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Are Auctions a Good Way to Sell Real Estate?

/ Real Estate Auctions

 

What is a Real Estate Auction?

Real estate auctions are an innovative, accelerated, and effective way to sell real estate.  Auctions have been around for thousands of years.  Why?  Because they work.  Auctions utilize an event-based marketing plan that creates urgency for the sale.  If a potential purchaser wants the property, they need to bid at the auction.  Auctions work best for properties that are unique, desirable, or in demand.  The sellers of these types of properties may find the best sales results with an auction, where potential buyers must compete for the property.  Competition leads to the property being sold at true market value.  Just because a property isn’t unique desirable or in demand doesn’t mean it cannot be sold at auction.

 

What types of Properties are Sold at Real Estate Auctions?

All types of properties are sold at auction.  These include:

  • Residential Real Estate,
  • Luxury Homes,
  • Condos,
  • Commercial Real Estate,
  • Lots,
  • Farms,
  • Groves,
  • Acreage, and
  • Timberland.
 

Why are Real Estate Auctions Used?

By using an auction to sell a property, the seller typically knows ahead of time when they will receive an offer or offers.  They also know when the closing should take place.  Auctions level the playing field among all potential purchasers, by stipulating the terms of the Contract for Sale and Purchase that will be signed.  Yes, the seller stipulates the terms.  Sellers don’t have to respond to individual offers with different terms, while trying to decide which one is best.  Further, auctions start at a lower price, and work their way up.  This creates momentum and competition among potential buyers.  On the other hand, a traditional listing publishes an asking price.  If that price is too high, the property may just sit on the market.  This high asking price also fixes an unrealistic value for the property in the minds of the seller.  If an asking price is too low, the property may receive multiple offers quickly, and sell below its true market value.  Further, certain techniques, such as High Bidder’s Choice and Multi-Par can only be done at auction.  These techniques cannot be done through traditional one-on-one negotiated sales.  Auctions are also effective for pre-construction sales and builder closeouts.

 

What about that Top-Notch Real Estate Professional who can Sell a Property in one day above the Listing Price?

We have all heard the story of some great real estate agent that sold a house the first day it was listed, with multiple offers, above the listing price.  Was that really a great real estate agent?  If the property sold above the listing price, was the listing price high enough in the first place?  Did the seller get lucky that they received an offer above the listing price?  Was the true market value of the property even higher?  Did the listing price act as a limiter for higher offers?  Finally, the property wasn’t actually sold the first day it was listed.  The property was simply “Under Contract”.  Any number of things could have gone wrong and the sale would not have closed.  Typical Contracts have contingencies for the buyer to obtain financing, for inspections, and some even have contingencies for the buyer selling their current home.  These contingencies can drag out the time from Contract to Closing.  In some cases, the buyer may be able to back out of the Contract because of contingencies.  During this time, the seller is still responsible for all costs associated with the property, including:  The mortgage, insurance, maintenance, repairs, and taxes.  Further, inspection contingencies may allow the buyer to come back and ask for concessions for repairs.

Real Estate Auctions are Different.

In a real estate auction, there is no limit as to how high the bidding can go.  Further, there typically are no contingencies – unless the seller wants them.  The buyer would be purchasing the property, As-Is, for cash.  They would waive their rights to further inspection.  There would be no contingency for obtaining financing.  Can a buyer finance the purchase?  Of course – but this would have to be arranged in advance of bidding. This lack of contingencies could possibly save a seller thousands of dollars in carrying costs associated with the property.  Since some sellers would even prefer to sell their property for less rather than have extended carrying costs, this is definitely something to consider.

 

Back to the Question:  Are Auctions a Good Way to Sell Real Estate?

Real estate auctions sound pretty good.  And, they are.  So, are auctions a good way to sell real estate?  The short answer is, it depends. Most properties can be sold at auction.  However, not all properties should be sold at auction.  But for certain properties, a real estate auction may be the best choice.  To understand this, we need to look at three things:

  • The Seller,
  • The Property, and
  • The current Market Conditions.
 
The Seller:

The first thing we look at is the seller.  It is important that the seller understands auctions. Many sellers who object to auctions simply don’t understand them.  Also, there are a lot of well-intentioned real estate professionals who also don’t understand auctions or have a limited understanding of auctions, who spread misinformation.  We need to know a little about the seller’s situation.  Here are some things to consider:

  • What are the reasons for selling? There are many reasons to sell.  But those which are time-sensitive might point to an auction being the best choice to sell a property.  Time-sensitive situations might include:
    • The dissolution of a marriage – divorce, or the breakup of a partnership,
    • The seller is in Contract on another property,
    • The seller is moving,
    • The seller is liquidating an estate,
    • The seller’s new home is near the end of construction,
    • The seller cannot afford the costs associated with carrying the property,
    • The seller is a developer who needs properties pre-sold to break ground by a certain time,
    • The seller is a developer who wants to close out a project to move on to another one, or
    • The seller needs to sell property to meet a balloon mortgage that is about to come due, or prior to an increase on an adjustable rate mortgage.
  • Does the seller need immediate cash? If a seller needs immediate cash, an auction may or may not be the right choice.  Even though auctions are quick, they are not immediate.  Auctions work best with time to implement the marketing plan.  If the immediate need for cash would not allow for adequate marketing time, the seller might not be a candidate for an auction.
  • Is the seller willing to accept true market value for the property? If the seller needs a certain price for the property to make it worth selling, or if the seller has an unrealistic concept as to the true market value of their property, they might not be a candidate for an auction.  Many things go into determining the true market value of a property, including:
    • The property’s location,
    • The property’s condition,
    • The age of improvements on the property,
    • The property’s usefulness,
    • The property’s appeal,
    • Liabilities on the property,
    • Current Market conditions, and
    • The contract terms stipulated by the seller.

