Frequently Asked Questions & Answers
Q: Aren’t auctions just for the selling of personal items & distressed properties?
A: No, not any more! Auctions considered appropriate for art, antiques and property needing a quick sale, have increasingly become an attractive & accepted method of sale of prime real estate.
Once considered a last resort for disposing of distressed property, professionally conducted real estate auctions have now entered the “mainstream” of residential, commercial and industrial real estate marketing and sales. The increasing popularity of real estate auctions can be attributed to one simple fact- they work. In many states, including California and Florida, auctions are used to kick off successful marketing campaigns of large residential developments. In more and more cases, a real estate auction will yield a much higher net selling price in a shorter period of time than traditional brokerage!
Q: “Why should I sell my property at auction?” “Aren’t auctions only for distressed property?” “Is the owner in trouble?” “Why wouldn’t the owner use a real estate broker to sell this property?” “Is this property in foreclosure?”
Some of the questions I usually get from a prospective seller (and from most buyers) of real estate are:
A: The auction process is still greatly misunderstood, although auction marketing is gaining in popularity with many estate planning professionals and the general public. Even the most knowledgeable lenders, attorneys, financial planners, accountants, and their residential and commercial real estate clients don’t understand the financial benefits of a well-run real estate auction.
Benefits of selling residential and commercial real estate at auction are many, but almost all arise from a shorter marketing period. Months and sometimes years of marketing expenses are eliminated. This shorter time frame minimizes the risk of declining asset value, attracts the highest number of potential buyers, and provides numerous benefits to the seller and their legal, financial, and accounting advisors. This article will highlight some of these benefits.
Q: Don’t I have to accept the final bid made at the Auction?
A: No! Nearly all of the real estate sold at auction is sold subject to the owner’s acceptance of the winning bid. The main advantage to the seller is that even after observing all the offers including the final bid – THE SELLER MUST STILL APPROVE OF THE FINAL SALE AMOUNT!
Three General Methods - Seller controls the type of auction used, to auction Real Estate depending on the needs of the seller.
At an absolute auction, real estate is sold without minimums or reserves. That means that once a property is offered, it is sold to the highest bidder regardless of price. Although most sellers fear an absolute auction, this form generates the maximum interest and response from the market place and the highest possible selling price.
An auction that is subject of confirmation allows the seller to reserve the right to reject or accept the final bid. This type of auction affords protection to the seller but usually generates less enthusiasm than the absolute auction.
The final alternative is the minimum bid auction also known as an auction with reserve. Here, the seller agrees to sell to the highest bidder after a stated minimum price is reached. Minimum bid auctions work only when the stated minimum, or reserve, is substantially below fair market value.
Q: What about fees? How do they compare with traditional real estate commission fees?
Time Value of Money- Because of the nature of an auction’s expedited marketing campaign, the seller will receive funds from the sale of their real estate sooner than with a traditional brokerage approach. When it comes to getting paid, sooner is always better than later! An auction’s high impact, shorter marketing and settlement period allows a seller of real estate to take full advantage of settlement funds for otherwise lost opportunities. In effect, the sooner a property sells, the more money will be available for reinvestment into other opportunities.
High Carrying Costs Reduced - Months and sometimes years (on larger properties) of interest, taxes, insurance, association fees, and property maintenance expense and payments are eliminated. The avoidance of these carrying costs often cannot be achieved by traditional brokerage where the marketing time is much longer and the settlement date is unknown. Our company conducted an auction a couple of years back where a developer had 7 commercial units that he could not sell and the lender was about to foreclose on the property. We were able to convince the lender to go to auction. Within 60 days from the running of the first advertisement the bank had been paid in full and our customer walked away with money in his pocket!
Q: What is the difference between an absolute auction and a reserve auction?
A: An absolute auction means that the property is sold to the highest bidder, regardless of price. A reserve auction, sometimes also referred to as an auction “subject to confirmation,” means that the seller reserves the right to confirm the high bid at the conclusion of the sale. Unless explicitly advertised as “absolute” and likewise disclosed in the Terms and Conditions, auctions are “reserve” auctions.
Q: What is a buyer’s premium?
A: A buyer’s premium is a percentage of the high bid that is added to the high bid to establish the total purchase price. For example, if your high bid is $100,000 and that particular auction is using a 10% buyer’s premium, the buyer’s premium would be $10,000 ($100,000 high bid multiplied by 10%) and the total purchase price would be $110,000. This methodology is common to the auction industry, but is not used in all regions or in all auctions. Refer to the Terms and Conditions of specific sales to see if the buyer’s premium is applicable.