One day several years ago while I was director of real estate services for a “start-up” residential real estate e-commerce venture that failed, a key investor in the company asked me the question: “How do I sell a home for free?”
Being adjunct faculty in the real estate department at the business school of a prestigious university, a veteran of both the commercial and residential markets, and a frustrated member of the National Association of Realtors (NAR), I surprised myself by having to stretch for an answer. In a flash it came to me … and I replied to the investor that you can “auction the property.”
After all, at a traditional auction the seller pays the auctioneer to promote and manage the auction process, but no fees or commissions are usually paid to the buyer or the buyer’s representative(s) if he or she has one, which is not always the case.
Along with my role at the time in helping to “shape our real estate e-commerce business model,” and interest in verifying my naïve assumption that auctioning is a way to sell real estate for free, I decided to research the subject further.
I came across a book entitled “How to Sell Your Home in 5 Days (Bill Effros; Workman Publishers,New York), a “consumer-centric” work targeting the “do-it-yourselfer (For Sale By Owner).” The book does an excellent job in both explaining the process of auctioning and the fundamentals of running an auction on your home in 5 Days in order to get buyers to competitively bid on your property.
After reading the book in 2007, I decided that it would be a good exercise for my students to combine our study of real estate theory at the university with contemporary real estate practice. I solicited student volunteers to help document a 5 Day Sale/ Home Auction. We found a seller in Denveronline who was in need of help in conducting his auction, and we offered to help in exchange for the right to videotape and document the effort as a case study. This auction/5 Day Sale was successful and you can view the video and review our case studies at: www.AuctionBySeller.com .
My curiosity peaked; I continued to research auctioneering industry practices and even joined our state auctioneering association. While not all auctioneers sell real estate, those that do must hold real estate licenses in their given state of operation. While all states require real estate practitioners to be licensed (and therefore regulated), not all states require that auctioneers be licensed.
Auctions can take many forms. On the one end of the spectrum, there is the “absolute auction” that results in a sale regardless of price as long as the minimum disclosed bid level is met (assuming there is one). On the other end of the spectrum, there is the auction with an “undisclosed bid.” In each of these approaches, the point is to start your bidding at an either artificially low – or minimal acceptable – price point so as to engage as many potential buyers available in a market at a given point in time, and then to bid those potential buyers competitively to find the best buyer for the property. Best buyer is usually defined as most competitive bidder that meets or exceeds the seller’s minimal acceptable price (reserve). By definition, competent auctioning produces market prices at a static point in time.
I have since been engaged to assist and document multiple real estate auctions and/or 5 Day Sales, all of which have been successful, but not all of which resulted in the sale of the property at that time. That said, they all provided “perfect market” feedback directly from buyers to the sellers regarding the given properties’ features and those buyers perception of market value. For the record, I believe the auction methodology is a valid and legitimate real estate sales strategy. I am particularly impressed with the fact that auctioning is a much more “proactive” sales strategy than is the traditional listing of real estate, which I believe to be a passive sales strategy.
The question then becomes, is auctioning a cost effective method for selling real estate when compared to traditional methods of selling real estate? The fact is that it takes time, money, and effort to run an auction, sell the property yourself, or list it with an agent.
Most auctioneers will charge a significant auction marketing fee to cover promotional costs and their time. Additionally, most auction firms charge a “buyers premium” that the buyer pays net of their offer. This means that while the seller pays no fees directly, the buyers’ offers are “net” of any auction and buyer’s agent fees. Auctioneers’ “buyers premiums” for real estate transactions range from 5% to 10%, depending upon whether the bidders are represented by real estate agents or not.
We already know what’s wrong with the traditional real estate listing model where we start by overpricing our property and listing it. This approach does neither the client nor agent any good as the property languishes on the market as both client and agent chase the market down through price reductions in frustration together, (Circa 2008). By the way, this traditional real estate listing pricing model is known as a “Dutch Auction,” an auction where the seller starts high and takes the first lower acceptable offer.
So … what then is wrong with the auctioning model?
In its current form, the traditional auctioning model has the potential to lead to “conflicts of interest” between sellers and auctioneers, and they are just as expensive as – or more so – than the traditional listing of real estate. The expense is often justified, given the “time value” of a sale, but if that sale involves an auctioneer producing a buyer represented by an agent, then the fees – while paid by the buyers – decrease those buyers’ effective purchasing power net to the seller, and the seller achieves a lower effective sales price.
Whether it it’s an auction or a traditional listing the buyer always bears the cost of fees, because they are paid for from the proceeds of sale.
Is there an alternative auctioning business model for sellers and agents alike?
Yes … through our online real estate auction platform resources, expertise, and consulting.
By: Kyle Cascioli – AuctionBySeller.com
December 20, 2008