The following are questions I often hear regarding the real estate auctions I conduct... and my answers and commentary - Joe Cotten
"Why is the property up for auction?"
Sellers are motivated to sell by many possible reasons. I think the number one reason a seller chooses to offer their property at auction is because it promises a quick sale. There are times when folks relocate and do not want to have two mortgages to pay on while a realtor might take several months to produce an offer. Many times the property is in an estate and the heirs just want to cash out. In recent times, I have sold a lot of homes that were acquired by investors and rented for many years... and now it is their time to retire and let someone else reap the rewards of owning income property. And there are times when a seller does not know what a property is worth because it is very unique, and the only way to really find out what it is worth is to put it up for auction and let the buyers tell us what the property is worth.
Besides a quick sale of the property, the second benefit to the seller is that the property is sold "as is" with no contingencies. There are no financing or inspection contingencies in the contract with the buyer.
“Is this an ABSOLUTE AUCTION?”
“Absolute auction” means the seller will sell to the highest and best bidder no matter what the final bid is. Although the term "absolute auction" appears in the Uniform Commercial Code and does not apply to real estate, that terminology has gradually been referred to in questions about real estate auctions.
Are there really genuine “absolute” auction sales of real estate? Yes, there are some… and I have conducted some of what would be called "absolute" auctions over the years, but they are rare. Not all real estate can be promoted as being an “absolute” auction. If the owner does not have an absolute equity position in the asset, whether it is real estate or personal property, it cannot be offered as an “absolute auction”. If there is money owed on a machine or other asset or a parcel of real estate, then the owner does not have an absolute equity position in the asset.
Very few property owners truly own their property free and clear, other than current real estate taxes, and can sell “absolute” without the conflicting interests of a mortgagee or other parties that may be unwilling to risk a short sale.
Once an “absolute auction” is opened for public bidding, the Seller is committed to sell for the highest and best bid. In the past, it was not uncommon for an Auctioneer to advertise a real estate auction as “absolute”, and simply not open the auction for public bidding until the Auctioneer had solicited a satisfactory starting bid from someone in attendance. And now you know why you may have waited around for an hour for an absolute auction of real estate to begin. Although that technique was widely used in the past to protect the Seller's interest, and some auctioneers still use it (perhaps unknowingly), it is considered a bad practice now… and it is illegal in most states to engage in that practice.
Under circumstances of an absolute auction, the seller really doesn't have any protection once the auction is underway. If the Seller cannot attend and witness the bidding process during the auction sale, what would prevent the Auctioneer from selling the property immediately upon the first bid to a friend or relative? Or...what if the buyers conspire and agree not to bid against each other thereby forcing the property to sell cheap so the conspirators can market the property later at a profit? What if there is a heavy snowstorm on sale day and buyer attendance is limited? These are issues a Seller has to consider before offering real estate under conditions of the "absolute" auction.
Another issue a Seller has to consider before proceeding with an “absolute auction” is the customary costs of conveying property to a purchaser. In the case of real estate, it is possible that the bids may not exceed the taxes owed on the property and the costs of title insurance and other conveyance costs. I have had auctions of dilapidated or abandoned homes and land where the high bid did not exceed the total of accumulated taxes and liens, which meant that the Seller would have to actually pay money out of pocket in order to convey the property if the property had been offered under circumstances of "absolute". Some kind of "minimum price" has to be in place to protect the Seller from getting caught in that particular trap, otherwise the Seller would probably be money ahead to just let the property go for taxes.
In the last year, we have had several homes at auction where the Seller actually put "no minumum price" or a dollar amount just high enough to cover conveyance expenses in our listing contract. These are sellers that want to be unburdened of the property and are in a financially capable position to manage the risk of selling to the highest bidder no matter what. Even in those instances, the term "absolute auction" is not used in our advertising.
"Is there a “RESERVE”?"
What does “reserve” really mean? Actually, the term “reserve” has three meanings and applications in the auction business.
The advent of eBay (the online auction entity) and eBay’s wide use of the term “reserve” to simply mean the Seller’s minimum price has clouded the traditional definition of “reserve”. The public now presumes that the term “reserve” just means the seller's minimum price. Even some state governments have adopted that very simple definition in their auction law.
But, there is much more to the word “reserve” in the auction business. Selling with "reserve" can mean the seller has reserved the right to reject any and all bids. Selling with "reserve" can also mean the sale of the property is subject to a reserved minimum price. Selling with "reserve” can also mean that the seller, or another party with an interest in the property, reserves the right to bid on his/her own behalf or on behalf of a lienholder during the auction sale. That is how the term "reserve" originated relating to auction sales in the first place.
