Auctions play a central role in the market economy. They are an exciting and efficient way to liquidate valuables, furniture, antiques and art. Whether it’s a live event featuring an attentive audience wielding numbered placards or an online sale in which bidders race a ticking clock, sellers can often expect to walk away with cash and buyers experience the euphoria of outbidding their competitors for desirable goods.
Real estate auctions, however, sometimes have unpleasant associations for buyers and sellers. The idea of using an auction to sell a home may conjure up images of Dust Bowl farms taken over and sold by lenders during the 1930s, or of the foreclosure crisis that stretched into the 2010s.
Joan Witter, vice president of Witter & Witter Boston Cape Cod Connection at Compass, noted that she had difficulty convincing sellers of a luxury home to try selling through an auction. Those perceptions that auctions are a sign that something is wrong with a property played a role in her sellers’ hesitation.
“There’s still a misconception out there as far as whether it is it just a different avenue of marketing or if the owner is trouble,” Witter said. “It’s just in a different way of marketing the property.”
While distressed properties are part of the auction scene, they are far from the only homes sold that way. According to the National Association of Realtors, the majority of real estate auctions do not take place due to financial distress. Instead, those sellers who use auctions are typically seeking a fast, cost-effective way to get the best price possible for their homes.
“Probably the biggest distinction with an auction is that there’s a date that’s certain for a sale,” said Rick Levin, president of Rick Levin & Associates, an auction company based in Chicago. “Instead of just dragging out for weeks, months or years, the sale can occur at a date that the seller chooses. That really frees the seller up to make that determination when they want to sell their property.”
Witter suggested that sellers interested in selling through an auction do so early on rather than having their property listed over an extended period.
“Most sellers turn to auctions after they’ve had a property listed for a while,” Witter said. “They’re frustrated, where it could be if it’s hot off the press, that’s probably when you’re going to get the most reactions. If someone wants to sell quickly and they’re in a competitive market, it would probably behoove them to go this route. If you are going to bring something to auction, and it’s never been on the market before, you’re going to create a buzz.”
The dated notion that auctions are associated with tragedy or misfortune is perhaps the greatest hurdle agents and sellers have to overcome. In fact, there are many reasons a buyer may want to sell at an auction. Luxury homeowners in particular often have properties in the multimillion-dollar range that are hard to move through conventional channels. Those homes could sit vacant for years while waiting for a sale to occur, and extended vacancy may lead to price drops.
However, an auction would seem to carry an element of danger for the seller. What if the property is purchased at a price far below its value or below what the owner considers an acceptable price?
Thankfully, there are multiple scenarios that can help homeowners avoid such issues. Homes are typically sold at three types of auctions: minimum bid, reserve or absolute (auction without reserve). In a minimum bid auction, a threshold price is established. If no one bids at that price, the sale does not take place. Reserve bid auctions function in much the same way. The high bid functions as a purchase offer, though the seller has the option of rejecting all bids. The seller has to decide whether to accept or turn down bids within a certain time frame, often 72 hours.
An absolute auction is an auction in its purest form. In these auctions, the property is going to sell as long as someone places a bid. While there’s a danger that a home may sell for much less than it is worth, Levin noted that these types of sales often bring the most interest and highest prices.
“Some sellers get concerned about doing that, but it brings the highest number of bidders because buyers know that there will be a sale for sure,” Levin said. “If there is going to be a sale for sure, all the buyers want to get there so they can determine the price they want to pay. If all the buyers are there, it’s more likely that the price achieved will be the highest price available to the seller.”
Read more from this issue:
- What your lawyer wishes you knew about real estate auctions
- This twist on 1031 exchanges opens opportunities
- How auctioneers spotlight sellers’ assets
Witter recommends that sellers’ agents take the opposite approach and opt for a reserve bid auction. The seller potentially generates some hype and some excitement around the auction while guaranteeing that the desired price is met. If the timing isn’t right for auctioning the property, the expected bidding war might not materialize to help drive up the price.
