PRO View - Speeding Up Sales in a Slow Market: How to Get Buyers and Sellers off the Fence through Auctions
The NAA was granted permission from the Pinellas REALTOR organization to republish an article that appeared in their publication, PRO View. The Pinellas REALTOR organization is based in Clearwater, Florida and represents REALTORs in Pinellas County.
Speeding Up Sales in a Slow Market:
How to Get Buyers and Sellers off the Fence through Auctions
By Mathias Bergendahl, CAE
Director of Marketing & Communications
You listed a property a few months ago. Since then you've received a few offers yet all of them fell far below what the owner is willing to sell the home for. You held open houses and consistently marketed the property through a well-integrated marketing campaign. You brought in a staging professional to make the home stand out. You created a stand-alone website for the home with a virtual tour. You uploaded a video presentation on youtube.com. You consistently advertised in newspapers and magazines. You and your client lowered the price three times to attract a buyer.
The home is not selling.
Finally, your client asks you: how about an auction?
Auctions are emerging as a viable option to the many homeowners looking to sell quickly.
What kind of property would typically qualify for an auction? How quickly would a property likely sell? How should an auction be positioned to a seller? How do I assist a buyer?
Now is the time to learn about your role in a prospective real estate auction. What are your responsibilities and liabilities while guiding your customers through an auction and how will you be compensated as their REALTOR®?
Here's what auction industry professionals and REALTORS® working with auctions had to say.
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Mike and Jane were thrilled. Jane had just been promoted to a position for which she had worked long and hard. Two months later she would report to her company's headquarters located on the other side of the state. Their children were excited too – finally they'd live closer to their grandparents. Only problem was, now they needed to sell a home. Fast.
Once the cheers rang out, their worries began. Questions started to mount. Could they sell their home quickly and if not, could they afford housing in two locations until they did? Should Jane go alone and let the family stay behind until the home would sell? Could they rent the home for the time being?
Families across Florida find themselves in a situation similar to Mike and Jane's. Whether the selling of a home was induced by a looming threat of foreclosure or a job transfer, homeowners face the uncertainty of how long it will take to find buyers. All of them want to know: how long will it take for us to sell our home?
Mike and Jane will need advice. They come to you, their REALTOR®. As part of your listing presentation you discuss what you believe would be a realistic price and show statistical data outlining the anticipated time on the market at different price points. Eager to sell, though, Mike and Jane pose the question of simply offering their home at auction.
The situation is not unlikely. Sellers are looking for creative ways to get out of their homes and auctions have seemingly gained more attention in recent months. How would you maintain your relationship with your clients and not lose their business if the sale of their home was conducted through an auction company?
Auction as a Viable Option to Sell
When you hear the words real estate auction, what comes to mind? Many would probably define it as the last resort to sell a home, not unlikely in an effort to avoid foreclosure these days. If you have followed the news media's reporting on real estate you have probably heard about auctions conducted on the courthouse steps. You may have seen signs around your neighborhood inviting you to attend foreclosure auctions. With such exposure it's easy to get the idea that the reason for holding an auction is to sell properties that are in some stage of foreclosure. Others may perceive it as lost commission, instead going to an auction company.
Not so fast.
According to Chris Longly, Director of Public Affairs and Communications at the National Association of Auctioneers (NAA), auctions are suitable for any property, not only those under a foreclosure threat.
"For whatever reason a home is selling, offering it at auction creates more urgency and sometimes an auction may be the only way to arrive at a true market value of a property."
As an example of the latter, Longly mentioned the 23-bedroom estate of the late King of Soul James Brown. "How do you put a value on the fact that Brown lived there?" Comps? Not likely. "Only an auction will show what the market is willing to pay for it," he said. The option to put a home up for sale through auction may instead be beneficial for any real estate when sales activity generally is slow," he added.
Top Reasons to Sell at Auction
So why should a seller consider an auction?
According to Longly, selling property by auction shortens the listing time significantly. "From start to finish, the sale is usually complete within 30 to 45 days, with a total process of maybe 60 days." He also stresses the advantages of auctions not holding any contingencies or room for continued negotiations. When you sell a home or property by auction, Longly says, terms and conditions are pre-set and non-negotiable, not the least barring any last-minute pulling out of a deal. A sale is not contingent upon a loan approval because all bidders are pre-approved and properties are sold "as is" with no stipulations for repairs or changes. Also, the sale is also not contingent upon selling current property, which is common in many traditional real estate sales - certainly an advantage in today's marketplace.
In a traditional transaction, sellers risk overpricing their homes, leading to little interest among prospective buyers. To the opposite extreme, they risk under-pricing and selling for much less than the property is worth. As Longly points out, "auctions set the true market value of a piece of real estate."
