FAQ: Selling at Auction
I'd rather list my house first with a Realtor. If I am not successful in selling it, then I will consider an auction later. Is that the best strategy?
Auctions are generally viewed as a marketing alternative to liquidating property in a fire sale effort. An example would be the owner who uses the auction method after exhausting efforts over a long period of time of attempting to sell the property privately, also known as private treaty.
To create a scenario for comparison, consider attempting to sell a beautiful automobile by placing it on the corner of a highly traveled street with a "for sale" sign in the window. After a period of time of being exposed to the market place at a certain sales price, the seller reduces the price to attempt to create additional interest unsuccessfully. After an even longer period of time, the seller reduces the sales price further thereby creating an image within the market that surely there is something wrong with the car or it would have sold at this point and most certainly it could not be worth the original asking price. We all have seen this same type of marketing effort occur time after time in the real estate field. After a certain period of time of unsuccessfully being marketed, the value of specific pieces of real estate drops substantially. The value drops because the attitude of the market toward that piece of property has changed.
Although it is not ideal to auction every piece of real estate, sellers should analyze their particular posture by discussing their needs with a full service real estate firm that offers both the auction and the private treaty services. Discuss with a Realtor whether you want actual market value for the property or a specific sales price. Market value will be attained through the auction procedure and the property will be sold at a certain date. If the seller wishes to attain a certain price for the property and is willing to risk overpricing or underpricing the property, then the seller should consider the private treaty alternative instead.
Are there better times of the year to sell certain properties at auction?
You will find some real estate auctions across the country are structured to take place at a certain period of time during the year because "that's the way it has always been done." Some auction houses do adhere to the statement, "If it ain't broke, don't fix it," and do not look for ways to break tradition, while others will pioneer an area worthy of consideration.
One example is, "You don't sell farm land until the crop is out," allowing clients only a few months within the coldest and most dismal part of the year to sell one of their most precious possessions. Why not consider structuring a marketing campaign at the optimum time of the harvest season when the land can boast of its bountiful crop? Selling the land in the summer and:
- Closing the sale a few months later, or
- Closing the sale, then giving possession a few months later, would be a more attractive procedure for everyone.
Other examples are selling farm equipment "in the dead of winter only," selling resort property "in the spring and summer only," and many more philosophies far too numerous to mention. From personal experience, some of the very best farm equipment sales and land auctions I have ever conducted were in the summer.
If you have real estate for sale, don't let tradition strictly guide you. Rain or shine, a properly conducted auction will attain true market value for you every time.
What if it goes low, will you buy it yourself? Have you or any member of your auction organization ever bid on any real or personal property at your own auctions?
Some auction companies have been known to use their "house number" at their auctions when bidding on items either to buy for themselves or to increase the bidding activity, a practice that is misleading and damaging to the auction profession. It is very tempting for members of any auction company to bid on some of the more desirable items sold, especially when the price seems low. However, they should take the stand that it is a conflict of interest to bid on any article involved in any of their sales, regardless of the size or price. Also, it is my contention that auction companies cannot possibly represent themselves as well as their clients and customers at the same time.
Having a policy that no member of the auction organization can bid on any article without exception gives potential bidders the assurance that they will only be bidding against the marketplace. This policy is not only the fairest way to work with the bidders but ultimately the best method in attaining the highest possible sales price for clients.
Why would people give up control of their property to be sold at auction?
To give up control is essential to the success of many professional procedures. Can you imagine demanding to sit next to the commercial airline's pilot to be able to grab the controls in case of the unexpected even though you know nothing about flying. Or, requesting that you stay awake during major surgery to watch your surgeon and stop him if things appear to be going wrong, even though you know nothing about surgery?
One of the primary reasons so many homes are waiting to be sold on today's market is clients are too much in control and do not allow their Realtors to do the proper jobs. If individuals would like to sell their real or personal property for the true market value, then sellers must have enough confidence in the Realtor they select and the auction procedure to give up control. Sellers must allow the professional representative selected the flexibility to do the work; then, a properly conducted auction will, without exception, attain true market value.
As with flying planes and performing surgery, the amateur seller who wishes to attain a certain price or keep the property to wait on the perfect buyer should reconsider and stay home. The results of a properly conducted auction have nothing whatsoever to do with the seller's anticipated price. The auction procedure should not be used for any other purpose; it will not work effectively.
Have you ever had a "no show" or "flop" auction?
This lingering doubt in the minds of many potential clients of whether anyone will show up for an auction indicates one of the most common misunderstood points concerning a properly conducted auction. After offering an enticing advertising campaign to promote the property within the market place, including privately soliciting the interest of as many potential buyers as possible, the auction invariably has the potential of drawing interest from four groups of bidding participants. They are: "the buzzard", the investor, the user and the impulse bidder.
- The Buzzard - The first type of buyer present at an auction is the "buzzard", the professional buyer or speculator, who always comes to any properly conducted absolute auction. These buyers are interested in any property at their price and plan to immediately resell it for a profit. If this type of buyer is confident that the property will sell with no minimum or reserve to the highest bidder on auction day, they will be at any auction and serve as the safety net of the auction. If it is going "to be stolen" in their opinion, they will "do the stealing" and fight among themselves, which will carry the bidding upward.
- The Investor - The second type of buyer present at an auction is the investor. This professional will pay more then the buzzard since the investor plans to utilize the property over a longer period of time as an investment either for rental or speculative purposes.