“The biggest problem for my situation was that they didn’t have a reserve,” Witter said, referring to an auction sale that did not bring in as much as her sellers expected. “People weren’t sure as to what they were even willing to accept. And so that was definitely our biggest issue. I suggest that if you are going to go this route, you definitely have to have a reserve.”
Buyers can benefit greatly from auctions. Laura Brady, founder and president of Concierge Auctions, said her company works hard to ensure that purchasers have access to quality homes and that sellers are sincere in their intentions. Buyers also don’t have to negotiate a price because the highest bid stands.
“For buyers, that transaction is a very easy process,” Brady said. “The buyers who come to our auctions know that we work very hard to curate the properties that are in our marketplace. Properties that are listed for sale on our site have gone through a very strict vetting process of making sure that it’s quality merchandise and that the sellers are sufficiently motivated and ready to accept whatever the buyers say that the property’s worth. So when the buyers come forward, they know that it’s a motivated, realistic seller, and that it’s good merchandise.”
The technological shift
The ever-evolving nature of technology touches auctions, too. Many auctions are now held online. Some auction companies handle properties that are almost exclusively targeted toward iBuyers, would-be bidders who use online auctions to find homes.
Levin’s company offers a model that combines real-time sales with an online auction component to bring in iBuyers. In this hybrid model, a live auction takes place that iBuyers can watch online as it occurs. They can see the bids that people in the audience are placing and they can enter their own bids. With both audiences bidding, the seller can often get a better price than if the auction was exclusively online or strictly a live event.
“I still love live auctions,” Levin said. “But internet auctions and that technology have really expanded the use of residential auctions. Because more and more people are going online and searching for their real estate needs that way, more people are likely to see it. When they see it, that might be the right time for them to want to buy it.”
Concierge Auctions features a digital component in all of the company’s auctions. Brady said the company developed an online platform in 2010, but it was retired soon after its introduction because there weren’t enough buyers interested in bidding online at the time. Concierge launched a new bidding software in 2015 that proved more successful, partially due to the fact that it has a mobile component.
“Within the first year of us launching it in 2015, we thought maybe half of our auctions that year would be conducted online, and the other half would be live auctions,” Brady said. “The public acceptance of it in 2015 was so undeniable that that year we had 80 percent of our auctions conducted digitally only. So now 100 percent of our auctions have a digital component.”
Connecting agents and auctions
The fact that the role of agents hasn’t come up yet in this story doesn’t mean they’re shut out of the process. In fact, real estate professionals are often an integral part of property auctions, whether at live events or exclusively online. Working with auctioneers, agents can expand their business and better serve their clients by providing them with a quick and profitable route to a sale.
Witter recommends that agents who are interested in auctions do their research first to see what they offer in terms of commission, marketing and support.
“There are quite a few different auction houses out there,” Witter said. “I would definitely interview them see what their level of expertise is and what their marketing plan is. It’s just like interviewing an agent. I think it’s important to you know what the different companies are offering.”
Agents may be reluctant to turn to an auction company out of concern that they will be cut out of a sale or that the auctioneers are their competitors. Trayor Lesnock, president and founder of Platinum Luxury Auctions, said that agents and brokers play key roles in nearly all of his company’s transactions. One of his company’s challenges is convincing the real estate industry at large that it’s a collaborative relationship, rather than a competitive one.
“For almost every transaction we do, and I’m talking 97 percent or above, we are doing the transaction in cooperation with the existing listing agent or broker,” Lesnock said. “In other cases, we actually go ahead and bring one on, if one’s not there, to be our market partner and also to take care of certain licensure and legalities that need to be covered in a given county or state.”
Lesnock noted that he sometimes hears agents steer clients away from auctions because they see the buyer’s premium as an additional cost, but in general the premium functions as a way to pay agent commissions, closing costs and other fees seen in a traditional transaction.
Concierge Auctions works to educate agents about the auction experience and how they can make money through auctions. Agents play a vital role in the process through their knowledge and networks of connections.
“A lot of agents, if they don’t know us, consider us competition and don’t understand that we always protect our agent commission,” Brady said. “While we have real estate brokerage licensure in most of the markets that we do business, we don’t operate as the broker. We always rely on them for their local market expertise.”