If the seller is willing to accept true market value for their property, they may be an ideal candidate for a real estate auction.

  • Does the seller have enough equity in the property? As a rule of thumb, it is ideal if the seller has 25% or more equity in the property to hold an auction.  As with any rule of thumb, this is a generality, and every situation should be looked at on an individual basis.
  • Does a seller have a listing that is about to expire? This is a question that affects real estate professionals more than the seller.  If a real estate professional has a listing with a seller that is about to expire, they may want to consider an auction, to have an offer prior to the expiration.
The Property:

The second thing we look at is the property.  Some properties are ideal for real estate auctions.  Other properties are not.  Some questions to consider are:

  • Is the property in high demand? If the property is located in an area of high demand, there should be multiple potential buyers interested in it.  Having multiple potential buyers leads to competition for the property.  Competition leads to a sale at true market value.
  • Is the property desirable? Even if the property isn’t located in a high demand area it may still be desirable.  Some desirable traits might be:
    • It is a corner lot,
    • It is on a cul de sac,
    • It adjoins a property that cannot be developed,
    • It is lakefront,
    • It is beachfront,
    • It is fenced and cross fenced,
    • It is fully leased with current market rate rent,
    • It is in the vicinity of an attraction, mall, big box store, etc.,
    • It is the last available property of its kind,
    • It is sub-dividable, or
    • It has marketable timber.

The list goes on.  Many aspects of the property may make it desirable.

  • Is the property unique or difficult to appraise? Imagine there is a community of homes, where all the homes are similar. There are thirty of these homes on the market, all with relatively the same listing price. Try as you may, but it would be difficult to create a sense of urgency to purchase a home at auction there.  A home in this situation could still be sold at auction.  It will receive true market value.  But a key factor to that value would be the number of homes available on the market.   Now imagine a unique property – a one of a kind property.  Or, imagine the largest, best kept property in an area.  Imagine a property that is only available once in a lifetime.  These are the types of properties should be sold at auction.
  • What is the condition of the property? There is a perception by some that real estate auctions are for foreclosures and distressed properties.  This is far from the truth.  Today a majority of the properties sold at auction are not foreclosures and are anything but distressed.  More and more sellers are choosing the cost-effective, accelerated method of marketing that auctions provide.   But please don’t think that fixer-uppers won’t do well at auction.  They do.  Today there is a market for fixer-upper homes and homes that can be “flipped”.  The key to condition is difference.  Is the property different from the properties around it?  Is it a fixer-upper in an established community of well -maintained homes?   Is it a fully updated home in an older community? Condition isn’t a limiting factor for auctions.  But it is a factor to consider.
  • Are there title problems with the property? There are numerous situations that may cause a title problem.  Everything from typographical errors, to open building permits, to illegal deeds can cause a title issue.  If a title issue is discovered, it is best to correct it before auctioning a property.  Why utilize an accelerated marketing process, only to then have a delay in closing due to a title issue?
  • Is the property sub-dividable? If a seller can sub-divide a property into two or more parcels, the property is an ideal candidate for auction.  Only at auction can a seller take advantage of the Multi-Par technique, an innovative method to maximize the value of a given property.
  • Are there multiple similar properties being sold? Is the seller selling lots in a subdivision, or condos in a building?  If there are multiple properties being sold, the situation would likely be helped by a real estate auction.  Only at a real estate auction can the individual properties be sold as High Bidder’s Choice, thereby having all potential purchasers compete to be the first to select which property or properties they would like to purchase, maximizing the value for the seller.
  • Does the property consist of acreage? In some areas, sellers wouldn’t consider selling acreage in any way except at auction.  In an acreage auction it is common for the bidding to be in terms of the price per acre.  At the end of the bidding, the price per acre is multiplied by the number of acres being sold in establishing the Contract price.  A small increase in the price per acre can mean a large increase in the overall sales price.  A fifty dollar increase per acre, would translate to a twenty five thousand dollar increase in the sales price of 500 acres.
The current Market Conditions:

Although auctions work in all market conditions, they work best during a seller’s market.  When there are more buyers than sellers, why wouldn’t a seller want those buyers competing to purchase their property?  Auctions should be strongly considered during such a market.  Auctions should also be considered when market conditions are changing.  If a seller must sell their property when the market is going from a seller’s market to a buyer’s market, and prices are going down over time, the accelerated sales process associated with real estate auctions can provide the seller with a hedge against further price reductions.  When the market is transitioning from a buyer’s market to a seller’s market, and prices are going up, the fact that auctions don’t limit the ultimate price may benefit sellers.  During these times, a listing price may be placed on a property that is quickly outpaced by the rise in prices.  In this situation, a real estate auction might help to ensure that the property sells at true market value.

 

The Two-Thirds Rule:

The National Association of Realtors (NAR) recommends using  what they call the Two-Thirds Rule to determine if a property should be sold at auction. According to the NAR, “A dependable way to determine whether a property lends itself to auction is this: If two of the three main components of a transaction (market, the seller and the property) lean favorably toward auction, then it should be offered to a seller as a sales option.”

 

Contact Us:

As you can see, there are a lot of reasons to use the auction method for selling real estate.  However, not all situations are suitable for auctions.  If you are a seller, contact us, or another professional real estate auctioneer to see if your situation is suitable for auction.  If you are a real estate broker, contact us to learn how you can get involved in real estate auctions.