Matthew Ferrara, Philosopher
 

7 Reasons to Auction Every House Today

If I were talking to homeowners today about selling their home before the end of the year, there’s one word I’d use to sum it all up: Auction. Here’s why.

I’d say to sellers: Auctions aren’t just for distressed properties. They are for desirable goods, like diamonds, art, antiques, and your home. Let me explain. Contrary to popular belief, auctions work. During downturns, they work really well. Take a look around your town: Are your neighbors losing time and value by “fishing” for the right price, then lowering it, month after month?

Auctions make all this go away. Most of all, they’ll make you go away, to your next home, too!

Now back to us:

A year and a half ago, I visited two countries that use auctions to sell homes regularly. In Australia and New Zealand, the auction is a normal, ordinary way to sell homes in about 30 days. You read that right: sold in about a month.

The process is simple: Sellers decide to move. They hire a broker who sells them marketing and transactional services (marketing fees paid up front, actually, but that’s another story). After showing and marketing the home for about a month, they invite all interested parties to a room with a professional auctioneer. One of them  buys the house that very day.

Home sold.

Any home that sells at auction is sold for the actual market price. Sometimes, the excitement causes buyers to offer even more. But it’s not sold for less, unless the seller agrees to it. Seller set a reserve price; if nobody bids at or above the reserve price, they keep the home. They can try something else later. Unlike a distressed property sale, normal auctions involve a seller’s choice.

So: Thirty days on market. Sold at or above market price. Sellers get on with their life. Agents get paid fast. Sounds too good to be true?

Most people like auctions. They are exciting, fancy, prestigious. James Bond films feature auctions. We love car auctions on television. Antiques Roadshow is a hit on both sides of the Pond. We auction art, jewelry, horses, movie props and fine goods. Who hasn’t dreamed of someday bidding at a Sotheby’s or Christie’s auction? We love Ebay.

Auctions are serious events, where serious people pay serious money for seriously desirable goods. So why not real estate?

But aren’t auctions just for distressed homes? Don’t the buyers expect to get a “deal” or a discount? Truth is, buyers always expect to get a deal. Don’t you? Sellers expect a deal, too, when they buy their next home. Even buyers who pay full price of a “lowered asking price” are getting a deal.

Trouble is, we still let too many sellers go on fishing trips. Why not? If someone came along and told you they’d spend all their time, and put their people to work at no up-front cost, to try to sell your home, wouldn’t you take advantage of it? Sure, you’d intellectually know there is a risk of your home becoming stale on the market; but you’d take that risk, when it’s free. Thus, the kabuki dance between real estate agents and sellers. Today that dance involves a slow, painful process of lowering the price, month after month, until somebody breaks down: Often, it’s the seller’s nerves. Frequently, it’s the broker’s budget. Too many times, it’s the listing contract that expires, without home sold or agents paid.

Is this healthy for anybody? Must selling real estate be stressful for customers, fearful for agents, and destructive to both parties’ wealth?  There has to be another way.

There is: Auctions.

Auctions short-cut the process. They can sell a home today, at current market prices. They get the job done; Everybody goes on with their lives.

But would American homeowners go for it? Common wisdom today says “smart money” has been buying homes during the recession. Read: affluent consumers. Smart money comes off the sidelines in a recession because that’s when the best values are found (even wealthy people want a deal!). Wealth is created and preserved during recessions. And smart, wealthy buyers are also sellers.

In fact, wealthier Americans are using auctions to sell their homes today. They want to move on, protect or re-invest their wealth into different assets (such as real estate rather than the dollar or stock market). A Bloomberg article recently noted how rich Americans were turning to auctions “after price cuts failed” to sell their home. Some sellers noted they didn’t want their home to get “stale” on the market, or wait years to move on with their lives. Even more interesting from the article:

  • One auction company noted it generates an average of 276 inquiries per listing and 16 bidders at the auction.
  • The dollar amount of homes sold at auction has risen 30% over the last year; and opening bids have increased over 100%

So, are you getting 276 inquiries on your listings and 16 visitors at your open house making offers?

