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Auctions:
Frequently Asked Questions
Q: What is a
Real Estate Auction?
A
Real Estate Auction is a method of
buying and selling real
estate. It is an intense and accelerated real estate marketing
process that involves the public sale of property through open,
competitive bidding.
Q: What are
the various methods of auctioning that a seller may choose from?
Essentially, there are three different types of auctions:
Absolute Auction:
(Or
Auction without Reservation) The property sells to the
highest bidder, regardless of the price. The main advantage of
an
Absolute Auction is that it generates maximum response from
the market place. Since a sale is guaranteed regardless of the
price, buyer excitement and participation are heightened.
Because this type of auction generates an ideal response, many
financial institutions and government agencies have begun to use
it in greater frequency. Despite the fact this type of sale
attracts a larger number of buyers, the guarantee of a sale at
the highest bid, regardless of the price, often makes a seller
feel nervous and at risk.
Minimum Bid Auction:
The
auctioneer will accept bids at or above a disclosed price.
The minimum price is always stated in the brochure, in the
advertisements, and is announced at the auctions. An alternative
approach is to post a "suggested opening bid",
but that opening bid does not commit the owner to sell at that
price. An advantage to selling via the minimum bid method is
that it creates a safety net for the seller that does not exist
in the
absolute method. The seller's risk is limited
in that the
price that the property sells for will fall above a minimum
acceptable level. Disadvantages to this method are that the
seller limits interest in the auction to only those buyers who
are willing to pay the minimum bid price, and the fact that
there is a minimum bid may make it difficult to generate
the proper excitement.
Auction with Reservation:
A minimum bid may or may not be posted and the seller reserves
the right to accept or reject the highest bid within a specified
time - anywhere from immediately following the auction up to 72
hours after the auction's conclusion. The owner predetermines
the price at which the property will be sold. The advantage is
that the seller is not obliged to accept a price other than one
that is entirely acceptable. The main drawback of such an
auction is that many prospective buyers do not want to invest
the time and expense of investigating a property when they have
no certainty they will get the property even if they are the
high bidder. The high bid is reduced, in effect, to an offer,
not a sale.
Q: What are the benefits of a real estate auction?
The
real estate auction is definitely a win-win proposition for
everyone involved. The seller disposes of properties quickly and
efficiently, thereby saving long-term carrying costs such
as interest, real estate taxes, and maintenance. For the buyer,
this can mean a smart investment, since properties are usually
purchased at fair market value through competitive bidding.
Because the
auction sale is conducted on an open forum, both
motivated buyers and motivated sellers have the assurance of
watching the property's true market value emerge as the bidding
process progresses. For both buyer and seller, fair market
values for the property prevail. An auction creates competition
among buyers and exposes the property to a large number of
pre-qualified prospects. Because it is an accelerated sale,
property can often be sold within 6 weeks of listing. For the
agent, auctions can mean an increased client and customer base,
as well as increased profits.
Q: What factors determine the success of an auction?
+ The desirability of the property being
sold. This includes location, condition, and surrounding
properties
+ An aggressive marketing and advertising plan geared to
prospective purchasers.
+ Realistic expectations on the part of the seller.
+ Selecting the type of auction that best suits the property and
the seller's needs.
+ Conducting the
auction in a professional manner and following
up through closing.
+ Undertaking due diligence ahead of time so buyers are
knowledgeable and the only issue that remains is price.
Q: Are all properties suitable for auction?
Most properties, but certainly not all, are sellable by
auction.
Residential property (including town homes, condominiums,
cooperative apartments, and single-family homes),
commercial
property,
vacant land - even boat slips - are sold at
auction.
Some sellers try to sell unsuitable or unmarketable property
through an auction. This is property that perhaps has been on
the market too long, causing prospective buyers to consider it
"tainted". Perhaps the project itself was poorly constructed or
planned. These types of properties don't do well at an
auction
and most reputable
auction marketing companies would not accept
them.
