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’s 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 5-10% 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. 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 BPOS, 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 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.