Why Real Estate Brokers Are Turning To Auctions
Have you ever wondered why real estate auctions seem more common these days?
Why Are Real Estate Brokers Are Turning To Auctions? From luxury homes to large commercial properties, auctions are frequently in the news, and with good reason. Most properties today readily pass the National Association of Realtor’s “Two-Thirds Rule,” which holds that, after an “analysis of the market, property and seller situation…if two of the three parts (market, seller, property) lean towards auction, then auction should be offered to the seller as a sales option.”
Brokers have an interest in auctions because they represent another way to assist buyers and sellers. Real estate licensees can participate as listing brokers, co-brokers, cooperating brokers or referral brokers, depending on the individual transaction and client preferences.
Reasons to Choose an Auction
For brokers, an auction is simply another marketing tool, a way to get a property bought or sold. However, unlike other forms of marketing, auctions have a number of unique characteristics that make them especially attractive.
Simplicity: There was a time when real estate contracts were just a few pages in length. That’s no longer the case. Today, real estate agreements are lengthy documents filled with tiny type and covering just about every contingency that could possibly arise short of meteor strikes. Auctions bring back simplicity: Homes are sold without contingencies and settled within a few days.
Certainty: According to NAR, in January 2015, the typical existing home was on the market for 69 days before being sold, two days more than a year earlier.
For real estate professionals, more time on the market means increased marketing costs, greater seller dissatisfaction and delayed commission payments. With an auction, a property is scheduled for sale on a given date. If there’s no seller reserve, the property sells there and then, as is and without fanfare.
DOM strategies: An average days-on-the-market (DOM) figure can work both for and against buyers and sellers. A new listing may encourage interest at or near the listing price for a buyer who wants that particular property. A listing that lags on the market beyond the local DOM average is likely to see lesser offers because buyers may think “If the property is so great, how come it hasn’t already sold?”
With an auction, DOM questions are irrelevant. The property will be offered at a given time and date and likely sold within a few minutes. That’s it. For the seller, an auction means not worrying about a lengthy marketing process, while for buyers interpreting DOM figures is replaced by visible bids in real time.
Transparency: One of the most difficult situations in real estate is a property sale with multiple bids. No traditional buyer wants their offer revealed and no purchaser wants to bid more than they should. With an auction, multiple bids are a way of life: All bids are open and visible, so the marketing process creates a level playing field for everyone. A prospective purchaser can bid or not bid with a clear understanding of the property’s demand. Rumor and intimations are out, and claims that “another buyer may be interested” have no meaning when a buyer can readily see and evaluate a solid bid with money on the table.
Luxury homes: Homes in the upper price brackets have always represented unique problems for real estate brokers. As home values rise, the pool of potential buyers becomes smaller, simply because fewer people can afford big-ticket properties. With an auction, the availability of a property is open to all prospective buyers, including some from the Auction.com database that the brokerage community may not have known about.
Fair housing: In recent years, there’s been an increase in the use of “pocket listings” and “coming soon” listings. These are listings accepted by an MLS-member broker but not immediately placed on the system. As an example, a broker might acquire a listing and then sell the property directly or share it with a small group of other brokers, practices that may raise significant fair-housing issues.
According to Elizabeth Miller-Gadabouts, senior counsel to the California Association of Realtors, “If agents limit their listing exposure to only certain sectors of the market, it may have an alleged discriminatory effect, i.e. reinforcing segregated housing patterns, even when there is no intent to discriminate.”
With an auction, everyone gets the same chance to bid, at the same time, and with the same disclosures. Marketplace exposure is expansive, not restricted, and all are welcome. With public announcements and widespread promotion, there are no pocket listings when a home is sold through an auction.
A New Niche for Brokers
If brokers can specialize in such areas as neighborhoods, condo projects, HOAs, farms, commercial properties and office leasing, then why not in auctions? After all, at this point, auctions are a growing factor in the real estate marketplace, yet not often a broker specialty.
Looking toward the future, it’s clear that more and more brokers will want to increase their knowledge about and participation in auctions for the very simple reason that auction activity is growing. For instance, Auction.com recorded approximately 35,000 transactions in 2013, a number that grew to almost 50,000 in 2014. Meanwhile, during the period when auction activity was soaring, existing-home sales actually declined 3.1% in 2014, according to NAR.
For brokers, the conclusion is obvious: If auctions represent more business opportunities, then why would anyone look the other way?
Peter G. Miller is a nationally-syndicated real estate columnist.