Part I of this article series comments on an agent’s pre-auction activities. Part II of this article series discusses the agent and buyer’s bidding strategy prior to auction and the role of the buyer’s agent during the auction.
Advice and due diligence: the role of a buyer’s agent
A prospective homebuyer receives a publication announcing a private owner’s auction of his property. The flyer gives the date and time of the sale to be held at the property, as well as dates and hours of three open house events prior to the sale.
The flyer also states the auction will be absolute, signaling the owner has not set a minimum acceptable bid threshold and will accept the highest bid received at the auction –and close on that price.
The buyer checks out the property online and becomes interested in acquiring the home to occupy as his principal residence. Having never attended an auction, the buyer contacts a local real estate agent with experience in real estate auctions.
The buyer and agent enter into a single property fee agreement in which the buyer will pay the agent $2,000 if he does not acquire the property, and if he does, 2.5% of the price paid. The agent’s fee arrangement is based on the agent’s completion of a due diligence investigation of the property prior to the sale, strategizing with the buyer prior to bidding and providing oversight during the auction. If his buyer is the highest bidder, the agent will also supervise contract signing. [See first tuesday Form 103-1]
The agent checks the multiple listing service (MLS) website and reviews the information published on the property by the seller’s listing broker. The agent then accompanies the buyer to the planning department of the local government (city or county) where the property is located. With the help of the department staff, they review zoning maps, property improvement reports, permitted uses and neighborhood plans for the area surrounding the property. The agent and buyer also review the department’s records and determine it is not located within a natural hazards area. An online review of a title company’s property profile indicates no liens encumber the property.
Similar to any negotiated sale, the buyer’s agent then completes a comparative market analysis (CMA) of the property since he was able to locate a few similar properties sold within the last few months. A further check is made into the county assessor’s records and data on the property for value allocation, square footage, etc. Thus, the agent develops an opinion as to the fair market value (FMV) of the property, which he will review with his buyer when setting the ceiling on the amount the buyer is to bid. [See first tuesday Form 318]
Later, during one of the open house periods prior to the sale date, the agent accompanies the buyer to the property. Together they conduct a visual inspection of the improvements on the property to determine their condition just as he would any property he is investigating for a prospective buyer. The agent uses a Condition of Property Disclosure – Transfer Disclosure Statement (TDS) as a checklist of items he will cover during his inspection, and include any other conditions that might adversely affect the property’s value. [See first tuesday Form 304]
The agent also asks the listing broker present at the open house what he knows about the property and the surrounding area using an Open House Agent Interview Sheet. The interview sheet functions as a checklist of queries to be posed to the listing broker regarding the seller, property specifications and the surrounding neighborhood. [See first tuesday Form 320-2]
The listing broker provides the agent and buyer with a flyer outlining the basic attributes of the property, such as square footage, and various property disclosures, such as a Natural Hazards Disclosure Statement (NHD) and the seller’s TDS about the condition of the property. [See first tuesday Forms 304 and 314]
After the open house, the agent and buyer discuss the bidding strategy and set a ceiling on the amount the buyer will bid for the property based on its value.
The agent then accompanies the buyer to the auction itself. The buyer registers to bid in accordance with the rules set by the company conducting the auction. Prior to bidding, the buyer and agent are handed a bidder’s packet, containing further information about the property and mandatory property disclosures, such as the TDS and the NHD prepared by the private owner and listing broker. [See first tuesday Forms 304 and 314]
The agent reviews the disclosures with the buyer and determines they are consistent with the results of their due diligence investigations and prior disclosures by the listing agent.
Bidding prices start low but increase quickly. The prospective buyer places a final bid as it is higher than anyone else is willing to bid, but lower than the ceiling previously established by the buyer and agent. The private owner accepts the buyer’s bid and the agent accompanies the buyer to the contract signing room to help guide him through the contract review process and assist in completing the necessary paperwork.
After signing the purchase agreement, the buyer signs escrow instructions to pay his agent the 2.5% contingency fee, as agreed to in the single property fee agreement, when the transaction closes 30 days later. The buyer also agrees to pay a buyer’s premium of 2% of the purchase price to the listing broker, which will be shared with the auction company. [See first tuesday Form 103-1]
Auctions: understanding the niche market
It is a commonly held misconception that properties sold at auction are either in foreclosure, lender-owned or in some way distressed. However, this is an inaccurate stereotype. Regular private owners who are motivated to sell very quickly are active participants in real estate auctions.
The advantages of an auction to the private owner relate mostly to time. In a traditional sale, it may take some months to locate a bona fide purchaser, and then numerous additional weeks before contingencies are removed and the sale actually closes. Auctions, which typically close in just 30 days after the auction (preceded by a six-week marketing campaign), are ideal for sellers who must sell their property on a short timeline without protracted negotiations, for reasons such as divorce, death or the need for quick cash.
Despite the advantages auctions may hold for some sellers, they still have not become a popular method for private owners to sell their real estate, even under the most stressed of markets during the boom years or the aftermath in the bust years, as we’re currently experiencing. While the auction environment has endured, it has not caught on as a popular way to sell or buy real estate.
However, there are still ways for an agent to profit from the auction environment since they do exist. The real estate auction is a market niche all agents should consider as a potential source of revenue either as the listing broker counseling the owner to go the auction route, or the buyer’s agent bringing a buyer (owner-occupiers, speculators/flippers and investors) into the auction carnival tent.