In a slow real estate market, Naples, Fla., real
estate broker Daniel DeCaro has been holding three to five real estate
He largely deals in high-end real estate properties. But last September, he established "DeCaro South," a separate division in Sarasota that auctions properties valued below $2 million.
"I've been doing auctions for almost 30 years," he says. "It's especially busy now that a lot of people are in a position where they need to sell. Traditional methods aren't working."
With a real estate auction, sellers can get a property sold fast on an auction day-with no contingencies. The transaction may be settled within 30 days, usually with a cash contract. "The advantage for buyers: They generally get a substantial discount on their purchase," DeCaro says.
Real estate represents the fastest-growing categories of auction specialties, according to the National Auctioneers Association in Overland Park, Kan., Gross sales revenue from residential real estate auctions between 2003 and 2006 grew 39.2%, from $11.5 billion in 2003 to $16 billion in 2006. That's followed by land and agricultural real estate, up 33%, and commercial and industrial real estate, up 27.4%. In contrast, charity auctions grew just 16.3% and auctions for art, antiques and collectibles, 15.7%.
Real estate auctions gained popularity in the 1990s, when the Resolution Trust Corp. needed to unload the property of failed thrifts. But today, with slow housing sales, they are picking up steam in many markets. Just this year, the National Association of Realtors launched a presidential advisory group on auctions made up of five of its members from the association and five from the National Auctioneers Association. The organizations are working together on this increasingly popular real estate concept.
Should you consider recommending a real estate auction for your client who is having trouble selling a home? And what other options are available if a client's property isn't moving?
Jack McCabe, CEO of McCabe Research & Consulting LLC in Deerfield Beach, Fla., says financial advisors need to get up to speed on the real estate market. However, he cautions that real estate auctions may not always be the best solution. While a seller often pays a commission of 5% to 7% of the contract price to sell a home through a real estate broker, auctions could run 7% to 12%, says Ben Anderson, chairman of the NAR presidential advisory group.
That's because it's not uncommon to have up to three agents involved in an auction. But unlike an outright sale, in which the seller traditionally pays the broker a commission, compensation in an auction may be split in a variety of ways. It can come from the seller, who signs a property listing agreement. There may be a "buyer's premium," or a commission provided by the buyer. There also may be an assessment for auction fees for such things as marketing charges and other costs. The advantage of the auction, Anderson says: "It engages more people."
Real estate licenses are required to auction real estate in all states. However, just 32 states have auctioneer license laws, according to Bill Sheridan, president of the 5,600-member National Auctioneers Association.
There are three primary types of auctions:
Absolute auction. The seller has committed to selling the property to the highest bidder without any minimum set price. This supposedly attracts the most buyers because if you're the only one at the auction and bid $1, you can buy the property. But it's a turn-off to a lot of sellers who risk getting hammered.
Reserve auction. A property is listed for a specific minimum price, undisclosed at the auction.
Minimum bid auction. A minimum bid is set that is disclosed at auction.
"Probably the most popular is the real estate auction with the reserve, in which the seller has the right to say yes or no," Sheridan says. "When we sell real estate by auction, there's an underlying mortgage we need to respect."
DeCaro recommends "absolute auctions" as the surest way to unload property fast. It's also billed as a way to attract the most people. However, he stresses that steps must be taken in advance to make sure that only legitimate buyers attend.
Certified checks, advance deposits or bank letters of credit typically are required up front to prequalify buyers. An agreement, such as a "Terms and Conditions" agreement, also must be signed in advance.
Those selling high-end properties already are familiar with auctions,
where they frequently buy furniture, classic cars and antiques, DeCaro
But McCabe warns that sellers also can take a licking in real estate auctions. Take the Tampa, Fla., developer who had bought at the top of the market and was selling condo conversions. He hired an Alabama auctioneer to unload 100 units-40 with no reserve and 60 with a reserve. None of the 60 with reserves sold. The 40 with no reserves sold at an average price of $147,000. Some $180,000 units went for as little as $90,000, and three-bedroom units, which had been retailing for $295,000 to $325,000, sold at $180,000.
Was it a success?
"The builder got rid of 40 in one day," McCabe says. "But prices went incredibly lower than what he paid for them when he bought them. He had his back up against the wall. The lender was requiring some income."
NAR's Anderson, whose auction company, Anderson Auctions in Destin, Fla., has been conducting mostly reserve auctions, says the actual sale may close before or after an auction. He has seen sellers who had set reserves lower prices to close a deal. So even if no one meets the reserve, a reserve auction can serve as a very effective sales tool by obtaining qualified buyers.
