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THE REAL ESTATE AUCTION -- A NEW KID ON THE BLOCK

If you haven't noticed, there is a new way to market the family farm.  In this day of stagnant real estate sales and uncertain financing, a real estate auction may be the wave of the future and the right marketing approach for your property. This article compares residential real estate auctions with the conventional listing of a home with a real estate agent.   (Also see the related article below entitled "Subprime Odyssey" at page 2, dated February 26, 2008.)

Step One:    A conventional real estate transaction begins with interviewing and hiring a real estate agent.  The formal process includes signing of a multiple listing agreement that requires the seller to pay a six (6) percent commission when the house sells.  Unfortunately, most real estate agents do not disclose nor formally commit to what actual marketing steps they are going to take in your behalf nor when.  In reality, many real estate agents have become cheap and lazy.  Instead of significant marketing action of your property, they put up a sign, put your listing on the internet and then retire.  The seller is at the mercy of the real estate agent's efforts and timetable after those two events and there is no date except eternity that determines when your real estate is going to sell.    An auction gives the seller a date certain. 

The auction process begins in Alabama.  Sounds a little rough doesn't it?   The big daddy's of real estate auctions are J.P. King, Albert Burney and the Redfield Group all from Gadsden, Alabama.   There is a guide to Real Estate Auctions on the internet for you to find an acceptable company in your local area.   The friendly real estate auction salesperson will come and visit you for free, even from Alabama, but here is where the difference begins. 

Step Two:   As the auction salesperson will soon disclose, they want to be paid up-front for the marketing expense.  In a straight forward residential sale the up-front expense could be as little as $10,000 or as much as $100,000 for a Lake Oswego imperial mansion.  The catch is that half their budget is for their office overhead rather than actual outside vendor marketing expense (such as slick sales brochures).  That up-front expense should be considered in your negotiations.    Auction companies appear to be much more professional about their marketing and virtual tour packages.    They are also much more professional about the team approach to selling your property.  The auction company also is more sophisticated as to how to entice out-of-state buyers to get interested in your local property. 

Step Three:     The principle difference between a conventional sale and the auction is the timeline.  The auction concept has a carefully coordinated sixty (60) day sales plan with the actual auction to occur about sixty days after you have hired the auction company.   They don't want their sale too much longer than sixty days because they key their marketing to the immediacy of the distribution of their marketing materials.  In other words, they want the sale to follow within about a month of the dissemination of their marketing materials.  Thus, the seller has a date certain for sale of the property.

A significant nuance is the "absolute auction".  This is the 'no reserve' sale which means the house will sell to the highest bidder come rain or shine.  There are a number of ways to attenuate this, such as by having a 'conditional sale'  This means the sale is conditioned on acceptance by the seller.  The second alternative is to state the starting bid price in the marketing materials.  This is a soft way of setting the reserve in advance. 

An actual sale  --  The Bar M ranch is a huge dude ranch in eastern Oregon.  The family which owned the property had various squabbles and no one in the family could agree on how to market the property.  Finally, they sold the property through J.P King auction company from Alabama.    The property was appraised at about $2 million dollars, but had numerous capital improvement issues.    There were over ten people who qualified for the sale.  Three qualified bidders showed up and only one bid for the property.  The bid was 1.4 million and sold for that amount.  The sellers were happy and the eastern Oregon rancher who bought the property was happy.

Buyer's premium  --  Built into the marketing material is a clear understanding that this is an unconditional sale as to the buyer (meaning that house inspections and other 'due diligence' must take place before the auction date).  The auction team arrives on site at least eight days before the auction to facilitate 'due diligence'.  Also made clear is that the bidders must post a certain deposit to make them qualified bidders.  Finally, the materials make clear that the buyer must also pay a buyer's premium of ten percent commission to the auction company when the high bid is accepted.

Thus, the up-front marketing money paid by the seller at the front end is, in fact, the commission payment to the (real estate) auction agent by the seller with the remaining profit for the auction company coming from the buyer under that 'buyer's premium' concept. 

These auctions work, they are fun and not as risky as they sound.  There are numerous local companies getting interested in this concept in this age of foreclosures.  It is important to note, an auction is not a liquidation sale.  The auction companies market the property to achieve the maximum possible price, because, after all, their profit is based on the ultimate sale price. 

 

Posted on Wednesday, April 30, 2008 at 02:12PM by Registered CommenterLAUREN PAULSON in | Comments4 Comments | References72 References

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