Guide to Auctions

FAQ

Q. What is a Real Estate Auction?
A. A real estate auction is an innovative and effective method of selling real estate. It is an intense, accelerated real estate marketing process that involves the public sale of any property—most certainly including those that are nondistressed—through open cry, competitive bidding.

Q. How will auction benefit me?
A.The real estate auction is a win-win proposition for everyone involved. ^Back to Top^

BENEFITS TO THE SELLER:

• Buyers come prepared to buy
• Quick disposal reduces long-term carrying costs, including taxes & maintenance
• Assurance that property will be sold at true market value
• Exposes the property to a large number of pre-qualified prospects
• Accelerates the sale
• Creates competition among buyers—auction price can exceed the price of a negotiated sale
• Requires potential buyers to pre-qualify for financing
• The seller knows exactly when the property will sell
• Eliminates numerous and unscheduled showings
• Takes the seller out of the negotiation process
• Ensures an aggressive marketing program that increases interest and visibility

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BENEFITS TO THE BUYER:

• Smart investments are made as properties are usually purchased at fair market value through competitive bidding
• The buyer knows the seller is committed to sell
• In multi-property auctions the buyer sees many offerings in the same place at the same time
• Buyers determine the purchase price
• Auctions eliminate long negotiation periods
• Auctions reduce time to purchase property
• Purchasing and closing dates are known
• Buyers know they are competing fairly and on the same terms as all other buyers
• Buyers receive comprehensive information on property via due diligence packet

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BENEFITS TO THE REALTOR®:

• Generates a list of ready, qualified buyers
• Offers clients and customers new selling and purchasing options
• Increases revenue and market share
• Develops your own market niche
• Assurance that property will be sold at true market value
• Property is sold within a relatively short period of time
• Exposes the property to many potential purchasers
• Auctions bring people in to look at all your listings, not just the auction listing
• Successful auctions result in referrals and return business
• Agents can earn commissions as referring agent/broker, cooperating agent/broker, or as the listing agent/broker

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Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

Q. What are the different types of Real Estate Auctions available to me?
A. Essentially there are three types of auctions:

1. Absolute Auction (or auction without reserve)

• The property is sold to the highest bidder, regardless of the price.
• Since a sale is guaranteed, buyer excitement and participation are heightened.
• Generates maximum response from the market place.
• Many sellers, including financial institutions and government agencies have begun to use this method more frequently.

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2. Minimum Bid Auction

• The auctioneer will accept bids at or above a published minimum price. This minimum price is always stated in the brochure and advertisements and is announced at the auction.
• Reduced risk for seller as the sales price must be above a minimum acceptable level.
• Buyers know they will be able to buy at or above the minimum.
• The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, and therefore it must be low enough to act as an inducement rather than a hindrance.

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3. Reserve Auction ( an auction subject to Confirmation)

In this scenario, the high bid is reduced, in effect to an offer not a sale. A minimum bid is not published, 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 concludes. Sellers predetermine the price at which the property will be sold and are not obligated to confirm a sale other than at a price that is entirely acceptable to them. The main disadvantage of a Reserve Auction is that prospective buyers may not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder. ^Back to Top^
Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

Ever wonder how you can tell if a property is well suited to auction? Think of your listing, then take the Two-Thirds Rule test!

Q. What properties are suitable for Auction?
A. Most properties are salable by auction. All types of real estate, including residential property (e.g., town homes, condominiums, cooperative apartments and single-family homes), commercial and industrial property, vacant land and even boat slips are sold at auction. Not all property, however, is suited for auction. If a property will only appeal to a narrow market, auction may not be the most effective marketing method. ^Back to Top^

An Auction Self-Test: The Two-Thirds Rule

One method to determine if auction is the best marketing strategy is the Two-Thirds Rule. This involves analysis of the market, property and seller situation. Generally, if two of the three parts (market, seller, property) lean towards auction, then auction should be offered to the seller as a sales option. ^Back to Top^

Market Factors (Buyers)

A good auction situation is one where the market is:

• A changing market
• A dull market; too much product but buyer interest is expressed
• Not enough of the property type (unique, lake front, etc.)
• An emerging market — new developments could kick off a sales program, once some of the properties were auctioned
• A seller’s market where there is known high demand and a lot of competition can take place

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Seller Factors

A good auction situation is one where the seller:

• Needs immediate cash
• Has a partnership or marriage break-up
• Is moving out of the state
• Wants to liquidate an estate
• Is retiring
• Is an auction-minded seller
• Has a listing that is about to expire
• Has already purchased another house
• Knows the auction will bring a fair market price
• Has financial problems
• Has high carrying costs on the property

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Property Factors

A good auction property is one that:

• Has a lot of equity (25 percent or more)
• Is unique — there is enough buyer/market interest to encourage competition (unique properties are difficult to appraise)
• Has a lot of high carrying costs for the owner
• Is vacant — vacant properties may encourage vandalism
• Is difficult to appraise

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Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

Auctions Are Often Thought of as “Fire Sales” For Properties in Distress. Is this True?