The reservation of the right to bid on the seller's behalf is often the only protection a seller has against instances of buyer collusion or buyers forming combines to inhibit the competitive bidding process when the auction is underway. This is why you will often see a "reserve the right to bid" provision in auction terms of sale, whether it is real estate or personal property.
All auction sales are “reserve” auctions unless expressly promoted as “absolute”.
“Is there a MINIMUM STARTING BID?”
There are instances where I may conduct an auction where I publish a “minimum starting bid” amount. If a "minimum starting bid" is published, then the Seller is committing to sell at or above that dollar amount. This is usually an instance where the Seller has a high equity position in the property and can afford to sell at a very attractive price below fair market value.
How many sellers are in a high equity position? Not that many.
The problem with offering a property under the circumstance of a “minimum starting bid” has everything to do with perception.
It really only works well for both buyer and seller when the real estate just happens to be in a location or neighborhood that has a considerable amount of nearly identical properties around it.
If the property is a home in a subdivision of cookie-cutter houses and the published minimum bid amount is half of the normal selling price in that neighborhood, then there is going to be a great deal of interest in the property at the “minimum starting bid” amount. How can you go wrong at making a starting bid at what you know is half of true market value?
However, if the property is unique… meaning that there is nothing reasonable to compare it to… and therefore no way for a prospective buyer to resolve whether or not a “minimum starting bid” is a great deal or not… in that instance, the “minimum starting bid” may inhibit the original objective of the auction… which is to sell the property.
In most auctions, I prefer to let you, the buyers, open the bidding on real estate at whatever dollar amount you wish. Let the buyers set the starting bid… and then let the buyer-driven forces of a free and uninhibited market flow from that point until the conclusion of the auction.
There can be a problem with publishing a "minimum starting bid". Too often sellers reconsider that minimum bid and lower it before the auction, and many buyers are unaware of that and do not attend the auction. To illustrate how publishing a minimum starting bid can affect an auction, consider this scenario... you see an ad for an auction sale of real estate with a minimum starting bid of $100,000. You decide not to attend the auction because that seemed to be a rather bold minimum bid price by your estimate. Then you find out after the auction that the property sold for only $80,000 and you are disappointed that you missed the opportunity to buy the property. How can this happen? Sometimes sellers reduce their minimum price after gaining feedback during the marketing process. This is an example of how publishing a minimum starting bid can actually inhibit buyer attendance at an auction.
"Is this a TAX SALE?"
I get this question a lot . I do not conduct tax scavenger sales. The tax sales are conducted by county officials every November here in Illinois. Delinquent taxes are sold to investors eager to make up to 18% interest on the taxes when redeemed.
However, I do sell properties from time to time that have been acquired by tax buyers. Tax buyers purchase delinquent taxes to earn the high rate of interest on the money... not necessarily for the promise of acquiring real estate. It is just another way of investing money. If the taxes are not redeemed, the tax buyer may petition for a tax deed. After acquiring title, the tax buyers are eager to sell the property to recoup whatever they can of their investment with a quick sale and then use the proceeds to purchase more taxes at the next scavenger sale.
"Is this a FORECLOSURE AUCTION?"
From time to time, I conduct foreclosure auctions for financial institutions.
Typically, a court order of sale as a result of a judgment in foreclosure results in the property being sold to the highest bidder by a judge in a courtroom. The plaintiff in the proceeding opens the bidding at the amount owed under the judgment and winds up owning the property. The times I conduct foreclosure auctions are instances when the plaintiff prefers not to ultimately own the property, and instead prefers to use my professional services to market the property to the public. The amount owed to the plaintiff may exceed the market value and the plaintiff may prefer to just cash out their position rather own the real estate. Naturally, the plaintiff will be at the auction and reserve the right to bid on their own behalf should they deem that to be in their own best interests.
Very often, you may become acquainted with someone that says they buy "foreclosures", but what they are really buying are REO's. "REO" means real estate owned. REO's are properties that have been through the foreclosure process and are now owned by the financial institution and are for sale under the customary terms and conditions in the private real estate market.
Buying a property at the foreclosure auction may be an extraordinary opportunity for you. If you see a property at one of my foreclosure auctions that you would like to bid on, there are things you have to keep in mind. Foreclosure auctions are different than the customary real estate transaction that you may be familiar with. The best thing you can do is consult with your attorney regarding the foreclosure process and what will be expected of you as the successful bidder, however, there are some things that might help you ask the right questions in your consultation with your attorney.
In foreclosure auctions, you will be buying "subject" to real estate taxes, special assessments or taxes, easements and restrictions of record, zoning laws, municipal ordinances, etc. So, if there are back taxes on the property you are responsible for paying those taxes.
There are times when the foreclosure proceeding is brought by the junior mortgagee, meaning that the property may still be subject to an existing first mortgage after you have purchased the property. Your attorney can explain this to you in detail.
