On Auctions...

Auctions have come to the forefront of the real estate market as a viable means of liquidating properties that just will not sell under the traditional brokerage model. With surging inventories and diminished sale prices, many are under the perception that the best way to induce a quick sale is sign with one of the companies who is offering auction services. Based on my study of several local auction companies (whose function in the market I highly respect) I am going to explain how the process works. I believe that the process has a value to it, but is not appropriate for all the sellers who have chosen this path as of late. While many of the local brokerages are sponsoring this new way of moving homes, I am not convinced that an auction has a true benefit to sellers at all. Michael Saunders and Company continues to operate under the philosophy that a well-priced and professionally marketed property will always sell- and often at a higher than auction price.

The auction process often starts with the seller being to referred to an auction company by his or her listing agent. For this referral, the agent will be paid a commission in conjunction with the successful sale at auction. An up-front marketing fee is paid to the auction company- this is often over $10,000. Before the auction begins the auction company and the listing broker establish an aggressive marketing plan to create a buzz about the property to be sold. During this time, several prospects are driven to the property and in some instances the listing agent is able to procure a sale without going to auction, but the seller still has paid up front costs out of pocket. If the property does make it to auction, the best way to sell the property is absolute (a term which apparently has many meanings). An absolute auction means that the property will go at any price, although several stipulations can apply to this such as an approval from the lender if the property is a mortgage short sale. If the property does reach a successful sale at auction almost all the auction companies charge a 10% buyer’s premium on top of the sale price. So buyers are always mindful of this and offering 10% less than what they are willing to pay. Those percentage points start to get awfully big very quickly. Out of the 10% premium, the listing broker gets 3% for the referral and the auction company keeps the rest (If anyone reading this thinks the process work differently, please enlighten me at drewrussell@michaelsaunders.com)

So to recap, an auction seems like the worst way to sell a home unless you are absolutely in immediate distress. In addition to the normal closing costs such as prorated taxes, doc stamps, title fees etc., the seller forks out a large sum of money up front. At Michael Saunders and Company, most of our agreements are structured so that we are paid on a contingent fee basis, meaning we are paid to perform. After this money is gone from the seller’s pocket, bidders come to see how low they get the price, ever mindful of the painful buyer’s premium, closing costs, loan origination fees etc. etc. The end result is much more money being spent to procure the property transfer at a huge disadvantage to both parties involved. The traditional brokerage model works and compensates real estate professionals fairly for their work. As a seller, consider speaking with your agent seriously about a price reduction before you go to auction. Do you believe enough in the marketability of your property to stroke a check to the auctioneer? If not, get real and give your agent a price reduction. Undercut the market and create a buzz and frenzy. My bet is that in a private sale, assisted by a qualified broker, both parties will come out ahead while maintaining a bit more peace of mind.