Until recently, real estate auctions, unlike art and antique auctions, have experienced unfounded negative images in the marketplace. The majority of auctions today don’t result from foreclosure of distress situations, but rather are the result of a seller choosing a cost-effective, accelerate method to sell a property. Builders or financial institutions, for example, prefer auction rather than laboring for months or years to sell units of a development one by one. Auction allows the seller to eliminate virtually all long-term carrying costs, passing the savings directly to the purchaser in the form of a reduced price. Auction is truly a win-win situation: sellers obtain immediate cash and buyers purchase properties at fair market value, the price determined by open, competitive bidding.
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What Factors Impact the Success of an Auction?

1. The seller must have realistic expectations, including a fair sales price, terms and timing.
2. The desirability of the property. This includes location, conditions, plus the value of surrounding properties.
3. Since a variety of auction methods are available, carefully choose the auction type that best suits the property and the seller’s needs.
4. A well planned, aggressive marketing/advertising campaign targeted to prospective purchasers is critical to an auction’s success.
5. Using a recognized real estate auction company or a REALTOR® auctioneer to ensure the auction is conducted in a professional manner and followed-up through closing.
6. Making sure that due diligence information is provided to prospective buyers AHEAD OF TIME.
7. Preparing the property for sale so it is presented to prospects in its best condition. (i.e.., title insurance, clean-up, financing, etc…)

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Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

There are several ways to get involved in real estate auctions:

• Agents/brokers refer clients or customers
• Be a cooperative agent/broker
• Be a listing agent/broker (co-broker)

OPTION A: Agents/Brokers can refer clients or customers

A real estate agent or broker can refer a seller to an auction company and receive a referral fee. The referring agent or broker may also be instrumental in convincing the seller of the merits of auction.

Responsibilities of Referring Agent/Broker:

• Help seller analyze his needs, the property, and market to determine if a good auction situation exists.
• Refer seller to professional real estate auction company.
• If a negotiated sale listing agreement exists, cancel the previous listing to be superseded by an auction contract.
• Send notice to MLS stating that the property will be sold at public auction.
• Collect referral fee from auction company when the property closes.
• Types of Agreements Used in This Situation
• Auction contract to supersede listing agreement

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OPTION B: Be a Cooperative Agent/Broker

A cooperating (selling) agent is any agent/broker who sells a property. He may be the:

• Subagent
• Buyer’s agent
• Dual agent

A cooperating agent or broker registers a buyer who purchases property offered through an auction and earns a commission established by the auction firm. This agent or broker accompanies the bidder to pre-auction events and the auction, registers him to bid, and receives a portion of the commission.

Responsibilities of Cooperating Agent/Broker:

• Before the Auction
  • Call auction companies to be placed on their mailing lists.
  • Attend real estate auctions to learn how they work.
  • Advertise as an agent/broker who is knowledgeable about auctions to obtain prospects.
  • Attend pre-auction open houses with prospects.
  • Help prospects determine the market value of the property prior to sale (check comparables, property indebtedness, title, lien and market conditions, and read the due diligence or bidders packet).
  • Learn the rules necessary to earn a commission for registering a successful buyer.
  • Learn the terms of the auction.
  • Register bidder prior to the auction pursuant to the auction firm’s requirements.
  • Assist bidder with auction strategy.
• During the Auction
  • Attend the auction with prospects.
  • Help them register.
  • Assist prospect with bidding strategy.
  • Accompany successful bidder to contract room.
• After the Auction
  • Collect commission check when property closes (usually handled by title or escrow company).

Types of Agreements Used in This Situation

• Buyer registration at open houses
• Broker registration for prospect representation

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Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

OPTION C: You can be a Listing Agent/Broker (Co-Broker)

A listing agent/broker is an agent of the seller who markets the seller’s property and represents the seller during the sale and at the closing. In a sale by auction, the listing agent/broker manages many traditional real estate functions and shares the commission based on the amount of involvement and the relationship defined by the parties involved. This relationship is beneficial for auctioneer and agent when services by a local auction or real estate company are needed or when an agent identifies a potential auction situation for a seller and the agent is not an auctioneer.

Responsibilities of Listing Agent/Broker

• Before the Auction
  • Provide the lead (in most cases).
  • If a negotiated sale listing agreement exists, cancel the previous listing to be superseded by an auction contract.
  • Send notice to MLS stating that the property will be sold at public auction.
  • Provide a fact sheet on the property.
  • Perform market analysis.
  • Provide local licensing information.
  • Complete due diligence.
  • Order and obtain sign, photographs, and keys.
  • Obtain bids for maintenance and supervise property management.
  • Hold open houses for inspection.
  • Assist bidders with pre-qualification process.
  • Provide feedback (progress reports) to the seller.
• During the Auction
  • Assist auctioneer in bid process as needed.
  • Accompany buyer to contract signing room.
• After the Auction
  • Help buyers with post-auction inspections, insurance, financing, etc.
  • Assist in pre-closing events.
  • Attend closing.
  • Collect commission check when the property closes.

Types of Agreements Used in This Situation

• Listing agreement between the broker, auction company, and seller
• Auction contract to supersede listing agreement
• Pre-auction sales contracts and addendum
• Prospect registration forms

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Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.

For More information, to purchase an auction property or set up an auction for your own, Contact TM Holmes Auctioneering Today!