As accountant Ian Eldershaw explains, "Auctions get you second best - never the best. The second best price level is set by the second best bidder. An auction stops when the second best bidder drops out and you never know how much you could have really got.

For instance, imagine two people called Ken and Helen both want to buy your home. Ken is prepared to pay $340,000 and Helen is prepared to pay $320,000. But what will happen in an auction? You'll get a little over $320,000. When Helen stops bidding at $320,000, Ken will bid $321,000. And the bidding stops! The auction is over. It's an anti-climax. Ken grins in triumph because he paid $19,000 less than he expected. You missed out on $19,000. You got second best."

Ian points out that a skilled negotiator would have got the best price of $340,000. To get the best price, each buyer would have been asked to declare their best price one time and one time only. Helen would have declared $320,000. And because Ken would not have known Helen's price, he would have no option but to declare his best price. The big trouble with auctions, for sellers, is that the prices being offered are done in public. Every buyer knows exactly what other buyers are offering. Everyone knows the sellers' lowest price, but no one knows the buyers' highest prices. This is like playing cards where one person has to turn the cards face up and the others are allowed to keep them face down. The people who see all the cards have a huge advantage.

Marilu Hurt McCarty, Professor of Economics at Georgia University, says that when bidding is transparent - meaning that each bidder can see what other bidders are offering - buyers hold their bids below what they are prepared to pay. This means they are "paying less to the sellers". And this is why auctions do not get the best price, they get the second best price. But still, thousands of sellers are tricked by the one-sided arguments of the auction agents.

David Slade is a real estate agent in Timaru, New Zealand. His agency was considered for the sale of a prime lake-front site on Lake Tekapo. David advised against auction, but he was not selected as the agent. The sellers signed up for an auction with a large real estate network. At the auction, the bidding commenced low, as it always does, and then, when it reached $192,000, it stalled. No further bids. The property was sold.

A newspaper wrote a story about the success of this auction with the agent boasting, "It's a lot of money." Yes, it was a lot of money. But, not in the way that most readers were led to believe. The buyer had been prepared to pay $315,000.

But the second highest buyer had only been prepared to pay $191,000. And so the sellers received $192,000, which was one thousand dollars above the second best price. Had they followed the advice of David Slade and not chosen auction, they would have received an extra $123,000 - from the same buyer.

They would have received the best price, not the second best price.

Auctions don't get the best price. They get the second best price.

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This is an extract from the book, Don't Sign Anything! by Neil Jenman.