There is no title insurance or warranty of title provided in foreclosure sales. Due diligence on the buyer's part involves a search of the courthouse records performed by you or your attorney, and I have seen prospective bidders secure a title commitment in their name from a title insurer prior to the foreclosure auction. I have also seen buyers immediately insure the property against fire or other casualty to protect their interest after purchasing a foreclosure. Again, your attorney can give you advice regarding issues in purchasing at foreclosure auctions.
Want more information on foreclosures? Here is a link to Wikipedia regarding foreclosures: http://en.wikipedia.org/wiki/Foreclosure
"What is the SELLER’S CONFIRMATION OF THE FINAL BID?"
What does this mean? You will see the majority of my real estate auctions offered under those terms. It means that there is no deal unless the Seller agrees to accept and sell at the final bid price. The Seller can reject all bids if the bids are below the confidential minimum price set by the Seller. Naturally, if the bids achieve the minimum price stipulated in the Auctioneer's contract with the Seller… the Auctioneer can declare the property sold.
The Seller can always consent to take a lesser amount achieved at the auction than stipulated in the contract with the Auctioneer. Just because there is a minimum stipulated in the contract with the Auctioneer doesn't mean that the Seller can't agree to accept a lower offer on sale day.
I have done all kinds of sales of real estate over the last 30 years. I have done absolute auctions, and minimum bid auctions, and reserve auctions… and selling with "seller’s immediate confirmation of the final bid” is the cleanest deal for all parties involved.
The Seller witnesses the bidding process in action… and after seeing the bidding process the Seller gets a clear picture of what the market really is for their property. By offering real estate subject to the Seller’s confirmation of the final bid, the Seller doesn't have to worry about exogenous influences affecting the auction such as a two-foot snowstorm… or the potential of an unscrupulous bidder making a deal with an unscrupulous Auctioneer to drop the hammer promptly upon an artificially low opening bid... or the prospect of bidders banding together and taking unfair advantage of the auction process.
Every real estate sale has to be “confirmed” in some way. Meaning someone has to agree to and sign off on the transaction. Even foreclosure sales or other Court Ordered sales, where property is advertised as being sold the highest and best bidder have to be “confirmed” by a Judge.
So, is selling under terms of “subject to Seller’s confirmation of the final bid” good for the seller or is it good for the buyer? It is good for both because it is the most upfront and fair to all parties involved.
Are there regulations regarding real estate auctions?
The Real Estate License Act of 2000 regulates sale of real estate in Illinois whether it is by private sale through a real estate broker or by auction. The “Act” stipulates that the Seller must set a “listing price” with the sales agent. This not only applies when listing a property with a real estate broker, but it also applies to auction sales. This means the agent (whether it is a real estate broker or an auctioneer) can only declare the property sold if it achieves the listing price or above... or with Seller’s consent, at a lower price.
So… theoretically a Seller could stipulate a listing price of $0.01 in the contract with the auctioneer… in effect agreeing to sell for $0.01 at the auction sale, which would be about as “absolute” as you can get.
But, does it make good sense to offer a property that way? Not really.
Would I be doing a seller a great disservice if I sold his/her property for a penny? Yes.
I can assure you that the seller would be very unhappy with me if their property sold for $0.01 and they had to come up with money just to close. Sometimes sellers do have to pay money at closing as a matter of choice. Yes, there have been instances where the Seller was upside down on a mortgage and had to come up with cash-out-of-pocket at closing to satisfy the mortgage and preserve their credit rating… and yes, the Buyer got an extraordinary good deal in those instances. But, not every Seller is financially capable of selling for less than what is owed. And not every financial institution is willing to do a short sale. Most owners just let the property go into foreclosure in that circumstance.
SO, ARE THERE GOOD DEALS AT AUCTION?
There are some incredible good deals at auction or buyers simply would not attend.
You never know what is going to happen at an auction.
Many properties sell for less than the amount that the Seller stipulated in the listing contract with me... but, then... just as many sell for more than the minimum amount stipulated.
The market is what the market is.
Except for those times when other issues drive the market. After all, if the home you are bidding on is going to be your "home"... why would you care what you spend on it? Is price as important as the promise of the quality of life that the right home can provide? Sometimes it is not as important to get a "good deal" on a house than it is to have a place that you truly feel will be your home.
In conclusion… I like to let the market forces flow. Let the market dictate the price. I don’t like to do anything that may inhibit the buyers from arriving at their own conclusion of value, but I will do a “minimum starting bid” auction sale if that is what a seller wishes. Just Let the forces of the real estate market run free… and let's see where the bids end up.
Copyright 2006 Joe Cotten - All Rights Reserved