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In most situations an auction is the way the get the highest price for some thing of value. Usually, auctions are held for rare or hard to find items. It brings those niche buyers together and they bid against each other to drive the price to the highest market value. The "frenzy" effect also helps in pushing prices higher. After all, how do you sell a rare coin for the highest price? You advertise heavily that coin will be sold. You advertise a starting price way below its value. You advertise where research says those buyers will be reached. You bring those buyers together and they push the price over or to the highest possible market price. It works great...for coins and collectibles, but NOT for houses.
Most homes sold at auction are foreclosed homes. Investors come. It is their full time job. They know they must buy that home at around 65% of what they can sell it for in order to make a profit. Most of those investors are not making a lot of money. But they enjoy their job, have no boss and go with their own schedule.
I recently wrote about an upcoming auction. I was not there, but the agent reported back what she experienced. I will leave all names out, but it was as I expected. Here is my interpretation of what she reported.
First of all, let me remind you. The seller is to pay $3,000 to be in the auction. The home is listed at a price about 60-70% of the ORIGINAL list price of the home. Most of the sellers have had their homes on the market for a long time and dropped the price dramatically. So, their old price looks good. The buyer pays the bid price plus a 10% fee to the auction house. The auction house splits that 10% with the Realtors. The seller does not have to accept the highest bid.
The Realtor and her seller were very disappointed. They received NO bids for their property. Not many buyers showed up, the turn out was low. There was no excitement created and the bids were low. To get the price up to market price you need a vigorous excited group of bidders, bidding against each other. The only value the Realtor saw was, with the lack of bids, at least it might motivate sellers lower their prices.
She was unaware of any sale going through at the auction. However, the auction reported 80 out of 150 homes supposedly sold......"mostly done on their website." Remember the auction is advertised for 90 days, and if you don't sell, there is no charge to be in the next auction. So, homes just keep rolling over. It appeared as though many of these homes were just getting sold by the Realtors over time as they were still registered with the auction the auction took credit. Who really knows, but if they aren't selling at the auction, I really don't believe their website was doing it.
Again, if the homes don't sell they just stay on MLS with their current realtor. This agent said, it was not something she would recommend to most sellers but builders with lots of inventory may get lucky.
In my opinion, when times are tough people take advantage of you offering this quick fix. There are no quick fixes. There are only 2 reasons a house does not sell: it is priced wrong or it is marketed wrong! PERIOD!
Showing posts with label home auction. Show all posts
Showing posts with label home auction. Show all posts
Tuesday, January 29, 2008
Thursday, January 17, 2008
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."
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."
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