Real Estate Auctions Popular with Both Sellers and Bargain Hunters
Did you know that according to a realtors study, one in every three properties sold by 2010 will be sold utilizing the auction method? Even now, gross sales of residential properties at auction rose nationally to $14.2 billion in 2005, up 24 percent from $11.5 billion in 2003, according to estimates reported by the National Auctioneers Association, an auctioneering trade group.
Fueling the auction trend too is the higher comfort level most Americans feel as a result of using Internet auction services, which have legitimized auctioning as an acceptable form of commerce to the masses. The Internet allows them to search for properties all over the world, take virtual tours of properties they're interested in and participate in remote auctions.
In Australia and New Zealand, where auctioning is the dominant method of selling real estate, buyers do not view auctions as a last-chance route to sale. While buyers in North America thought that auctions are only for distressed or tainted properties, most properties sold at auction today get there because sellers chose to sell them that way so as to attract the highest-possible sale price.
The auction process also changes the way negotiations are typically handled. With the auction method, buyers are focused on winning the bid, and beating out other buyers and not on beating up the seller. With the auction method, buyers push the price up against each other with no ceiling instead of negotiating against the seller, who has already pre-set the ceiling.
Types of Auctions
Those of you who frequently handle business-asset auctions are likely already familiar with the typical auction methods. The types most commonly used are open outcry (or English auction) and sealed bid.
This is the type of auction most familiar to sellers. The crowd gathers, and the auctioneer calls out buyers' bids. The excitement builds until the high bidder is "knocked down" by the auctioneer, the contract is signed and the property goes into final escrow. Open outcry auctions may also permit buyers to bid by telephone, proxy and online. The asset most suited to open outcry is one that is similarly valued by the buying community and where open competition of bidding will serve to drive up the price. This generally includes residential, commercial and industrial properties of all shapes and sizes (as well as machinery, equipment and other types of personal property). The open outcry works best when there is a large pool of potential buyers to tap in to.
All bidders submit their offers to the auctioneer by a certain date without knowing the bids of other participants. Here, the buying public may value the property differently among themselves. One buyer may have a particular use in mind for which he is prepared to pay a certain price, while another buyer will have a different use and price point. A sealed bid insures that each will submit his best and highest bid. The sealed bid works best when there is a limited pool of potential buyers to tap into.
In either of these types of auctions, sellers have two methods they can use to sell the property: absolute and reserve. An absolute auction means that the property is sold to the highest bidder without reservation of price, but at the terms and conditions set by the seller. An absolute sale is the strongest-selling message to the buying community. It attracts purchasers from the greatest geographic area. Buyers can justify their time and efforts to inspect, bid and buy, knowing there is no question that the property will be sold. The more participants, the higher the price received.
A reserve sale means that the property will be sold at any price equal to or greater than the agreed reserve (minimum bid) at the terms and conditions set by the seller. A reserve price provides the seller with a floor, but the reserve price must be market-competitive. In a declining market, there is always the real danger of setting the reserve price too high.
Reasons and Benefits from Selling Real Estate at Auction
There are many reasons why you would choose to sell real estate at auction aside from wanting to achieve the highest possible sale price. Many of these also apply to sales of personal property.
•When a transparent sale process is required. An open outcry auction allows for full public disclosure and participation with no portion of the process concealed from view. This can be particularly beneficial for trustees or situations involving ownership disputes. Buyers also love the transparency of auctions. Unlike the traditional way of selling real estate—in which buyers first make a bid, sign a sales contract, then pay for the inspections and renegotiate the price—auctions let them do their due diligence before the sale.
•When time is of the essence. This includes properties that must be sold by a certain date, probate sales, trust, bankruptcy, divorce, inheritance and partnership dissolution sales. The benefit here is that the seller has a certain date by which the property is sold and money received. Additionally, the shortened period for an auction program can save a seller three to six months' additional costs of taxes, insurance, maintenance, etc.
•When release of liability is required. Properties with unique circumstances for which the seller wishes to be relieved of any and all liabilities, such as potential environmental hazards or structural defects. In other words, the property is sold "as is, where is."
•When simply listing the property has not attracted buyers or resulted in a sale. Auction programs can offer an expansive marketing, advertising and promotional campaign to attract the largest pool of buyers and subsequently the highest possible price. This typically goes well beyond what a normal listing broker would do.
•When the seller wants to avoid commissions. In an auction, the seller usually pays zero commission. All commissions are paid by the buyer via a buyer's premium.
Use of Real Estate Auctions in Bankruptcy, Other Situations
In a recent auction sale, the owners had resisted realty agents' frequent overtures over the years to list their property. Upon the death of the owners, the trustee opted instead to sell by absolute auction. One month before the auction, the trustee received multiple offers of $2.9 million. The trustee decided that to preserve transparency and fairness, as well as having a noncontingent sale, it was best to continue with the auction. The property went to the highest bidder for nearly $3.5 million—a 21 percent higher sale price than the highest pre-auction offer. This result, a 21 percent higher sale price, is common with absolute auctions.
The relationship between an auctioneer and a seller is similar to that between a broker and client. The auction contract does establish an agency relationship between the seller and the auctioneer.
Sellers pay no commission when selling real estate at auction—an important benefit. As with business-asset auctions, most auctioneers charge a buyer's premium typically ranging from 4-8 percent of the sale price for real properties. This buyer's premium is used to compensate buyer's brokers if they bring a successful buyer to the auction. In many auctions, the property is currently listed by a broker. These brokers partner with the auctioneer, and when the property is sold they get a portion of the buyer's premium.
The relationship between an auctioneer and a seller is similar to that between a broker and client. The auction contract does establish an agency relationship between the seller and the auctioneer. A reputable auction company should hold an auction license and a real estate broker's license. Real estate auction companies must have extensive valuation expertise to educate the seller on the true value range of the property.
To ensure a commercially reasonable sale, attract a national and/or worldwide audience and obtain top price for the property, the auction company should be able to provide an extensive marketing, advertising and promotional campaign. This includes advertising in local and national publications, direct-mail campaign, using strategic alliances with Internet search engines, listing on local and regional listing services, alliances with prominent brokers nationwide, cable television advertisements, online video tours of the property and, in some cases, television and radio.
An experienced real estate auction company will have a bidder's qualification procedure that will ensure that all bidders arrive on auction day financially pre-qualified and with a deposit for at least 10 percent of the expected sale price. This guarantees that all participants are serious buyers with the ability to close the transaction and quickly provide money for the seller and/or creditors.
Unlike foreclosure auctions on the courthouse steps, all real property auction sales do not require an all-cash sale on the day of the auction. Final payment can be set for as much as a 30-day period following the auction date. This enables the buyer to obtain standard financing that provides the buyer the ability to pay the highest possible price.