Reader Question: We are selling our home and cannot decide between a traditional listing and having an auction. What is your take on the differences?
Monty’s Answer: A real estate auction is an event conducted by an auctioneer on a certain date, place and time where potential buyers bid openly against each other in attempts to purchase the property, and the bids continue to increase by increments, selling to the highest bidder. Some real estate firms offer the method as an alternative service to a traditional listing. Auctions have been around for thousands of years.
Two types of auctions
The English auction mentioned above is the most popular auction in the U.S. The method of sale can vary, including live outcry, webcast, timed, sealed bid, and more, but there are only two types of auctions in the U.S., “With Reserve” and “Without Reserve,” the latter is commonly called an Absolute auction. For example; an auction is “absolute” when the seller has not established a “reserve.” A reserve indicates a price under which the seller is not obligated to accept a bid. Absolute means the seller will accept the highest bid, regardless of price. Understanding the terms of sale at the auction is important.
Not all property can be auctioned successfully
The home, a seller’s circumstances and the marketplace itself often signal whether or not a seller should even consider an auction sale.
- Homes that are unique or difficult to evaluate are often good candidates. Several well-grounded opinions of value with a substantial gap between the low and high estimates may indicate an auction. Is the property capable of attracting prospects that might compete for it? Is there substantial equity?
- A seller should have a strong motivation to sell. Auctions move quickly, and a seller should be able to determine on the spot if they are willing to accept the high bid if the reserve price has not been met.
- The marketplace should have good demand for similar homes yet very few available. A hot seller’s market, where there are multiple offers and demand for similar homes, is another indicator. Even a slow market but an exceptional home that could cause some excitement may be a candidate. An expired listing with an extended market period and several price reductions may also be a good candidate. Another option may be offering the property first at auction, then converting to a traditional listing if it does not meet the established reserve.
Major auction differences for sellers
Sellers allow the buyer to set the price where there is an open competition. The seller is gambling that open bidding competition will favor them in the outcome. The seller also knows these buyers are serious. It is the quickest method to find the market price if there are serious, knowledgeable bidders. The seller sets the sale and closing dates, there are no contingencies, and the property sells as-is. According to Rich Coccodrilli Jr., an auctioneer and Realtor in Pennsylvania, “ Some companies charge for advertising and not a sales commission, while other companies may charge a flat fee or percentage to either buyer or seller, or a combination.”
Major auction differences for buyers
The buyer sets the price in a transparent public setting and competes with others seeking to buy the same property. The buyer registers to bid and agrees to the terms of sale prior to the auction. Financing must be in place before the auction begins, because closing is not contingent on financing. Buyers may pay a premium for the commission in addition to the bid price. The buyer knows they are competing fairly and on the same terms as all other buyers.
Potential disadvantages for sellers
- The seller pays the advertising costs even if the home does not sell.
- The competitive bidding is not guaranteed to bring a price the seller is satisfied with.
- If the promotion is lacking the auction may not generate enough qualified bidders.
Potential disadvantages for buyers
- Being outbid at the sale.
- The expense of inspections prior to sale date only to be outbid.
- Costs of necessary repairs or upgrades.
An option to consider
A successful auction eliminates long negotiation period and reduces the time to sell the property. It is also very convenient if the seller is downsizing and is selling personal items. Attend auctions in your area. Talk with professional auctioneers and real estate agents about all the options. They can advise you on the best solution for your situation.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”