Referring a Client to an Auctioneer
"REALTORS® typically have a network of other professionals," said Thomas L. Williams, Co-Founder of Williams & Williams and current NAA President. "Now is the time to add a professional auctioneer to your business relationships."
Williams suggested REALTORS® do their due diligence in researching auctioneers they can refer their clients to. He recommends checking which auction companies have the highest concentration, area expertise and product knowledge in your specific marketplace. Next, he proposes, check at least five references from home sellers who have used an auction company's services within the last six months. Make sure to ask those references how they felt about the process used by the company. Also, Williams advises, become familiar with the marketing strategies they will employ to reach potential buyers. Finally, he points out; negotiate the terms under which you would partner and agree upfront on a reasonable commission split.
Once REALTORS® have done due diligence as to the research of suitable auction companies, Williams stresses, they are clear from any liabilities that could arise from an auction transaction.
Where REALTORS Fit In
Many brokers and agents would probably ask if there are enough benefits for a REALTOR® when suggesting that a home is sold at auction. According to Ben Anderson, Real Estate Broker and President of Anderson Auctions, Inc. in Destin, Florida, there are several reasons why agents and brokers should consider a real estate auction either as seller's or buyer's agent.
"Auctions generate a list of ready, qualified buyers and give you assurance that a property will be sold at true market value." Anderson further said that an auction process gives you the opportunity to sell your client's property in a short time period, exposes the property to many potential purchasers, brings people in to look at all your listings, not just the auction listing and typically result in referrals and return business.
"Representing clients for auctions allows agents to earn commissions as referring agent/broker, cooperating agent/broker, or as the listing agent/broker and as the buyer's representative," said Anderson who currently serves as the Chairman of the NAR Presidential Advisory Group on Auctions.
According to Longly at NAA, each auction company offers different compensation schedules for brokers and REALTORS®. What most have in common is that a buyer's agent must be pre-registered prior to auction. In some cases brokers are paid a percentage of a written opening bid and a percentage of the difference between their clients' opening bid and the final contract sales price. A likely requirement is that a client must close on a property and pay the total contract price before a commission is paid.
According to Anderson, the importance of auctioneers and REALTORS® working together has perhaps never been greater. "It's imperative, especially in today's market, for all of us to come together to help sellers sell and buyers buy." Asked about the perception many may have about auctions, Anderson, also a REALTOR® for 35 years, mentioned that auctions essentially provide yet another method to sell a property. Ultimately, he said, it's the same as a traditional sale. "It's about bringing buyer and seller together at a meeting of the minds at a fair market price, a win-win situation where we together help the seller accomplish their goals while giving the opportunity to a buyer to get a good buy at their price."
Anderson mentioned that his company is about to change the way they cooperate with REALTORS®. "Previously, the referring agent would withdraw their listing agreement with the seller and we, as the auction company, would enter into an exclusive right of sale with the seller, paying a referral fee to the REALTOR®. We now have a new program that allows REALTORS® to maintain the exclusive right of sale." He said that's accomplished by engaging his company to conduct the auction sale through an addendum to their listing agreement or by separate agreement between the seller, REALTOR® listing agent, and his company. This, he said, allows the listing agent to remain close to the seller and the listed property; their role is to simply evoke a sale through the auction process. "This is a win-win-win situation for all!" Anderson stressed that the integrity of the REALTOR® is maintained while everyone focuses on an auction as the alternative means to sell a property.
"Although it seems that we see a property offered for sale at auction in every neighborhood or town, this is just a sign of the times," Anderson continued. "The auction is an accelerated method of selling a property in an over supplied market; it offers the seller quick solutions in a slow market." Anderson made sure to point out that the auction method of sale will not replace the REALTOR® and the traditional listing. "Now, however, is the time for the REALTOR® to add auction to the services they offer their clients."
Anderson suggested a few steps you can take to as a way of getting started. "First, attend auctions in your area. Next, interview several auction companies and ask how they will cooperate with you as either a listing agent or a buyer's representative. Also, ask for referrals. In addition, check out their website to see if they sell properties similar to your listings? Furthermore, check if they are familiar with your area and Florida law. Finally, ask questions, understanding that auctions do not fit all sellers or all properties."
The Inner Workings of an Auction
"Going once! Going twice! Sold to the gentleman in the back for $95,000!" The words of Craig King, President and CEO of J.P. King called out to announce the completion of yet another transaction at a recent auction held at a downtown St. Petersburg hotel. In rather quick succession, King and his team of associates sold over $3.8 Million worth of condos, boat slips and garages of the Clearwater Cay Club Resort & Marina.