Phyllis Rockower, a real estate investor who runs Realestateclubla.com, a Los Angeles real estate investment club, agrees. She says she sold a property for some $370,000 at auction with a reserve in Palmdale, Calif., in the summer of 2006 after getting no response from a newspaper ad. In fact, she says, she would not sell property at an auction without a reserve.
Her auction closed with no one meeting the reserve, but a buyer came up after the auction and upped the price. "Auctions are great," she says.
Because the sale occurred after the auction, she says, she was able to get some fees refunded.
Mike Grigg, an auctioneer/agent with California Premier Auctions Inc. in Bakersfield, Calif., says he prefers a less common kind of auction known as a confirmation sale, where the seller doesn't commit in advance to a minimum sales price but has the right to say yes or no to a bid. Unlike with a reserve auction, Grigg says, the seller hasn't actually agreed in advance to a number that must be accepted. This eases the negotiation process. Meanwhile, the seller pays a $3,000 "production" fee if a sale doesn't close. If it closes, as did more than 80% of the 30-some auctions Grigg says he conducted last year, the seller's production fee is waived and a "buyer's premium," generally 10%, is charged.
If you do consider an auction for your client, there are a few things to keep in mind.
Auctioneers may turn away sellers whose expectations are too high or who owe too much on a property.
Buyers typically can't buy a property subject to contingencies, such as an inspection or qualification for a mortgage. All this must be arranged before auction.
Agreements that buyers sign before the auction can be binding-even if a
written contract for the purchase of the home has not been signed and a
buyer changes his or her mind after auction. If there's a mistake,
clients must immediately notify attendants, or "ringmen," to interrupt
the nine- to 12-minute auction and get it corrected, Anderson says.
Potential buyers should obtain copies of the bidder's package in advance and should have it carefully reviewed by an attorney.
Sellers need to carefully examine and negotiate the marketing package
and budget. Determine in advance how an auction will be publicized.
So what should you do if a client can't sell a home?
First, analyze a client's portfolio and determine what kinds of liquid assets they have to sustain themselves, McCabe advises. Consider the carrying costs per house, and whether it pays to rent the property.
In South Florida, for example, the cost to rent is running 50% to 75%
of the ownership costs of property. So someone who acquired the
property at the height of the market with an adjustable-rate mortgage
likely would be underwater by renting.
On the other hand, a client who bought years ago at a significantly lower price, and got a low fixed-rate mortgage, could find it pays to rent for a couple of years until the market rebounds.
Or, "A financial advisor may decide it's better to sell the house at a loss now, take the funds and put them into something more profitable," McCabe says.
If your client needs to sell a home fast, make certain he or she is
offering the best property competitively at the lowest price in the
market. Examine local competition. Study builder prices. McCabe says he
has seen individual owners attempt to match builders' incentives by
offering such deals as plasma TVs and a lease on a Mercedes for a year.
"I've seen a membership in a country club included, and paying home
owners association dues for a year." Don't necessarily expect such
incentives to work in a market that's still falling, he says.
You can get an idea of home values at www.zillow.com or www.realestateabc.com. Other places to research: Realtor.com and uscondex.com. But you need to establish, perhaps from a real estate agent or the local real estate board, how long homes are staying in the market. Examine how homes comparable with your client's are priced. Undercut them just enough.
Have a client underwater with a home worth less than its mortgage? Rockower suggests a "short sale." This means you get a buyer to talk the bank into taking a price that's less than the mortgage. But beware, she says. Banks won't even consider a short sale unless the borrower is substantially behind on the mortgage. "The uglier the house, the more likely the bank is going to accept a short sale," she says.
Other ways to sell in a stagnant market: Offer owner financing. Because it's harder to qualify for loans, owner financing is gaining favor again, she says. Sellers might also offer to pay closing costs.
Another attractive tactic: Offer the realtor a bonus for a quick sale. Say the standard real estate commission is 6%. Consider offering 8% if the real estate agent sells the home in 30 days, 7% if it's sold in 60 days and 6% if sold in 90 days, she suggests.
Yes, you can find online auctions, Anderson says. But unless the buyer signs a contract in advance, the auction is not binding. When it comes to real estate, eBay real estate auctions are nothing more than ads aimed at letting people contact people and start a dialogue, a spokeswoman confirms.
Meanwhile, the National Auctioneers Association's Sheridan, who owns Sheridan Realty and Auction Co. in Mason, Mich., says he lists all his auctions on Craigslist because those ads typically are free.
Gail Liberman is a Florida licensed
real estate agent and mortgage broker. Her latest book is Quick Steps
to Financial Stability (QUE Publishing).