One method used by
auction firms to analyze the market,
property, and seller situations is the two-thirds rule. A
general explanation of the rule is that if two out of the three
parts (market, property, and seller) lean favorably toward
auction, then the
auction should be offered to a seller as a
sales option.
Q: If a property doesn't sell at auction, is it possible to
still market it?
Yes. The
auction marketing method exposed the property to a
large segment of the buying public. Many times a buyer who wants
the property but is uncomfortable with the auction process will
make an offer after the auction date. In other instances, offers
to buy the property prior to the
auction date are made and
accepted.
Q: What if the sale doesn't close?
A well-conducted real estate auction by its very nature
minimizes such failures. There are generally only three reasons
buyers will back out.
+ They think they've been misinformed. If
the marketing plan spells out all information, buyers won't
experience feelings of this sort.
+ They think they've overpaid. An
auction demonstrates price in
a clear, concrete fashion; a second highest bidder made a bid
just below the buyer's.
+ An act of God can take place.
Q: What happens to the earnest money if a buyer decides at a
later date not to buy the property?
Many of the same things happen in an auction situation as in any
other real estate transaction. The earnest money deposit is
forfeited if the high bidder is unable to consummate the sale
regardless of the reason. If the seller fails to close because
of defective title, etc., the buyer's deposits will be refunded
immediately.
Q: Don't real estate auctions depress home values?
Not at all.
Real estate auctions reveal the true market value of
a property because auctions are conducted in an open forum where
all bids are known, and participants receive immediate feedback
on the property's value. At
auction, values settle at the level
that the market can bear, neither elevated nor deflated.
Q: What is a Buyer's Premium?
A
Buyer's Premium is an additional charge to the purchaser of
the property. It is usually expressed in the form of a
percentage of the high bid. The typical
Buyer's Premium in a
real estate auction is 2% to 10%. You need to refer to the terms
and conditions of the specific
auction to ascertain the amount
of the
Buyer's Premium. The prospective buyer must consider the
impact of the buyer's premium when deciding on the amount to bid
for the property.
Q: Is a Buyer's Premium always charged in real estate
auctions?
No. Always check the terms and conditions of the specific
auction to see whether a buyer's premium applies.
Q: Real estate auctions are often thought of as a "fire sale"
for someone who cannot meet his/her mortgage payments. Is this
true?
Unfortunately, although most other forms of
auctions, like art
auctions, have a positive image,
real estate auctions have
suffered from a poor image. A majority of auctions today don't
result from individuals' foreclosed properties, but rather are
the result of the smart seller, usually a builder or financial
institution, who chooses the cost-effective, accelerated method
of selling a development rather than laboring for months or
years to sell the units of the development one by one. This
accelerated sale allows the developer to eliminate virtually all
long-term carrying costs. These cost savings to the developer
are passed along directly to the purchaser in the form of
reduced prices. It is truly a win-win situation. Developers can
move on to their next project, and buyers can purchase quality
properties at fair market value.
Q: Under what terms does a property sell at auction and who
sets the terms?
The seller sets the terms with the advice of the
Auction
Company. It is necessary to have "balanced" terms - terms and
conditions set by the seller under which buyers bid and under
which the winning bid is established. If terms are not set with
buyers in mind, there will be none. Once terms are set, there
are no contingency clauses on
auction day. Usual terms are that
the high bidder deposit earnest money (either a percentage of
the purchase price or a stated set amount) and enter into a
purchase contract immediately following the auction with the
balance of the purchase price due usually within 30 to 60 days
at the closing. The seller generally provides title insurance.
Properties generally sell "as is" with no warranties expressed
or implied. Since the only issue left is price, due diligence is
done in advance of the sale, such as preparation of information
packages and inspection reports.
Q: Who usually buys at real estate auctions?
Anyone can benefit from buying at a
real estate auction. Many
people who buy are
first-time homebuyers who may otherwise be
shut out of the real estate market. For them, the
auction is a
realization of a dream. Empty nesters and
investors also
comprise a large segment of the
auction buying public.
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