Ready to raise their paddles, over 300 people had registered for the auction and eagerly awaited the next property announcement. According to King, about 50% of buyers are consumers and the other 50% investors. "About one half of all transactions involve a broker as buyer's representative."
Auctions may differ as to the type of pricing they will offer. In an absolute auction, a property is sold to the highest bidder regardless of price and without a reserve. Absolute auctions typically garner a high response and participation. During a minimum bid auction the auctioneer accepts bids only at or above an advertised minimum price. The advantage for buyers is that they know up front that they will be bidding at or above that price. In auctions with a reserve the seller has the right to accept or reject any offer that falls below a confidential reserve price. The seller must accept any bid higher than the reserve price.
Getting Ready for Auction
Once a client has signed the dotted line to conduct an auction, J.P. King Auction Company makes staff available to anyone interested in learning about the available home up to six weeks in advance of the auction date. Marketing materials are developed and information posted online at the J.P. King Auction Company website. During the last two weeks prior to the sale, J.P. staff is available on-site to answer any questions prospective buyers, or their agents, may want to ask.
Meanwhile, REALTORS® should list the auction in the MLS. Asked what he recommends REALTORS® do, Anderson suggests listing an absolute auction just like any other sale. While it can sell at any price, the listing price should state an opening bid. "Even though a property is going to sell at a fair value, adding a note in the general comment area stating that it's a beginning price will give interested parties a general price idea."
Preparing a Buyer for Auction
For any prospective buyer it's essential to fully understand the terms of an auction, especially that the property is sold as-is with no contingencies. If financing is to be used, buyers must be pre-qualified for the anticipated price and ready to hand over a 10% deposit check as soon as the word SOLD is heard across the auction room.
Leslie Newman, agent with Charles Rutenberg Realty, recently worked with a buyer who was interested in purchasing her home at auction. Step one, she said, is to register with the auction company as a buyer's representative. "You want to make sure the auctioneer knows your affiliation upfront so that you are eligible to receive all the pertinent information about the property and the auction itself. You also want the auctioneer to know immediately that any purchase will be subject to commission split with you."
Prior to auction, REALTORS® are advised to assist a buyer with finding out everything there is to know about a property. Anderson: "We want the buyer to feel very comfortable by the time they enter their bid. Our goal is to have a buyer only thinking about purchase price at the auction - nothing else." Buyers may want to hire a property inspector, which they pay for themselves, prior to auction but often times sellers have had an inspection done within the last year. "Buying real estate is a high dollar investment – and it's just prudent judgment to hire an inspector," said Anderson. "It may be well worth a small invest to buy the peace of mind." Important to know, however, is that foreclosure auctions may not always provide that same opportunity.
Conducting a Short Sale through Auction
An ever-increasing occurrence these days is that of short sales and a commonly asked question is how an auction fits into that picture. Can an auction even be a short sale?
According to Williams, experienced in working with lenders and owners of distressed properties, the process of doing a short sale through an auction is similar to a traditional real estate transaction.
"A foreclosure is as devastating to a lender as it is for a homeowner and most lenders are becoming more receptive to a short sale in order to avoid potentially worse losses, whether through a traditional transaction or an auction."
Clearly, pre-approval by the lender is necessary before the auction company starts the process of selling a home. Traditionally, a REALTOR® advises a customer about a sales price based on current market value, offers come in and lenders either approve or deny any given purchase bid. In an auction, however, there is no set price, only the highest bidder. Asked what stipulations lenders typically make, Williams points out the fact that an auction will in fact deliver whatever the market determines the value to be."
So, are all lenders typically willing to consider a short sale through auction? According to Williams, the primary loan market is fairly easy as for working out a solution whereas the secondary market is very challenging, but that would hold true regardless of whether the sale goes through auction or a traditional listing.
A Glance at the Florida Auction Trend
Asked whether we can expect an increase in auction demand here in Florida, Longly shared that auctions have increased gradually over a number of years and not necessarily because of the housing slow-down we've experienced in recent years. "While real estate auctions increased 46% from 2003 until 2007, the increase from 2006 until 2007 was only 5.3%," he said.
King says that his company traditionally represents non-distressed properties above $1,000,000. To meet increased demand from those now facing foreclosure, however, J.P. King recently opened an asset sales division through which they mainly serve new clients; banks and financial institutions with the sale of distressed properties.
According to King, the number of condos sold at auction by his company increased 30% over the last year. He credits that increase to developers now being more open to finding alternative sales approaches in order to move inventory. King said that he anticipates an increase in business in the state of Florida this year. "We expect to do about 25% of our transactions in Florida," he said. Quite a large percentage considering that his company is doing business in a total of 49 states.
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