Some people worry that sellers might “get less” if they use an auction. Actually, auctioneers will only sell the home for the price the seller agrees to. No different than the classic “asking-price/offer/negotiation” technique. It’s just all sped up, with a dose of excitement and competition.

Still not convinced? Consider these additional seven reasons why auctioning homes is the best way to get the job done:

  1. If the economy continues to weaken,  jobs, credit availability and consumer sentiment will further decline. Home prices won’t rise over that period.
  2. Sellers, agents and buyers can get to the the right price right away. When a bunch of interested buyers tell you what they will pay for the home right now, that’s the market price. It’s up to the seller to believe it or not.
  3. Auctions can be non-contingent. Whomever bids highest has bought it. They pay a deposit (say, 10%) that day, with the balance due during a closing period. Everyone shows up prepared (and prequalified) to buy the house; no financing surprises.
  4. Sellers would only pay for their agent’s services. There’s no need to compensate any other agent, of the seller agent’s commission. In turn, that could lower costs for sellers. Cost savings attract consumers, especially in down markets.
  5. Agents would get paid more often. Imagine a real estate career with real cash flow. No more running up the credit cards in between .
  6. Paying up-front for an auctioneer, marketing or both, would be a healthy industry change. It would focus sellers on being realistic because there’d be a penalty for going fishing. When everyone is invested in the outcome, there’s an incentive to get the job done.
  7. Consider the psychological factor. Sellers can get on with their lives; Agents build reasonable careers. The old style “lower it until we hit gold” method isn’t healthy for sellers, agents or the economy.
Will it ever happen? It already is. Bloomberg reports that companies like J.P King Auction in Alabama or Grand Estates Auction Co. in Charlotte (who says only about 12% of their auctions are distressed) are auctioning more homes than ever. Some of our clients are already doing it, in Kentucky and California.

 

In America, we love imports. German cars, Italian art, Japanese food. Maybe it’s time to consider another import for our betterment: The auction. It works for millions of people around the world. Let’s make it work for American homeowners, as well.
  • Ginger Pugliese

    Matthew…
    It’s an interesting concept, although I think the general public would perceive that the properties are distressed.  It’s definitely time to think outside the box and come up with alternative routes to getting homes sold.  The old way just does.n’t work for the Buyer, the Seller, or the Agent.  Great article.

  • Ginger:

    Thanks for your comment. From the Bloomberg article, it’s encouraging to see that both sellers and buyers are getting the message – maybe slowly – that the homes aren’t distressed. But isn’t that our job, as real estate professionals, to educate the public and get the word out? It might be tough at first, but from what our clients who are doing this are telling us, it’s not that hard to change people’s perceptions. That’s what marketing is all about.
    There was a time when nobody thought they needed a buyer’s agent, either; but we educated them and CHANGED the marketplace and industry. Just like there was a time when nobody even KNEW they needed an iPod to enjoy music, organize them into playlists instead of albums, etc., and Apple changed that by coming up with a message and educating us to our desire for it.
    So, don’t give up until you’ve tried it. Because it IS happening and I think it will happen more and more.
    Thanks for stopping by!
    – MF

  • John Virgin48

    This is a outstanding article. Thank you for bothering to explain all this out for folks. It is a great help!

  • Anonymous

    Great blog post Matthew.

    I am one of the partners at Concierge Auctions, which is the preferred provider to Sotheby’s International Realty. 

    I think you did a great job outlining reasons for auctions.  Auctions are a great first resort for agents and sellers that don’t want to waste time.  In 30 – 45 days all parties will know exactly where the market is for their property.  It may sell, it may not. (Although at Concierge we sell them 85% of the time) The auction brings the market and then let’s the parties decide.  CMA’s on what a property SHOULD sell for has become a difficult exercise.

    Auctions activate the serious sellers and buyers in the market.  It also puts control back in the hands of the seller.  Sell on their time frame, as-is, no contingencies.  

