The truth about Real Estate Auctions!

I found this article in todays newspaper about a recent real estate auction held in Sarasota, FL. When I came across the numbers of the most famous deals I thought my calculator was broken. They sold @ 66% and 54% of the original asking price. Wowww!

Well obviously the company had taken the listings at horrible overpriced values and these couldn't sell. Instead of adjusting the asking price they intended for the fast dollar. IMO the only winner of this auction were the auctioneers as they charge not 6,7 or 8% commission. They charge 15% commission. Taking listings overpriced (to get them) and charge 15% later on. Eventually a nearly 100% sale quote. Nice, isn't it?

I am deeply concerned how a company whose first obligation has to be acting in favour of the seller can their seller advise these asking prices. But instead of going with the market they put these properties to an auction. I probably had qualms giving such advice to my seller without first putting the properties on the market with the right price.

Of course there are situations when an auction can be helpful, but I have doubt if it is the right formula in this declining market right now. IMO it looks like the last try for a company who is stuck with their overpriced listings. The clients pay the dues.

What do you think about it? Any qualms?

Could you persuade your clients to do this move? How?

Thanks Axel Weiss, MBA

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Bradenton Herald on 05-19-07
Manatee-Sarasota property auction rakes in millions
By SARA KENNEDY
SARASOTA --

Not many real estate auctions feature a hot buffet, black-clad waiters and the Sarasota Ritz-Carlton towering above.

But with multimillion dollar properties on the block, it seemed fitting. After more than two hours of bidding, the glamorous crowd had bought $18.62 million worth of property - among the largest packages of high-end real estate ever offered at one time, according to Chad Roffers, president of SKY Sotheby's International Realty.

"It exceeded all our expectations," said Roffers, who had assembled the 23 Sarasota and Manatee properties for sale. His firm expected to sell another $10 million worth of real estate over the weekend in related transactions, he said.

The highest bid of $6.9 million, including a 15 percent buyer's premium, set a record for Lakewood Ranch, Roffers said. It bought a property with a nearly 12,000-square-foot mansion featuring seven bedrooms, 12 baths, three fireplaces, elevator, guest house, polo barn with 22 stables, lanai and pool on 14 wooded acres. Listed at a price of close to $9 million with another firm, it had languished on the market for more than a year, he said. "It was a spectacular property, it worked for everybody," said Roffers. ($9 Mio inital offering --> $6 Mio net)

A new, four-bedroom, three-bath home at 6274 Parmeron Lane in Sarasota, originally listed for sale at $640,000, went for just under $400,000, including the buyer's premium. "I believe it's a great deal because it's a brand new house," said buyer Marvin Kaplan, an investor from Sarasota, who said he would rent it for now, then re-sell it later. ($640,000 inital offering --> $347,000 net)

Christopher Brown, also of Sarasota, said he was happy with the price his two lots near Sarasota Memorial Hospital fetched: They went for $200,000 and $100,000, respectively, he said.

"It was something I couldn't sell on the open market," said Brown. "I didn't make money, but I found a buyer." The sale, conducted by J.P. King Auction, attracted 93 registered bidders and hundreds of onlookers, an elegant assemblage that looked quite at home on the lawn of the luxury hotel. "They should probably do it every month for three or four years," commented onlooker Pat Hebda, who owns a concrete business and was observing the action. "It's fun. It's kind of like New Year's."

Posted Saturday May 19

(06/09/07 04:05PM) — Marc Rasmussen

If you diligently examine and value the properties that sold before, at and after the auction you will see that most if not all of them sold at fair market value. All of the successful sellers had the option of not taking the offers or top bids.

This auction created a transaction that otherwise would not have happened because the buyer and seller were too far apart. As a Realtor I would think you would be happy to see more transactions occur in our marketplace because now you have a comparable sale to use when working with a buyer or seller in the location of these particular properties that you did not have before. More transactions give buyers more comfort in jumping off the fence. It also allows sellers to get a better picture of the value of their properties now that they have a comparable property that sold.

Another thing auctions help to accomplish is to get some inventory moving in s stagnant market place. We can all wait around for the Mexican stand off between buyers and sellers to end or try to get it moving along a little bit.

Marc Rasmussen with SKY Sotheby's International Realty

(06/09/07 05:02PM) — Axel Weiss . Weiss & Weiss International LLC

Thank you Marc for confirming my opinion. You are absolutely right, it is a pleasure to see buyers and sellers coming together.

Let's discuss this from an analytic standpoint:
Selling at 66 and 54% of original asking can IMO only mean either one of two things (or both a little):

1.) Asking price way too high.

2.) Selling price way too low.

to 1.) It is difficult in today's market what to do with sellers insisting on overpriced listings? Take them and pray or not take them and let somebody else pray.

We usually try to work with the seller to make them see the world realistically. If this works this is the best for the seller. He doesn't have to follow behind the market on a downward trend. So from an ethical standpoint I still have doubt that the listings were originally taken at a reasonable price.

to 2.) I have doubt that an auction like this with it's closed audience is the kind of efficient market where the "true value" can be determined. In my opionion it is more like an inefficient market where offers are coming in, usually low ball offers. Everybody want to get a bargain when going to auctions in today's market condition. That's the only reason why buyers are going to auctions today.

