Real estate auctions just don’t work in my area! Oh, how many times I have heard that over the years. I always find that statement amazing as our company has completed over 1,200 auctions in just the last five years and, as near as I can figure, in my 35-year career I have been involved in somewhere around 2,500 land auctions. Auctions have been around for more than 2,000 years. Records handed down from the ancient Greeks document auctions occurring as far back as 500 B.C. At that time, women were auctioned off as wives. Now, those of us that have been doing this a while know of landowners who might be willing to auction their wives or husbands for a well drained 160 acres of land even today. All joking aside, if you’re trying to enhance your image as a full service real estate professional, real estate auctions should definitely be a part of your business.
What is a Real Estate Auction?
A real estate auction is an intense and accelerated real estate marketing process that involves the public sale of property through competitive bidding. The word ‘auction’ derives from the Latin word “auctus,” which means increasing. Well run, successful real estate auctions can create momentum for future business for you; increasing your income and enhancing your image as the person that can get things sold.
Is every property a good auction prospect? No and not every seller is a good auction prospect. As a real estate professional, it is your job to understand what makes a good auction property and if your seller will be a good auction prospect. I’ll talk more in detail about qualifying the seller and the property a little later in the article but, for now, let’s look at some types of real estate auctions that I have successfully used in my business and their advantages and disadvantages.
Absolute Real Estate Auctions
In an absolute auction there is no minimum bid. The property is sold to the highest bidder, regardless of price. The advantage of an absolute auction is that it attracts more buyers because they know the property is going to sell. The disadvantage is that it provides no safety net for the seller, which makes it difficult to recommend to seller client’s in some situations.
Minimum-Bid Real Estate Auctions
Sometimes called a minimum published bid auction. In this type of auction the lowest acceptable price is pre-determined by the seller and the auction firm. The minimum price is then stated on all the marketing materials. When the bidding reaches the minimum amount, the property will sell. This is a good type of auction to use when you have a property that might have been on the market for some time and is market weary. The advantages of this auction is that it lets buyers know what the minimum price the seller is willing to take for the property, and it still creates a safety net for the seller; unlike an absolute auction. The disadvantage is that sometimes the inexperienced agent and a demanding seller may set the minimum bid too high and buyers will not be willing to bid.
Reserve Real Estate Auctions
In a reserve auction, the seller reserves the right to accept or reject the highest bid. The owner, with the advice of his agent, determines the price at which he would be willing to sell the property. This pre-determined price is not published or disclosed to the public. Sellers are not obligated to accept any other price than the pre-determined reserve price or above. The advantage to this type of auction is that it provides a safety net for the seller while still giving the real estate professional the knowledge at what price the seller is willing to let the property be sold. The disadvantage is that many prospective buyers do not want to take the time or go to the expense of investigating the property when there is no guarantee that they will receive the property even if their bid is the high bid. Over the years I have had many buyers tell me that “We don’t come to auctions to bid, we come to buy, and so, until I know that the reserve has been met, I am not going to bid.” This can be a problem with this type of auction, so, it is very important that the seller and agent establish a very realistic reserve price.
Sealed Bid Real Estate Auctions
All bids are confidential. Usually, they are submitted to the agent and then opened at a predetermined time and place. This type of auction can also be used in conjunction with the three listed above. The advantage is that if you have a buyer with a very strong personality or presence in an area and other buyers don’t want to publicly compete with him they can do so. The disadvantage is that by doing everything confidentially, some buyers may question whether there really were other competing bids. You also lose the excitement created at a public out-cry auction that often times will cause competing bidders to pay more than they thought they would for a property.
Multi-par Real Estate Auctions
This type of auction works well for large parcels that need to be offered in smaller parcels to attract the most buyers. It allows the bidder to bid on one parcel or any combination of parcels. The advantage is that it allows bidders who want only one parcel and bidders who may want several or the whole thing to compete. The disadvantage is that the buyer who wants to buy the whole parcel does not need to compete until the end. It also requires a very knowledgeable staff to keep track of bids and help potential buyers submit bids that keep them in the winning position.
There are other types of auctions that can be used, but these are the ones that work best for me. As technology has advanced, online auctions and online bidding is becoming more common. However, since I often hold auctions in areas that I don’t have even good cell phone service let alone internet connections, this type of bidding has been a problem for me. These auctions are being used very successfully in the selling of livestock and personal property, and I do see them becoming more common in the land business in the future.
What Makes a Seller a Good Candidate?
Now, let’s talk about what makes a seller a good candidate for a real estate auction. Here is what I consider the top five questions you need to ask as the real estate professional:
- Is there adequate equity in the property?
- Is the property being sold to settle an estate or divorce?
- Has the property ever been listed?
- Does the seller have realistic expectations?
- Is the seller familiar with the auction process?
A “yes” answer to these questions would be positive towards an auction. A “no” answer would lead to the need for additional questions to be asked before deciding on encouraging the use of an auction.
What makes a good property to auction?
As a general rule, a property that is in good condition and in a desirable location will sell successfully at an auction. Am I saying that only good, well located properties should be auctioned? Of course not! The auction method can successfully be used in the marketing of just about any type of property. It is very important though that you analyze the seller, the property and the market to see if there would be positive demand for the property.
An auction should be a well prepared and carefully planned event. It definitely is not a one man show.
If you do not plan to become an auctioneer yourself, it is very important that you choose an auction company wisely. There is a saying, “There are three types of lies used in the marketing material of a lot of companies, lies, damn lies, and statistics.” Don’t just rely on the statistics presented to you in their marketing material. It is important that you attend a few of their real estate auctions, and don’t be afraid to ask for references from past clients. The entire auction team needs to be competent and professional in both their dress and their actions. Many times you will have people attend your auctions who are considering an auction on their property in the future. A well conducted auction is a great selling tool, but if the auction is disorganized and poorly ran it will be a reflection on you and you won’t get their future business.
Auctions can be a win-win situation for all. The sellers get their property sold at an acceptable price. The buyers purchase the property at fair market value, knowing the price was determined by open, competitive bidding and you as the agent have a happy client and a successful transaction.
I can’t possibly tell you all the things you need to know about auctions in this article. If you would like to know more about auctions and the auction method of selling real estate I would encourage you to take the Real Estate Auctions course offered by the REALTORS® Land Institute. This course will give you a very good background in auctions and how to use them to market real property.
I can tell you from experience that auctions do work and that the auction tool is one you, as a real estate professional, need to have in your tool box.
This article originally appeared in the 2017 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.
About the author: Sam Kain, ALC, is the Assistant Vice President – Real Estate / National Sales Manager for Farmers National Company in Des Moines, IA. Kain served as the 2005 National President of RLI and continues to be active in the organization as a LANDU Instructor for the Real Estate Auctions course.