Real estate auctions: Fad or fire sale?

COAST CITIES — According to some, real estate auctions are fast becoming one of the best ways to sell a home, especially during an accelerating or declining market. Others see the practice as simply one more tool in the tool box that’s better left for use as a last resort or to dispose of distressed property.
Nearly everyone agrees, however, that the sales method is not for everyone. “It’s definitely for a select few,” said Bill Menish, former news anchor for NBC San Diego and owner of Poway-based Menish Realty & Auctions. “It’s the right thing for some, but not everyone fits the criteria.”
Menish said he generally requires clients to have a time-defined reason to sell, heavy or complete equity in the property and realistic expectations about the economy and the impact the market is having on prices.
Menish said real estate auctions “do phenomenal in the best and worst of times and excel for sought-after properties in the best of times.” Mike Taylor of Dougherty and Taylor Prudential California Realty agrees.
In high-end real estate markets such as Rancho Santa Fe, where his office is located, Taylor said there is currently far more supply than demand, with approximately 100 homes listed in his area between $2 million and $3 million. “In this highly competitive market, homeowners are asking, ‘How do I differentiate my house from every other house?’” he said.
With an increasing inventory and a “huge decrease” in buyers, Taylor said the auction process is designed to “bring those buyers off the sidelines.”
One of his properties in Cielo had four showings in the 400-plus days it was on the market. Within the first month of advertising the property for auction, Taylor said he had 45 potential buyers. Five registered bidders and several others arrived on auction day, when the sale was narrowed to two bidders and finally, a buyer. The entire process took less than two months, he said.
The original listing was for slightly less than $3 million. The minimum bid was set at approximately $1.5 million and it sold for $2.1 million. Taylor said he didn’t simply lower the asking price because he likely wouldn’t have received the same result since there were several other properties listed in the area in that price range and there were still no buyers.
There are three types of real estate auctions. In an absolute auction, the property is sold to the highest bidder, regardless of the price. According to the National Association of Realtors, or NAR, Web site, this method guarantees a sale at true market value and generates maximum response from the marketplace.
In a minimum bid auction, the auctioneer accepts bids at or above a published minimum price. There is a reduced risk for the seller since the sale price must be above a minimum acceptable level. Buyers know they will be able to buy at or above the minimum. The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, so it must be low enough to act as an inducement rather than a hindrance.
In a reserve auction, there is no published minimum bid and the seller has the right to accept or reject the highest bid within a specified time up to 72 hours after the auction is over. “Sellers predetermine the price at which the property will be sold and are not obligated to confirm a sale other than at a price that is entirely acceptable to them,” the NAR Web site states.
“The main disadvantage of a reserve auction is that prospective buyers may not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder.”
According to CalHomeAuctions.com, all three methods benefit sellers by taking them out of the negotiation process, eliminating showings and attracting prequalified buyers who are prepared to make a purchase.
Buyers benefit as well by being able to determine the purchase price and knowing they are competing on the same terms as other buyers to purchase a property at fair market value. Auctions also eliminate long negotiation periods, reduce purchase time and determine exact closing dates.
The NAR Web site acknowledges that until recently, real estate auctions were viewed negatively. Now the organization considers them a win-win situation. Sellers obtain immediate cash, while buyers purchase properties at fair market value and the price is determined by open, competitive bidding, the Web site states.
“I used to think auctions were only for distress sales,” Menish said. “Now I see them as a new approach to selling homes.”
The process generally takes between 30 and 45 days. Once an auction company and an owner agree on a price, the auction company will spend about $15,000 to $20,000 in one month on an aggressive national advertising blitz, Taylor said.
Historically, clients were asked to pay those upfront fees, but nowadays, auction companies will make the initial investment, Taylor said. Typically the fees are about one-third higher than they would be in a traditional real estate transaction and are ultimately paid by the buyer.
“Consider adding auctions to your strategic game plan if you need to sell in a down market,” Kenneth R. Harvey recommends in a RealtyTimes.com article. “They’re not a panacea. But they work.”
Menish said sellers interested in the process should first contact an auctioneer who is certified with the National Association of Auctioneers. Taylor said a Realtor should be initial point of contact.

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