With this sick real estate market you may have noticed more and more advertisements and signs for real estate auctions. Auctioning off real estate has been around for a long time. Real estate auctioneers have obviously been busier the last few years as it has been difficult to sell property via the traditional manner.
Should you auction your home?
That depends on your situation and tolerance for a potentially low sales price. If your main concern is disposing an asset as soon as possible then perhaps an auction is for you. However, I would argue that even if you use the traditional method of selling and price it extremely aggressively you stand a great chance of selling. You will also most likely net a higher sales price than by using the auction method. Even though it is tougher to sell a home in the current climate, this market is still very efficient. If you under price a property it will sell.
I have attended several Sarasota real estate auctions and I would never sell a personal property via an auction. I don't have the stomach for it and feel that I can net more the traditional way. I might consider it if there was a reserve. The problem with a reserve auction (minimum bid required) is that it does not generate the same interest and excitement of an absolute auction (sells to highest bidder).
Who Attends Auctions?
Generally, people who attend auctions are investors looking to steal something or bottom feeders. There is absolutely nothing wrong with that. However, as a seller I would rather work with an end user versus an investor. End users who really like a home and who develop an emotional attachment to it will pay more than an investor who just sees cinder blocks and cash flows.
End users do attend auctions but they are generally outnumbered by investors.
Who Pays The Real Estate Commissions?
The seller. Well kinda. I have seen two methods for real estate commissions. The buyer pays a 10% premium on top of the highest bid and that is the total commission. So if the highest bid is $500,000 the actual sales price comes to $550,000. The $50,000 commission goes to the real estate broker, auctioneer, staff, real estate agents, event organizer, etc.
I have also seen auctions where the seller pay a 6% commission as well as the buyer paying a 10% buyer premium. If the highest bid is $500,000 then the seller pays $30,000 to the broker and nets $470,000. The buyer pays $550,000 for the property because of the $50,000 buyer premium. So the total real estate commission on this example would be $80,000.
In both instances who really pays the real estate commission? The seller. Every buyer is going to have a ceiling to what they are going to pay for the property. Every buyer factors in that 10% premium into their ceiling price. Essentially, the 10% premium is passed on to the seller in the form of a lower bid price.
Absolute or Reserve Auctions?
Absolute auctions mean the properties have no reserve price and that they will sell to the highest bidder regardless of price. These auctions attract more bidders looking for sweet deals. Again, there is nothing wrong with trying to get the best price.
Reserve auctions means that the property must meet a certain bid price or it will not sell. So if the home has a reserve of a $1,000,000 and the highest bid is $800,000 then the seller is not required to sell it. For obvious reasons these tend not to generate as much interest as the absolute auctions.
Some auctioneers go out and attract investors to put in minimum bids on properties in an effort to convince the sellers to put their home up for auction absolute. For example, lets assume a home is worth somewhere around $1,000,000. The auctioneer will go out and find an investor to put a minimum bid on the property for say $600,000. Whatever the price is, it has to be a good deal for the investor.
The auctioneer then tries to use this minimum bid to convince the seller to go without a reserve. They tell the seller that more interest will be generated if they can advertise the property as an absolute sale. Which is true. I suspect most auctioneers do this to guarantee that they will get a successful sale and thus a commission for their efforts.
What Should You Do?
That is up to you. Sit down and analyze your situation. If you need to have more control over the sales price of your home than the traditional method is best for you. Everyone complains about how hard it is to sell a home today but think about this. In Manatee and Sarasota counties there have been 8,166 single family homes and condos sell so far this year (yes, I double checked that number). I pulled that number from the Mid Florida MLS. Those numbers are impressive. You can sell your home in this market if you are the best home at the best price.
In All Fairness
I have seen several auction properties sell for market value and even some sell for more than market value. However, with the hefty real estate commissions I have seen a lot of properties sell for less than what I think I could have sold it for using the traditional method.
Auctions are here to stay. Their popularity will grow and shrink based on market conditions. You will probably see more auctions signs and advertisements for the next few years and then it will die off a bit as the market improves. Consult a real estate professional to weigh your options.