While it’s true that the real estate
market is making a slow yet highly anticipated recovery, the auction method of
sale remains a top option for both buyers and sellers. Whether it’s house
flippers, real estate investors, or someone in search of their dream
home, real estate auctions are still a
sought-after event. Despite their popularity, there are many fallacies that
remain when it comes to auctions. Here’s a closer look at some of these myths,
along with the real deal on each issue.
Myth #1: All properties being sold via auction are foreclosures
and/or in bad physical and financial condition.
Truth:
While auctions are a mixed bag, with every foreclosure or distressed property
you can also find a luxury home or enterprising commercial building with owners
that just want a fast sale. Luxury auction companies such as Concierge Auctions
and J.P. King have seen a significant rise in business over the past few years.
“We have executed auctions in 23 U.S. states,” says Laura Brady, President of
Concierge Auctions, “and while we have certainly found success with
metro-market primary residences, most of our properties are vacation homes in
luxury resort markets valued $2.5 million to $20 million.” Doing your homework
and thorough due diligence, as well as making a full inquiry on the property
with the auction company, can also help potential buyers avoid getting into a
possible ‘money pit’.
Myth #2: Properties being sold at auction cannot be inspected.
Truth:
Most properties for auction can usually be inspected just like those in
traditional sales, unless if it’s a property being auctioned by the County sheriffs office or if it’s a judicial auction. Otherwise, inspections of properties
being auctioned are most often arranged by appointment, or the auction company
schedules specific times for the property to be inspected.
Myth #3: Properties sold at real estate auctions must be
purchased in full, cash only.
Truth:
Typically, buyers must have 10-20% earnest money of the potential purchase price
on auction day. This deposit is required to be in the form of cash, certified
check or cashier’s check since credit cards are typically not accepted. depending on the situation, sometimes Potential buyers must also have a pre-approval for financing, but unless it is
a County or judicial sale, they do not need the full cash amount on auction
day. Keep in mind though, closing dates are usually within 30-45 days and the
deposit will be forfeited if a buyer cannot acquire the necessary funds on
time.
Myth #4: Selling a home at auction costs more than a traditional
sale with a realtor.
Truth:
While auction companies and private auctioneers do receive payment to cover
costs and possible property appraisals, the bulk of their fee goes toward the
accelerated marketing process. The mass promotion of the property being
auctioned is what makes this method of sale work. So although there are costs
that may be a little higher in an auction than in a traditional sale, the rapid
results that an auction can bring often end up saving the seller even more in
carrying and maintenance costs of a property they need to liquidate.
Myth #5: If I sell my home at auction, I will get a lower price
than market value.
Truth:
Ask any auctioneer and they will tell you that the auction method of sale is
the way to determine true market value of a property. Bret Richards, CAI, of
Hudson & Marshall comments, ”“When you’re using auctions, it is the true
market value no matter what you’re selling… If you’ve got a room full of 200
people trying to buy 10 houses, then the market has spoken. If you’ve got a
room full of 2 people trying to buy 10 houses, then the market has spoken. It’s
a direct reflection of the current market in that situation because you’re
putting those properties out there – you’re advertising through online, social
media, billboards, newspapers, etc…You can talk numbers to me and current
market analysis and BPO'S, but I’m telling you right now, the best thing about
the auction method of marketing is that it’s the truest value out there.”
Another factor to consider is that
competitive bidding often drives up the price in a real estate auction sale,
where in the traditional market the price of the property often has to be
lowered if it’s not selling fast enough. Sellers must also be realistic on what
their property is worth in today’s market. “Savvy sellers, particularly those
with unique properties, have come to realize that today a property is not
necessarily worth its “asking price” nor reproduction cost, but rather the
value a buyer is willing to pay for it,” Laura Brady says. “This realization
has led sellers to utilize the auction process to generate a fair,
market-driven price for their home, so they can move on to other opportunities.
Auctions give control back to sellers by allowing them to name all the terms of
the sale other than the price — timing, no contingencies, as-is, etc.”
Myth #6: Real estate agents and/or brokers cannot be involved in
real estate auctions.
Truth:
Totally false. There are three ways for a broker/agent to partake in real
estate auctions: 1) referring clients, 2) acting as a cooperative broker/agent,
or 3) acting as a listing broker/agent. Realtors can reap an average of 2% in
commission on this type of sale, making it a lucrative opportunity for more
real estate companies to get in the auction action. Many auction companies
welcome broker/agents, such as David Gilmore of Gilmore Auction & Realty
Services. “We actively market to the brokerage community. I am part of the
brokerage community as a broker in five states and a CCIM member, but I don’t
do traditional listings,” Gilmore says. “The broker is able to validate the
buyer’s bid with their local knowledge of the market. I believe that broker
participation helps to produce a successful sale.”
Myth #7: If the property being auctioned does not sell, it’s more
difficult to attract potential buyers after the auction whether in the
traditional market or another attempted auction.
Truth:
Most properties do sell at auctions. For the few that don’t, owners can be rest
assured that their property has been promoted to the fullest through a detailed
accelerated marketing process, often bringing in offers even after the auction
date. Pre-sales of auctions have actually become popular, meaning once the
auction is advertised, many offers come in for the property before the auction
date in the hopes of bypassing any competitive bidding.
Myth #8: The seller must accept the final bid, regardless of the
amount.
Truth:
The three main types of auction are Absolute, Minimum Bid, and Reserve (please
see Defining the Terms for
a thorough description of each type of auction). The only type of auction where
the highest bidder acquires the property, regardless of the amount, is an
Absolute Auction. There is no minimum or reserve price below where it will not
be sold. Absolute Auctions tend to attract the highest amount of interest due
to the rare possibility of a rock-bottom sale price. Otherwise, in Minimum and
Reserve bids, the seller has more control and holds the final decision on what
amount they are willing to accept.
Myth #9: Auctions are attended by mostly experienced investors,
leaving little chance for everyday buyers to get the winning bid.
Truth:
Real estate auctions are open to the general public and are often attended by
many first-time home buyers in search of their dream home. Many property
seekers hoping to find a good deal have begun to frequent auctions to educate
themselves on the process. “Today what you see at auction is a larger crowd
because YOU'VE got those who want to buy the property, as well as a buyer pool
that’s learning about the process,” Bret Richards says. “In the last 4 to 5
years auctions have become more prevalent, so you have a lot of first-time
auction buyers who are trying to get educated… On attendance day, it’s probably
about a 60/40 percent ratio of serious buyers to people who are just looking or
gathering information.” Hence, you don’t need to be a seasoned property kingpin
to compete in an auction.
Myth #10: Buying a property at auction is taking advantage of
someone else’s hardship.
Truth: Many property owners specifically choose the auction
method of sale for its accelerated marketing process and 30-45 day closing,
seeing it as an advantageous way to quickly liquidate an unwanted property.
Also keep in mind that homes and offices are much more helpful to the economy
when they are occupied rather than vacant.
