Real estate auctions have been around for decades. They rise and fall with market conditions, becoming more frequent when a tidal wave of distressed properties floods the market. Auctions become less common when the tide recedes and the market returns to the multiple listing service (MLS) routine managed by brokers.
In 2008, at the pit of the recession, almost 240,000 trustee’s deeds on foreclosure sales were recorded in California. For context, only 40,000 were recorded in 2013. During the peak recession years, trustee’s sales, also known as foreclosure sales, along with the sale of real estate owned (REO) properties, provided ample fodder for real estate auctions.
However, as foreclosure sales and REO inventory declined, real estate auctions also diminished – but they are not gone.
Auctions are simply another method of moving real estate. Agents representing individual real estate sellers who need to liquidate their properties quickly may recommend this method of selling as an alternative to a sale arranged in the MLS environment.
For buyer’s agents, bidding on properties offered at auction is an alternative to making offers on MLS-listed properties. With the MLS approach, buyers rarely know what their competition is offering, leading to frustration and many complaints about handling filed with the California Bureau of Real Estate (CalBRE).
Understanding the niche market
It is a commonly held misconception that properties sold at auction are always the product of a foreclosure or in some way distressed. This is a stereotype – it holds a grain of truth, but is overly simplistic. Nondistressed properties are also found at real estate auctions, placed there by owners who are motivated to liquidate their property quickly for cash.
However, the taint of the misconception persists. Auctions are not popular sales with individual sellers, despite the advantages of a formal auction environment. Individual sellers have been trained by gatekeepers of the MLS market to demand total control over the cat and mouse game of offer and counteroffer.
Absolute vs. reserve auctions
Auctions instigated by individual sellers fall into two categories:
- the absolute auction, in which the seller agrees to unilaterally accept the highest bid; and
- the reserve auction, in which the seller sets an undisclosed minimum sales price for the property. If the reserve isn’t reached, the seller is not required to accept any of the bids.
Role of the seller’s agent
In a traditional MLS sale, it takes time to locate a buyer, and the time varies by the mix of buyers generated by the MLS publication. Once a buyer is located and a purchase agreement negotiated and entered into, numerous additional weeks run before contingencies are removed and the sale actually closes. Much of this delay is due to the seller’s agents’ near total failure to provide timely disclosures prior to the seller entering into a purchase agreement.
Auctions, on the other hand, typically close within just 30 days of the auction, after a six-week marketing campaign. Auctions proceed according to pre-set schedules, with all disclosures and borrower vetting completed at the proverbial door. This set timeline is ideal for sellers who need to sell their property on a short timeline without negotiations. This need for expediency may be for reasons such as:
- the need for quick cash; or
- to focus buyer attention on a unique property.
An auction has many benefits for the seller, including:
- increased market exposure;
- assurance that the property will sell for market value;
- having a pre-determined sale date;
- shortened transaction time;
- elimination of multiple showing appointments; and
- disclosure of adverse property conditions by the seller’s agent delivery of transfer disclosure statement (TDS) and natural hazard disclosure (NHD) information on the day prospective buyers view the property.
The auction is a variation on the traditional real estate sale. Instead of relying on curb appeal, open MLS publications, individual buyer showings and negotiations with their agents, the sale of the property is widely publicized through mailings and advertisements. Additionally, unlike most transactions, the date the property will be sold is definitively set: the day of the auction itself.
Like an MLS-structured sale, an auction is controlled by:
- real estate law (requiring the disclosure of property conditions prior to the day of the auction);
- agency law (licensee advisory and fiduciary duties/representational behavior); and
- licensing law (a licensed seller’s broker is employed by the seller or auction company to oversee all property disclosures and contracting; the auctioneer merely finds the buyer).
Though the method of soliciting buyers is different, the primary goal of an auction is no different from a traditional transaction: to pair a seller with a qualified buyer and consummate the transaction. Thus, the only real distinction is how prospective buyers are located and gathered for the oral bidding. Timely disclosures before the buyer’s high bid is accepted eliminate the risk of litigation which often arises in the MLS environment when disclosures are delayed until the property is under contract.
Selling a property at auction, whether for an individual owner or a lender, is not an exemption for the seller or their agent from statutory disclosure laws. Brokers who list one-to-four unit residential property have a duty, separate from the seller’s (who may only be exempt from providing a TDS under certain circumstances), to all prospective buyers to disclose as soon as practicable (ASAP) any physical aspects of a property:
- observable by a broker on a reasonable inspection of the property; and
- affecting the property’s market value. [Calif. Civil Code §§2079 et seq, 1102(a), 1102.3; see first tuesday Form 304]
Without having the disclosures before entering into a purchase agreement, the buyer is betting the price agreed will be justified when disclosures are received.
Pre-bidding: strategize with the buyer, understand the auction environment
Auctions thrive on excitement and surprise. The bidding environment encourages buyers, called bidders, to make offers they might not otherwise make were they to offer and negotiate on an MLS-arranged transaction. Like an MLS sale, the prospective buyer at an auction is best prepared and cared for when represented by an agent. The buyer’s agent provides them with proper oversight and advice on what to learn about the property and surrounding area. With this information, the buyer has enough knowledge about the property to determine its current value and thus be able to bid wisely.
Before an auction sale occurs, the agent and their buyer need to carefully:
- conduct a due diligence investigation of the property and surrounding area;
- analyze data presented by the seller’s agent and gathered by the buyer’s agent from their research; and
- set the ceiling for bidding and strategize.
Having completed an inspection of the physical property, due diligence investigations and a review of a comparable market analysis (CMA) form, the buyer and agent are armed with enough information about the property to know its approximate value. [See first tuesday Form 318]
Auction sales are generally final, meaning that once the bid is accepted, the successful bidder may not cancel the purchase. Thus, the buyer needs to be fully satisfied with their due diligence and review of the property’s condition and disclosures prior to bidding.
In addition, if the buyer plans to finance the purchase, they need to be aware that there is generally no financing contingency in an auction, unless financing is offered by the seller. Thus, the buyer needs to be fully approved for financing prior to bidding. The risk of an appraisal condition on the buyer’s approval also needs to be taken into consideration when setting the maximum price they will bid.
If the bidding exceeds this ceiling, the buyer will not participate, letting a higher bidder pay more for the property than it is reasonably worth to the buyer, a common occurrence.
Similar to the MLS bidding war frenzy experienced on MLS listed properties in recent years, an auction creates an emotional state of agitation, often generating higher sales prices for the seller in the process. In exchange, bidders know exactly where they stand price-wise, eliminating the guess work and the seller’s agent inattention when presenting offers on MLS-listed properties. The gift of an auction is transparency at all stages in the process.
A prudent agent is always seeking new and innovative ways to assist homeowners in obtaining the best price and terms on the sale of their home in the shortest amount of time. To best serve these sellers, auctions need to be considered as a reasonable alternative for any seller in need of a quick sale – a selling technique not exclusive to REO resales or trustee’s sales.