Sarah Sonke, Auctioneer/Broker

How do you keep a buyer's feet held to the purchase contract on a short sale when it can take forever to get bank approval on the deal? Through an auction contract that has no contingencies for financing or repairs and requires a hefty non-refundable deposit. We just closed yesterday on yet another auction/short-sale. There were 5 competing bidders at the auction and the buyer remained in the deal through plenty of dramatic ups and downs due to a non-refundable deposit. According to two separate appraisals prior to closing, the auction achieved 98% of current market value. The short sale was approved in 10 days as the bank liked the idea that the final purchase price was achieved through competitive bidding rather than just one buyer stepping forward with a low offer. Buyer and seller are happily moving forward in life. And the referring agent and buyer agent are heading to the bank with their quick commission checks. I love auctions!

Here's a snapshot of one event in an otherwise mundane week.

One of your luxury homes sold and will close in 10 days so you're out at the property checking security. The mansion sits on 5 wooded acres that backs up to more wooded acres in the middle of nowhere & deer wander the streets at all hours- it was very picturesque. And remote. (Important foreshadowing). For some odd reason, you decide to go out on a 2nd floor balcony for better views of the yard. Suddenly the wind slams the door shut behind you. Not usually a problem. Except you didn't check the lock on the knob and now you're locked out!

What to do?

Got the cell phone - yea! If you call 911, they'll come to the rescue but may end up chopping the front door down or damaging the pristine back yard.

Decide to call everyone you know but no one picks up. So now there are messages all over the area with your cryptic call for help. You could wait for someone to call back. Surely it wouldn't take more than 2 hours for help to arrive. But you might have the front door key in your pocket (and no, it doesn't work on the locked door).

How about yelling? Hmmm.... not likely to help as you're in the middle of 4 acres.

Should you jump? The drop looks bad but can't be more than 8-10 feet to the deck below.



So you carefully lower yourself over the bannister and are hanging by your fingers. Then it happens. You lose your grip and before you know it, you've landed in a heap on the deck below. Stand up and do a quick body check. No broken bones - Yea! You do walk funny for a couple of days but no one asks why. They all know. And they saved your voice messages.

Question of the week - what would a sane person have done?

In a volatile market, real estate auctions can be an excellent vehicle to help establish market pricing quickly. If you set up a Google Alert for "real estate auctions", you'll notice that a lot of builders and developers are turning to the auction method not necessarily to "liquidate" a project, but to find the market price quickly. There's nothing worse than having a large number of townhomes, condos and single family homes sitting on MLS at a price that's obviously not correct for the market. Discounting the price slightly over time in order to find the market can be costly in holding and lost opportunity costs. Holding a real estate auction can cut that time down to 30-45 days. The market data learned through the auction process can be invaluable to the seller and help them move inventory quickly at market price. This is especially important as the buyer pool decreases during the Fall and Winter seasons.

We recently held an onsite real estate auction of nine new townhomes that had languished on the market for 18 months because they were overpriced. How overpriced were they? The builder (and their lender) found out in less than 45 days through the auction process. The prices were adjusted accordingly and all but two units were sold out quickly while the summer buyer market in this price range was actively shopping.

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Photo above: The bidding is underway and takes 8 minutes

CASE STUDY OF A SUCCESSFUL REAL ESTATE AUCTION

Experienced real estate auction firms know how to set up a successful auction and here's a textbook example from start to finish.

Qualifying the seller: The seller in this case was a real estate agent and this was the second personal home we auctioned for his family. He was relocating and needed a quick, efficient sale that would bring market value.

The property: The sellers had lived in the townhome for 24 years and it needed complete updating, new paint and wallpaper. Location was great. Fortunately it had never been listed on MLS prior to coming to us so had no price history we had to overcome. Two other townhomes nearby had been on the market over 6 months with few showings and no offers. Both had similar floor plans and one also needed complete updating. Our goal was to reach what we felt would be fair market price of $175,000.

Issues & competition: There were several townhome communities nearby that were far newer with more amenities and cheaper prices. The subdivision where our townhome was located had a high $175/month HOA fee with few perceived amenities. The exterior of the townhomes and landscaping had great curb appeal, but the paved roads were in rough shape.

