procrastination is so important in auctions.
How can you use procrastination to your advantage in auctions?
The basis of success in an auction has to do with manipulating Monkey Brain for your own advantage. The auctioneer wants to manipulate Monkey Brain to get him to want to be the top dog (or, rather, monkey) in the auction and to not let anyone else appear richer or stronger than he is. After all, if you can afford to pay a high amount for an item, you’re signaling to other people that you’re well off, and not only can you keep up with the Joneses, you can pass them!
The biggest psychological activity that happens in an auction is called the endowment effect, which we previously discussed in the article “The Endowment Effect: Why You Should Buy a Foreclosure and Never Sell to an Investor”. The endowment effect occurs when you own something. Because you own it, Monkey Brain makes it his own, scrawling “PROPERTY OF MONKEY BRAIN” in indelible ink on that object. Therefore, since Monkey Brain thinks of it as his thing, then he thinks it’s more valuable than an equivalent item that he doesn’t own. Put two identical coffee mugs in front of Monkey Brain and tell Monkey Brain that one of them is his, and he will immediately put a higher price tag on the one that’s his than the one that is not his.
The problem with an auction is that you don’t even have to own something for Monkey Brain to put his grimy little paws all over it and claim it as his. All you have to do is be the high bidder at any point in the auction, and Monkey Brain turns into Gollum, screaming “THE PRECIOUS! IT’S OURS! WE WANTS IT!”
Your goal is to use the endowment effect to your advantage in an auction.
If you’re the buyer:
- Don’t bid early. The last thing you want is for Monkey Brain to be screaming in agony because that other $#(*$( took away your widget by outbidding you and then have to listen to him pitch a fit for the entire time the auction is running. You’re going to have to keep telling him no, and eventually, you’ll suffer from ego depletion, and you’ll bid just to get him to shut up.
- Wait until the last possible second to bid. Because you don’t want the endowment effect to kick in and for Monkey Brain to dig his claws into whatever it is that you’re bidding on, waiting until the last second until you bid minimizes the time that you mentally “own” it. This will prevent you from getting emotional about it if you’re outbid and will allow you to more easily stop bidding once you hit your walkaway price.
You do have a walkaway price, right? That’s the price at which you refuse to go any higher. You need to set one LONG BEFORE you start bidding, when Monkey Brain isn’t paying attention, so that he can’t incorporate some fuzzy math into your calculations.
If you’re the seller
- Make the auction last as long as possible. Short auctions don’t give bidders time to really start to imagine themselves taking whatever it is that they’re bidding on onto their personal Flat Stanley tours, to see it mounted nicely on the mantle, or to imagine sitting in its luxury. You want your bidders to be dreaming of owning whatever it is that you’re selling. You want their Monkey Brains to be putting stickers and posters and graffiti on it. You want them hooked. The longer the auction, the more time you’re allowing your bidders’ Monkey Brains to do the work for you.
- Make the starting price as low as possible. The lower the starting price, the more bidders you’ll attract, and the more people you’ll have throwing their hats in the ring with a bid. Each time a new person bids, you’re introducing a new Monkey Brain into the mix. All it takes is for two of them to become really attached to what you’re selling to create a bidding war that will, hopefully, allow you to get an irrational price. It doesn’t always happen, as experienced bidders have learned to tame their Monkey Brains (or sit on them the entire time, only allowing the occasional muffled squeak), but sometimes you can get an inexperienced bidder or two who get emotional about the process. Opening the bidding at a low price gives you more opportunity to get those emotional bidders sucked in.
Unless you’re selling some rare Picasso at Christie’s, chances are that you’re not going to get more money out of an auction than you could in a private party transaction. You’re most likely going to use auctions as a seller as a matter of convenience.
If you use these tips, though, you’ll improve your control over the psychology of the auction process, much to Monkey Brain’s chagrin, and you’ll be a much happier bidder or seller.
What’s your experience with auctions? Have you ever been sucked into a bidding war? Tell us about your bids in the comments below!