Real Estate Auctions
Imagine your ideal real estate sales technique. It would probably be one that sold the property quickly at a price that both the seller and the buyer considered fair, and that gave the real estate agent a good fee or commission, too. Well, you don’t have to tax your mind trying to figure out what this technique might be, because it already exists.
Auctions are effective, easy and fun marketing tools that are rapidly growing in popularity as a means of selling real estate. No longer simply a way to dispose of property after a bankruptcy or foreclosure, auctions have become a legitimate way to sell real estate. And they work for all types of property, including residential, commercial, industrial, agricultural and vacant land. In fact, auction sales of real estate have more than quadrupled since 1980 and are expected to account for 30% of all real estate sales by the year 2000.
WHY AUCTIONS WORK
Why are real estate auctions so successful? Because they change the direction and focus of the sales effort in several important ways:
- From waiting for an offer to stimulating the market to get an offer,
- From reducing the price (negotiation) to building a price (bidding),
- From valuing only price to valuing the time involved in getting an offer, and
- From competition among properties to competition among buyers.
Let’s look more closely at how auctions differ from a negotiated sale, One of the most difficult parts of the traditional listing process is setting the asking price. If the price set is too low, the property might not bring in all it could. If the price is too high, the real estate might not sell for some time, resulting in holding costs that can eat considerably into the owner’s proceeds. Besides the sales date being uncertain, the offer is usually subject to negotiation and contingencies, such as inspections, which can adversely affect the price and make the closing less definite.
The auction process flips this over. The seller establishes the date and terms of the sale, such as minimum bid, auction without reserve (absolute auction) or auction subject to confirmation. Bidding sets the price. There is no negotiation, and the property is sold “as is.” This makes inspections part of the pre-sale due diligence process, not the post-offer negotiation process, and makes closing on the accepted bid almost a certainty.
Also, auctioneers typically allocate more for marketing than is the case for a traditional listing, in fact, well-planned marketing efforts are key to an auction’s success. Consequently, auctioneers use strong media advertising, targeted direct mail and other aggressive marketing techniques to get the word out about the auction and attract bidders to it. And because auctioneers often advertise in more than just the traditional places for example, placing ads for vacation homes in the sports section and their ads attract bidders who might not be actively seeking a particular property, but from whom the top bid comes.
From the seller’s point of view, auctions provide a powerful tool for selling their property quickly and for a fair market price. That’s because auctions often generate more interest — and greater value — than other sales techniques, for several reasons.
By establishing a definite sale date, an auction creates a sense of urgency that increases buyer interest. The pressure of a deadline can push bidding considerably beyond the price that would have been set in a traditional listing. This is due not only to the excitement about the possibility of obtaining a bargain, but also to the fact that bidders are competing with each other for a given property. An auction is a social event, not individual negotiation, that creates the apparent requirement that bidders compete to be the successful buyer. So they do sometimes much to the seller’s advantage.
Having a definite sale date gives auctions another advantage: The seller usually gets the proceeds shortly afterwards. Because a substantial down payment is required of the buyer, the sale almost always closes. As a result, an auction sale often gives the seller cash more quickly than a negotiated sale. Because of the time value of money, having the dollars in hand to invest in other ways, rather than tied up in the property for months or years, can make a quick sale worth more in future gain than a sale prolonged by lack of market interest, contingencies or negotiation. Auction sales can also eliminate the need for a costly bridge loan or for security and holding costs on a vacant property. Minimizing such expenses can make the proceeds of the sale even more valuable to the seller,
However, sellers are not the only ones who benefit from auction sales of real estate. Buyers like the fair competition that auctions provide all bidders have a chance to buy the property and the fact that they determine the purchase price. Buyers also have an opportunity to do inspections and due diligence before they bid, so they have a better idea of what they are purchasing and greater certainty that the top bidder will get the property. So buyers don’t waste their time negotiating on properties they may end up not purchasing.
Real estate agents benefit, too. Auctions can increase not only their sales and market share, but also their fees and commissions. They can even get a commission by bringing the winning bidder to an auction. Because auctions can help customers achieve their goals (or selling a property, real estate agents can strengthen their reputation and get customer referrals for more business. Also, by cooperating with an auctioneer, a realtor can generate leads from the bidders who attended the auction but did not end up with the property.
DECIDING WHETHER TO AUCTION
While auctions are suitable for all types of real estate, they may not be appropriate for some sellers or specific properties. In determining whether an auction is appropriate, see how it fits the nature of the market, the needs of the seller, and the condition of the property. Here are some things to consider when deciding whether or not to sell a particular piece of real estate by auction.
MARKET – AUCTIONS WORK, ESPECIALLY WELL IN:
Changing markets, in which there are no reliable benchmarks for setting the price, Dull markets, in which similar real estate is not selling (auctions bring in new people from other areas or markets), High demand markets, where no comparables exist for the type of property being sold, and Emerging markets, such as subdivision openings or closings (auctions generate interest).
Seller – The need of the seller for a quick sale or immediate cash can make an auction the preferred sales technique in situations like these:
- Foreclosure or bankruptcy,
- Partnership or marital dissolution,
- Estate liquidation, and
- Retirement to another location
- Property – While all types of property are amenable to an auction sale, the following are particularly well suited:
Vacant properties (the quick sale of an auction can reduce holding costs), Properties with substantial equity, and
Unusual, unique or high demand properties. Many auctioneers will recommend that there be a good fit on at least two of these three factors. Others prefer a fit on all three before they will accept a property for auction. But even when all three fit, an auction is not necessarily appropriate if other conditions are not right. For example, perhaps the worst time to set up an auction is when a real estate listing is about to expire (even then, however, an auction might provide a solution, depending on the amount of time left before expiration.)
If there is a fit but the notion of an absolute auction (where the property is sold to the highest bidder regardless of price) seems too scary, there are ways to reduce risk. For example, the seller might prefer a minimum bid auction, in which the auctioneer will accept bids at or above the minimum price. This guarantees that if the property sells, the seller will receive at least a certain amount. Another option is the reserve auction (also called an auction subject to confirmation), in which the high bid is reduced to an offer, which the seller has a right to refuse for a specified time. If the seller does not like the price bid, there does not have to be a sale.
GIVE YOURSELF THE AUCTION ADVANTAGE
Of course, if you have any questions about the merits of an auction for selling a particular piece of real estate, or about the best way to structure an auction to achieve your objectives, consult a professional auctioneer. As highly knowledgeable professionals, we can advise you about the best course of action. And if you decide to go with an auction, we will take care of all the details, from marketing through closing.
We would welcome the opportunity to discuss your situation and help you determine how an auction can help you sell real estate quickly and at a fair market price. Please call us for more information, and give yourself the auction advantage.
BUYERS’ PREMIUM INFORMATION
A buyer’s premium is an amount added to the high price of the property either a flat fee or a percentage of the high bid, that the buyer must pay in addition to the bid. The premium is advertised in advance and becomes a part of the final purchase price. The buyers premium works well on types of property: personal property, business liquidations and real estate. The buyer’s premium defrays the sellers cost of conducting the auction and thereby increases the bottom line for the seller.