REAL ESTATE AUCTIONS - GOOD DEAL FOR BUYER OR GOOD DEAL FOR SELLER?

One of our buyers contacted us about a home she was interested in that was being auctioned off. I thought is must be a foreclosure. To buy at the foreclosure auction you need to pay in cash and go up against the foreclosure mafia, the regular group that bid up any new comers. We found it was not a foreclosure. It was one of these real estate auctions you here advertised.

AUCTION? Does that mean a great deal for the buyer? Why would a seller auction off their home? Who is the winner and who is the loser? Should we buy at auction?

Why do people auction items off? Whether it be real estate, art, coins etc... Auctions are the best way for sellers to get the most for their product. Property is advertised at under market pricing. Buyers are all brought together to bid at once. The bidding becomes a feeding frenzy and many items sell above their actual value. Well, I guess that becomes their value. So, not really above, but at the highest price possible. This does not always work for real estate. What happens if no one comes for your home. If that happens, either you have a unique home that needs a unique buyer, it was not advertised properly or do the real home buyers come to auctions. Not advertised properly would mean not reaching the right people and not expressing the discounted price as being a steal.

We did a little home work. Honestly, I don't know who is the winner in the auction process. Let me walk you through how it works.

An auction company advertises homes for sale at great discounts. In this case the seller pays an upfront fee of $3,000 to the auction company. The home is advertised at 70% of it's "original list price." For example, this home was originally priced at $600,000 and is being advertised at a "70% discount starting bid at $420,000." However, the home is only listed for $499,000 in the MLS today.

What was more interesting is that the seller does not have to accept the "starting bid" or any bid below his/her minimum. The seller gives the auction company a "minimum price" to accept. For example, this seller may say I will accept nothing less than $450,000. Not much higher than the minimum bid. However, the seller pays no commissions. The buyer pays a 10% fee on top of their winning bid. That 10% fee is split between the two Realtors and the auction company. So, if a buyer bid $450,000, the buyer would actually pay $495,000 for the property. Many times buyers don't understand there closing costs until their earnest money is non-refundable. I am not sure how the auction companies handle the explanation process.

In this case, I would say the buyer is the loser and the seller wins. The home is for sale for $499,000 today in the multiple listing service, MLS. The buyer should be able to purchase the home for $450,000 to $480,000. Even better, if the home has been on the market for a while. If no one is looking at now. It might be over priced. It may be that it should be listed at $430,000 and sell for $400,000 to $415,000. Either way the buyer is over paying in the auction process. The seller would be the winner, in this case.

But what if the seller does not get a bid at or above the minimum acceptable bid? Now the table turns. Because the seller paid $3,000 fee to be in the auction. If the home does not sell, the seller is the loser. Even though there may be buyers bidding on the home, if it does not sell the seller loses $3,000.

This is why the auction process does not work, in my opinion. Most "real home buyers" don't attend the auctions. Their costs are too high, so even if they think it is a good price the closing costs ruin it. Sellers are paying up front fees. Auctions are great for collectibles and fund raisers, but I don't believe they are the answer in this market.

People are "thinking outside the box," trying to get homes sold in a buyer's market. Our experience shows exactly what we are taught is true. Price the home right. Make it available to the buyers and easy to show. Present it in the proper condition. The home will sell. Every time all three are done the home sells. The difficulty today is accepting what is the "right price."