A familiar complaint from someone who has sold real estate is that he was not able to get the price that he asked for. Equally familiar is the rejoinder of the broker; “I’m sorry, this is the best price we could get in this market.” Ironically, the person that provides this rationalization is the same person who advised the seller how to price the property.
Sale through the auction process, however, follows a different dynamic than listing a property with a broker. The auction process involves a more concentrated and direct advertising campaign because marketing efforts work toward a specific sale date. On the date of sale, a buyer will attend an auction, bid on the property and know immediately if he is the successful bidder. The seller at the auction is able to see what the market is offering and decides if that price is satisfactory; the seller is not left to question whether or not he obtained the “best” price.
Certainty of closing is also advanced through the auction process. Typically, at an auction, the successful bidder must place a deposit of 10 percent of the sale price and close within 30 days. Customarily, auction sales are conducted without contingencies for financing regulatory approvals. Failure to close after the prescribed period results in loss of the deposit as liquidated damages. Commonly, the second highest offer is required to remain open pending closing of sale to the highest bidder and the deposit of the second bidder is retained during that period. This process deters financially weak or otherwise hesitant buyers from bidding at auction.
Under present economic conditions, we believe that real estate auctions will continue to grow. Inability to service adjustable subprime mortgages, downsizing and will force individuals to sell their homes rather than lose whatever equity they have accumulated. Because of the build-up of inventory and heightened mortgage lending standards, the sale process in the present economy has become protracted. Even where sellers cut the price for a quick sale, they remain subject to unreasonable contract demands in a “buyer’s market” and delays as mortgage lenders scrutinize appraisals and buyers’ cash flow qualifications. During this delay, the sellers’ present mortgage may have gone into default. In this event, equity will erode in the face of default interest charges. Eventually, the home owner may give up trying to sell their residence through a negotiated sale and the lender will have to take the home back through foreclosure.
This result is one that neither party wants—the home owner losing their equity and the lender adding another property to its real estate owned portfolios. Had the homeowner auctioned the property rather than using an agent, it is likely that they would have satisfied the lender and retrieved the equity in the property within 30 to 60 days.
The media has clearly portrayed the trend—foreclosures at an all time high, bankruptcies on the rise and lenders closing their doors as the subprime fiasco spreads. This trend is far from over; when the 2007 year-end financials are reported, there will be many more write downs, foreclosures and bank owned real estate properties.
To minimize the pain from this phenomenon, the auctioneer is becoming involved in selling real estate at an early stage, assisting not only the lender but also the owner of the property. Lenders are now doing what bankruptcy trustees have been doing for years—they hire an auctioneer to liquidate the property. In a short period of time, usually 30 to 60 days, the auctioneer advertises the property, auctions the property and closes the deal. The bank is able to rid itself of an unwanted, non-performing asset and replace it with cash. Thus, we predict that in 2008 and beyond, real estate auctions will become most commonplace, at the instigation of both the lender and the real estate owner.