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FAQs

REAL ESTATE AUCTIONS: THE BASICS & BENEFITS

Q. What is a Real Estate Auction?
A. A real estate auction is an innovative and effective method of selling real estate. It is an intense, accelerated real estate marketing process that involves the public sale of any property -- most certainly including those that are nondistressed -- through open cry, competitive bidding.

Q. How will auction benefit me?
A. The real estate auction is a win-win proposition for everyone involved.

BENEFITS TO THE SELLER:
* Buyers come prepared to buy
* Quick disposal reduces long-term carrying costs, including taxes & maintenance
* Assurance that property will be sold at true market value
* Exposes the property to a large number of pre-qualified prospects
* Accelerates the sale
* Creates competition among buyers - auction price can exceed the price of a negotiated sale
* Requires potential buyers to pre-qualify for financing
* The seller knows exactly when the property will sell
* Eliminates numerous and unscheduled showings
* Takes the seller out of the negotiation process
* Ensures an aggressive marketing program that increases interest and visibility

BENEFITS TO THE BUYER:
* Smart investments are made as properties are usually purchased at fair market value through competitive bidding
* The buyer knows the seller is committed to sell
* In multi-property auctions the buyer sees many offerings in the same place at the same time
* Buyers determine the purchase price
* Auctions eliminate long negotiation periods
* Auctions reduce time to purchase property
* Purchasing and closing dates are known
* Buyers know they are competing fairly and on the same terms as all other buyers
* Buyers receive comprehensive information on property via due diligence packet

BENEFITS TO THE REALTOR®:
* Generates a list of ready, qualified buyers
* Offers clients and customers new selling and purchasing options
* Increases revenue and market share
* Develops your own market niche
* Assurance that property will be sold at true market value
* Property is sold within a relatively short period of time
* Exposes the property to many potential purchasers
* Auctions bring people in to look at all your listings, not just the auction listing
* Successful auctions result in referrals and return business
* Agents can earn commissions as referring agent/broker, cooperating agent/broker, or as the listing agent/broker

TYPES OF AUCTIONS

Q. What are the different types of Real Estate Auctions available to me?
A. Essentially there are three types of auctions:
1. Absolute Auction (or auction without reserve)

  • The property is sold to the highest bidder, regardless of the price.
  • Since a sale is guaranteed, buyer excitement and participation are heightened.
  • Generates maximum response from the market place.
  • Many sellers, including financial institutions and government agencies have begun to use this method more frequently.

2. Minimum Bid Auction

  • The auctioneer will accept bids at or above a published minimum price. This minimum price is always stated in the brochure and advertisements and is announced at the auction.
  • Reduced risk for seller as the sales price must be above a minimum acceptable level.
  • Buyers know they will be able to buy at or above the minimum.
  • The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, and therefore it must be low enough to act as an inducement rather than a hindrance.


3. Reserve Auction ( an auction subject to Confirmation)
In this scenario, the high bid is reduced, in effect to an offer not a sale. A minimum bid is not published, and the seller reserves the right to accept or reject the highest bid within a specified time -- anywhere from immediately following the auction up to 72 hours after the auction concludes. Sellers predetermine the price at which the property will be sold and are not obligated to confirm a sale other than at a price that is entirely acceptable to them. The main disadvantage of a Reserve Auction is that prospective buyers may not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder.

Real Estate Auctions: Marketing, Advertising, and Other Expenses

Q. How are auction properties advertised?
A. Because the lead time in a real estate auction is generally short, the marketing program must be comprehensive, intense, and targeted to prospective buyers. A specific advertising budget is established to properly expose the property to the marketplace.

Most auction marketing programs will include direct mail advertising (from a black and white postcard to a full-color brochure), print advertising (local, regional, and/or national newspapers, magazines, trade journals, etc.), and signage (attractive, attention-getting signs posted on or about the premises).

Additionally, platforms and techniques such as telemarketing, publicity, radio and TV, billboards are often used by professional auction companies to enhance market exposure.

Q. How much does advertising or marketing cost and who pays for it?
A. Depending on geographical location, value of the property, and size of the marketing area (local, regional, or national), advertising budgets can run from one to four percent of estimated proceeds.

While the auctioneer prepares, coordinates, and places all advertising, the advertising expense is generally the responsibility of the seller and is usually paid to the auction company at the signing of the auction contract.

Q. How long does it take to market the property, have the auction, and close the sale?
A. The timeframe varies, depending on the type of property auctioned. Generally, however, the process takes from six to 10 weeks from listing to sale day. Sellers usually allow buyers an additional 30 to 60 days for closing.

Q. What are the expenses related to an auction?
A. In general, auction expenses include the auction company’s commission, marketing and advertising, and co-brokerage commissions (sometimes).

Typically the auction company charges a commission as a percentage of the sale price. This commission is negotiable.

In addition, marketing and advertising costs are usually paid by the seller and are payable upon signing of the auction contract. A complete marketing proposal should be provided for the
seller’s approval prior to signing.

The auctioneer (or in some cases, the seller) usually pays a co-brokerage commission, either a flat fee or percentage of the sale price, if the high bidder and ultimate closer on the property is represented by the broker who registered the bidder prior to the sale.