    I would like to also point out that at Concierge Auctions we are the only auction firm that requires our auction properties to be listed with a local broker and pay a market rate co-op.  This is not the case with other companies.
       
    If anyone would like to become more familiar with auctions, we have some great videos on our website at http://www.ConciergeAuctions.com

  • Anonymous

    Matthew,

    The fact is, as usual, a process worth the quality of the people who design, implement and manage it. Having experienced first hand auction process, I can confirm that it works… under certain circumstances. The main one being that the auction company has to have a true marketing engine behind it, a proven process which involve a local broker who has the market knowledge and will serve as a supervisor, and, as usual, has to be honest and truthful to their clients.
    If the seller does not want to let his / her home goes under a certain price, the auction houses should not call it Absolute, which most of the auction companies do these days to attract buyers, but with Reserve. Make sure that if it is a truly Absolute auction, there is not “advised” prices.  If the auction house advise a minimum price, then this is a not an Absolute auction.
    Company like the one you mentioned claim success that sometimes they are not really entitled to.  Selling a home in auction for 50% less than a previously listed price on the market, in my world, is not a success for the seller but a success for the auction house, as they get their fees. Selling a home to prospect that were generated through other brokers, is not a proof that auction works. If you give the chance to a good broker to market a property with a substantial price reduction, the home will sell as well, and the broker would certainly be very happy to make a discount on the fees that the auction houses was charging.
    In short, there are all kind of auction houses in this world, the reputable and the others. Make sure to throuroughly investigate them, their people, their reputation, as usual read the fine lines, and if you are under hardship, auction is not for you.

  • Thanks for your comments; you bring up some great points. Of course, there are lots of issues to be careful with any process, including auctions, so you’re correct to point out cautions and alternatives. Ironically, most of the U.S. Market doesn’t even consider auctions at all – so for some of our readers, it’s a major change of thinking to even consider it as a first or second tactic; whereas in other countries, it’s quite successfully employed for AT or ABOVE reserve-price selling in months or weeks (like in Australia). In the end, it all comes down to the client’s goals; which is sometimes, price, other times, getting on with their lives sooner rather than later.
    I appreciate your comments!
    – MF

  • As a real estate salesperson in NZ auctions are a huge part of mine and my colleagues business.  Last year, which was the second worst year for real estate in NZ in the last decade, we sold 549 properties using a three or four week auction campaign and of those 73% were sold prior to the day, under the hammer or within 2 weeks of the auction compared to 18% of all listings advertised with a price.  Since then we have been going through a market growth and last month our hit rate was 84% sold using an auction campaign.  We don’t use price indicators and our market is getting educated with that fact that the best properties are being sold by auction and that they have to put themselves in a position to buy that way or miss out.

    Our biggest problem in getting buyers to sign is their decision to commit.  Auctions build urgency and a purchase deadline amongst buyers.  The auction process is a competitve transparent purchasing environment whereby buyers are competing amongst themselves and not with the seller.  The property is sold with no conditions and therefore the buyers cannot pull out of the sale without losing their deposit.  The seller can set the terms of the sale allowing them complete control of the process and they have the option to accept offers prior to the auction if an “auction stoppable” offer is presented (this brings the auction forward so that other parties can still have the option to bid).  With no price indicators the focus is on the property and not the price.  Our managers are our auctioneers and as such are involved in the process from the time of listing and work with us right through including any negotiations that are required during and after the auction.  As the sellers have to pay for marketing they are motivated to sell and it’s an easy way to show buyers that they are not just testing the market.

    As you can tell I’m a convert and always present auctions as the best way to sell a property to sellers!  We have a saying, it’s not the property that determines whether it can be auctioned, it’s the sellers.

  • Thank you VERY MUCH Susan for this great comment! The numbers are helpful as concrete benchmarks of the system’s ability to perform. Fantastic! One of these days, please consider being a guest on our MFLN show, too – I’d love to share more of your experiences with our viewers and readers! – MF