理财 Term - The Winner's Curse Worked Example

Auction Date :   24 Jul 2016
Auction Reserve Price :   $30k
Tenure :   Freehold⁠⁠
Condition :   Poor

There were 208 viewers to the property. Based on 1 bidder arising from 40 viewers, there would be 5+ bidders to the property.

On that day, 6 bidders turned up (exactly according to estimate). The auctioneer started the bid at 31k, with 5k as the bid gap for raising hand. The successful bid was 76k (an increase of 153%).

The condition of the property is poor and requires quite a bit of fixing. The value is priced at 43k (it is usual for valuer to price the property to be auctioned at 30% off its estimated market price, i.e., 70% of 43k = 30k). The meaning of 43k essentially means one can easily get another similar property around the vicinity with similar condition.

To pay for 76k instead of at most 43k (i.e., 76k - 43k = 33k, equivalent to buying 2 properties at the same time) is definitely unwise and at play with the Winner's Curse (WC). At this time (still relatively boom period), one would be better off just buying a property from the available market. To try to win / buy in the auction market is bad idea.

It remains wise to bid in an auction where there are 3 or less bidders. It represents the bane period for this property type. Successful bidding would make the investor very happy in time. Any successful bids for any property type, without paying WC, are always superior purchases.

Footnote:

It is very often that mindful bidder would not be successful at all in most auctions. But, a 1 - 2 successful bids per year would have enhanced my portfolio greatly. I can't be buying properties infinitely with no budget constraint.

In fact, this above-captioned property, with a proposed renovation of 25k, would make the property rent-able (or saleable) only at $0.5k per month, i.e., an ROI (return- on- investment) of 5.9% (0.5k x 12/[76k+25k]x100%). Although this ROI looks reasonably good for this particular property, it is not true if the successful bidder just only pays 30k+25k(reno), giving a ROI of 10.9% (0.5k x 12/[76k+25k]x100%). 

I have bid successfully for a similar asset class at 25k 2 years ago with no competitive bidders, giving a ROI of 12% (0.5k x 12/[25k + 25k] x 100%).

I have been unsuccessful for this new bid. I shall wait for my next lucky strike then.