Marketing: The marketing budget was just under $2000 and was primarily a regional campaign with several national components. Over the space of 30 days, 32 buyer parties attended the inspection open house periods we hosted. In addition, local agents scheduled approximately 20 showings. Another 38 individuals from 6 states downloaded the complete auction bid package from our web site with 7 of them also downloading the recent professional inspection report (purchased as a part of the marketing budget).

Auction Terms & Conditions: Auction terms and conditions are written in a way that attracts only serious buyers. In this case there was a non-refundable deposit of $5,000. The auction purchase contract had no contingencies for financing or repairs. And the purchase had to close within 30 days.

MLS List price: Having to put a list price in MLS is the worst nightmare of any auctioneer. We typically use either the current tax assessed value, the minimum opening bid, or what we believe might be fair market price. All have different required explanations in the Remarks section which we find most agents do not ready anyway. In this case it was essential to list the property all 3 ways in the course of 30 days because agents generally search by price even though our local MLS has an "Auction" category.

Agent Participation: Two local agents faxed in the required Broker Participation Form (3% broker co-op) 24 hours prior to the auction. They are required to also attend the auction with their buyer. Both indicated an opening bid at the minimum opening bid price of $120,000.

Auction day: 5 bidders registered for the auction. Each was required to bring a cashier's check made payable to their own name to the auction. The auction was held in the large living room as temperatures outside were in the high 90s.

The bidding: All of the heavy work for an auction is the marketing that takes place in the 30-45 days leading up to the auction. the actual bidding is very quick. In this case it took 8 minutes of bidding to sell the property. Typically it got down to 2 bidders quickly. Since the they are all bound by the same terms and conditions, it's all about the money - who values the property more. Total sale price was $172,400, just short of the $175,000 we felt would be about right given the property's condition.

Closing: The closing process is identical to a conventional close except that the closing date can't slide past the deadline set in the auction purchase contract. In this case, the buyer wanted to close in 2 weeks and sellers were amenable to that. The closing was quick and painless for all. Primarily because there is nothing further to negotiate, there are no additional tests to be done because the buyer did all this homework prior to bidding.

Summary: Auction sales are quick and efficient. While the short period leading up to the auction may cause lots of stress for the seller, what is worse: having the stress of your property being on the market for months and wondering if it will ever sell and having to keep it clean for showings? Or having the process take only 30-45 days with the same price results anyway?

Both the buyers and sellers are very happy. And the buyer agent is thrilled with a quick paycheck he's earned!

What makes a real estate auction successful? An experienced auctioneer can generally tell if a prospect is a good auction candidate or not by running through the following 6 questions:

1. How long has the property been on the market? Why do you feel the property hasn't sold? Any showings? What feedback are you getting from buyers? As any good agent knows, most homes don't sell because they're overpriced or the price wasn't reduced fast enough to keep pace with the changing market.

2. What is the motivation of the sellers? Are they price-oriented (holding out for a particular price) or are they now goal-oriented (ready to finally sell at a price the market will bear)? Auctions work best for goal-oriented sellers. The magic words to an auction company are, "Get it gone!"

3. What is the market value of the property and how did you come to that valuation? Where is the main competition located? Listing agents can usually answer these questions quickly.

4. What is the total debt owed on the property? If the total debt is close to the current list price an auction won't be successful. An exception might be if the property is so unique it is difficult to value. Unique properties can be a perfect fit for auction.

5. What is the lowest price the sellers would accept (factoring out all commissions)? Auctions are the exact opposite of conventional real estate in that a floor price is set rather than a list price. If a seller wants their auction reserve price set close to the current MLS list price, buyers won't be attracted to the auction. It will look like simply another price reduction rather than the potential of a great deal.

6. Are the mortgage payments current? If not, how behind are they? An auction may still be a great solution if the sellers are behind on the mortgage. But this info needs to be shared with no holds barred so that a correct analysis can be made. Additional questions may include information on whether or not there's a viable hardship and the names of the mortgage companies in case a short sale needs to be set up. Short sales work great with auctions because the terms of an auction keep the buyers feet to the fire with high non-refundable deposits.

7. Who is the likely buyer? The answer to this question allows an auction company to create a draft of the accelerated auction marketing campaign. The cost of this marketing is usually approved by the seller and funded upfront. Some unique trophy homes might require an international marketing effort whereas a typical suburban home would probably only require a regional marketing effort.