Sometimes, usually only during "good times" people get like intoxicated when seeing all the bids coming in. They give up their limits and bid even more. This is what people expect when telling them their property will go to auction. But as a Realtor you are dealing for the seller when putting a property to auction.

There is only one situation when an auction might make sense in today's market (from a seller's standpoint):

If he has an emergency and he is willing to sell for any price as long as he sells. But again I have doubt if this is true here.

Then, why the hell are auctions like this are taking place today:

Some ideas coming in my mind are:
PR for the Realtor, extra commission for the Realtor, extra commission for the auctioneer, selling an unsellable listing fast and easy.

As a Realtor we should take care of the client having a listing with us and get the best deal possible for him. This might have been the fastest deal, if it is the best deal, I still have doubt.

Thanks Axel Weiss, MBA

(06/09/07 05:16PM) — Marc Rasmussen

Axel,

I believe the answer to your initial question is:

1.) Asking price way too high.

"I have doubt that an auction like this with it's closed audience is the kind of efficient market where the "true value" can be determined."

What do you mean by closed auction? Anyone and everyone was allowed to go to the auction.

Auctions are taking place today because we have a ton of inventory and buyers are apprehensive about jumping in the pool. The auction provides a platform for buyers and sellers to get together and agree on a price. I believe the sellers that put their property in the auction were in a strong financial position but just did not want to wait around for the traditional selling method to work. They wanted to move on with their lives.

I am not an auctioneer. None of my clients wanted to put their properties in the auction. I sell the traditional way. I do believe there is a place and time for an auction and this is the kind of market where they can be useful.

I went to an auction about 3 months ago in a neighborhood where I would like to own a house. I was there as a buyer and not a Realtor. I feel the sales price of the home went for market value. There is a misperception that the properties in an auction always sell at a discount. That is not always the case.

(06/10/07 10:30AM) — Axel Weiss . Weiss & Weiss International LLC

Marc!

You are completely right, the seller's irrational view of the market is most of time the original cause for an overpriced listing. But there are instances when Realtors tend to overprice in order to "buy a listing". IMO it is up to the Realtor to educate the client and in some cases to reject the listing at this price. And of course it is the duty of the Realtor NOT to overprice listings, because usually the client is paying for that later.

All marketplaces are inefficient in some way. Now what do I mean with closed audience? I am aware that the auction was open for everybody, but the audience was closed to a few people or you can say limited. Even a few hundred are are limited when compared to an open market. Why? Because not everybody knew of it, not everybody could attend it etc. This happens with all marketplaces. Some more some less. The quality or efficiency of a marketplace is sometimes connected with the speediness.

Let me show some examples:

Let's say, a brand new agent is sitting on his porch, a client with a multimillion-$ property is on the phone and tells him: "Sell as fast as you can no matter on price."

He steps on the street, nobody there, then there is somebody coming around the corner. He tell him, "do you wanna buy this property, he says surprised, "ok for $1000, I take it." The agent says: We have a deal!

The agent gets back to his phone and calls the client. He dials his number. The client takes the phone and the agent tells him "I just sold his multimillion-$ property for $1000". First the client asks if the agent is alright, after that he screams in the phone like the agent had never seen it from anyone before and then the client tells the agent he is fired and that he is not gonna sign any contract for that price. What did he do wrong?

You can probably imagine. Although the agent followed his advise literally, he did not understand the clients needs. In my example it was easy for the client to reject, because the sale price was far beyond any realistic numbers and he was not in risk to take the bait. You can believe it or not it was fair market value! The market was the street at the time he stepped out. Nobody wanted to pay more than this guy and the Realtor was advised a fast sale.

Of course this example does not reflect an auction like the one we are discussing, but there are some similarities:

- Limited audience

- Limited time for reaction

Can auctions work?
Sure! You mentioned a residential auction where properties are more exchangeable. If there are enough buyers this works definitely. But why are all the people heading to a any auction? Curisosity and to make a bargain, otherwise this could call their Realtor and relax, right? But for expensive and large properties the prospects for more limited. Switching to the auction system limits these even more.

A study conducted by the PACIFIC RIM REAL ESTATE SOCIETY (PRRES) and the Queensland University of Technology covering the Brisbane housing system (which was in an similar situation like our market today) in 2005 showed that additional bargain power is established when switching to auctions.

The study showed that auctions can help getting back to the market track but there is a big risk that properties are sold under value due to the limitations of auctions. So although it might help the market it was still not the best for the sellers involved. The study concluded that it should be the Realtor's duty to educate the client about the true fair value when accepting a bid or setting the reserve price. There is an obvious risk of conflict of interests here, because I have doubt that all Realtors have enough respect to advise their clients to break a 100% deal.

Therefore I still see that sale price to offer price ratios of 55 to 65% like here are reflecting big deficiencies either on client education or on a best final sale price. IMO these are the main duties for a Realtor to perform when working with clients. Either way, maybe the clients were in such strong financial position to take this burden or there were other reasons to perform a quick sale. Anyhow this was a great deal for the transaction parties involved and the Realtors in common for getting compareables, if it was for the clients, I don't know and I have doubt about that.

Thanks Axel Weiss, MBA