- The User - The third type of buyer is the user. This buyer has a specific use, personal or business need, for the property. The urgency of an auction, many times, awakens this desire which may not surface at all through a private treaty effort. The user will pay more than the buzzard or investor since the user's needs are much stronger with an actual personal or business need for the property. Although the user would like a bargain, this bidder is usually prepared to pay fair market value at an auction since they are not buying it for resale at all.
- The Impulse Bidder- The last type of buyer is the impulse bidder. This buyer has given no advance thought to value or need and usually, bidding strictly on emotion with no purpose or direction, will pay more than the other three groups.
The second and third group of buyers (the investor and the user) consists of people interested in the property, ranging from a cool to a very active interest. The fourth group of buyers (the impulse bidder) involves the individual bidding strictly on emotion with no real desire for the property. All four groups do not come to every auction conducted, but the first type of buyer, the buzzard, will always come, while the other three types of buyers will come only if they are in the marketplace. The attendance of each group, excluding the buzzard, depends on the market demand for the property itself. The results of a properly conducted auction, therefore, rely heavily on the actual interest within the market place. Auctioneers cannot turn a mule into a race horse but they can sell either animal for its true market value.
How do you attain true market value?
Market value is described as the amount a willing buyer and a willing seller both agree upon in a transaction.
- Would the value change if another buyer would have paid more at the same time?
- Where did this agreed upon price originate?
From the seller who based the price on what he/she thinks, owes, paid, or desires;
From the buyer who based the price on his/her needs, abilities, or opinion;
From the appraiser who based the price on previous sales of other properties?
The risk in a private sale is in setting a price. If the price is set too high, the market will not respond. In many cases the property won't even get an offer. If too low, someone will buy the property and the seller will never know how much was left on the table.
The only way for the buyer and seller to know for certain if they will either respectively pay or attain true market value is for the entire market place to decide through a competitive bidding process with no artificial restraints. The final price may be higher or lower than anticipated, but if conducted properly, auctions will attain true market value for the buyer and the seller.
You sold that item for more than retail?
We hear time after time at our auctions that we attained more than what they could have bought the item for at retail. Many people are not familiar with why this happens. A properly conducted auction will draw the marketplace to a sale, will place them in a competitive bidding situation which results in bringing true market value for any item.
Here's what happened at a recent auction...
A family approached one of our affiliates to sell 90 acres of land they had owned for many years. They had a current appraisal on the acreage by a credible appraiser for $238,000 and were apparently prepared to market the acreage for that amount. Realizing that the family had no debt on the land, only wanted the fair market value for it, and that the acreage might have more value if sold in smaller tracts, our affiliate suggested that they consider another marketing alternative before making a final decision. At that point, we shared the auction concept with the client.
The family agreed to auction their acreage with no minimum or no reserve sales price. No minimum means that the auctioneer will sell the property for the highest bid. No reserve means that the seller cannot reserve the right to accept or reject the highest bid within a specified time. The acreage was surveyed to divide into 12 tracts and was offered individually, in combinations, and as a whole. Then, the marketing strategies began with the acreage being exposed to the market through direct mail brochures, an auction sign, newspaper advertisements and personal solicitations. On the day of the auction, the aggregate total was $471,000 after offering the acreage to a large crowd in individual tracts and in combinations. Next, the acreage was offered as a whole, increasing the total to $575,000. After another round of offering the acreage by individual tracts, the entire acreage was offered one last time, establishing the final sales price of $610,000.
If our sales associate had listed the property, when initially approached by the family, for $238,000 and had sold it for that amount, no one would have ever known that the land would have sold below value by $372,000. A properly conducted auction will not attain more than the true value; but, as in this case, it "always" guarantees the seller 100% of the value and avoids the risk of over or under pricing the real estate.
What are the pros and cons of a multi property auction?
Track 1: Shorter Time, Less Advertising Expense
Some auction firms work under the philosophy that multi-property auctions are wonderful for selling a lot of different properties in a short period of time for much less expense. The owners of the properties usually pay a much smaller advertisement budget up front since the advertisements usually involve all the properties together. The auction usually is conducted in one spot utilizing a slide projector to show the properties on a screen when they are sold. There are a lot of properties sold very fast with relatively little expense.
Track 2: Sell for a Higher Price
Other auction firms concentrate on attaining market value. This process takes longer since only one property is sold on a given day at the subject property site with usually all the advertisement in that particular market focused only on that property. Since the auction firm is concentrating on that one auction in this type of sale, there is time to personally solicit the market in addition to the auction advertisements. The advertisement cost is higher, and the time is longer, but the results are usually much different.
Both techniques have a place in the auction arena depending on the needs of the client.
What advertising expenses are there with real estate auctions?
Do I understand correctly that with real estate auctions, the sellers must put money up front to cover advertising expenses?
Every auction company has its own policy about advertising expenses. The optimum way for the seller is for the auction company to determine the amount of money necessary to promote the subject property to the market place properly and have the seller pay this amount up front when the contract is signed. The auction company should suggest an amount that will cover all newspaper advertisements, auction signs, brochure printing and mailing, and any other media costs such as radio and television. The advertising campaign is conducted to make the market aware of the sale. While the advertising expenses should be carefully spent, the outcome of the project is the only point on which the auction company should be focused.
There are some auction companies that may pay the advertising expenses; but, as the old saying goes, "You get what you pay for." Why tempt the auction company to cut corners to save on the commission? There are several important aspects of a properly conducted auction; one of them is to saturate the market with the best possible promotion to reduce the risk of any potential bidder not knowing about the sale. A properly conducted auction turns the attention of the market toward the subject property. Promoting an auction is not the time to be cutting corners.