Why Are Auction Terms Different?

Real estate auctions usually have very different terms than negotiated sales. These differences are manifest in many ways, such as cash terms with no contingencies for financing or inspection (prospective buyers must perform all of their due diligence prior to signing the “as-is” contract), a higher required earnest money (often 10% or more), a quick closing requirement (usually 30 days or less), and a strict adherence to all bidders relying on and agreeing to sign exactly the same contract with no changes.

These strict terms often seem difficult for any but the most knowledgeable and creditworthy buyers, or those with sufficient cash resources to perform. And indeed auctions are not for buyers who are not ready to make a commitment if they are the winning bidder, as the strict terms penalize those who cannot come up with the balance of the purchase price in cash within the set closing period, or who change their minds after the auction. Auction terms are not subject to renegotiation after the fact, so only bidders willing to accept these strict terms should bid at a real estate auction.

The primary reason for these terms has to do with the fact that sellers choose auctions when they must sell the assets quickly, and when they must eliminate as much uncertainty as possible to make sure that a closing does occur and title is conveyed.

By standardizing terms and eliminating all contingencies, the auctioneer creates a level playing field where all bidders are bidding on exactly the same product. If some bidders receive extra consideration that other do not receive, then the auction could not be said to be a fair and open determinant of price.

We have found that auctions are the preferred way to buy real estate for many non-native buyers from other countries who are accustomed to dealing on cash terms. Many of these cash buyers feel that on negotiated transactions, their cultural differences result in them being discriminated against because they do not have the “insider” connections or cultural affinities that native buyers would enjoy. They are much more comfortable participating in auctions, where the only determinant of who buys is the bid amount, not who they know, or who might extend more favorable terms to another bidder.

When a seller chooses to auction an asset, they should be really ready to sell it! When a buyer buys at auction, they should be really ready to close it!

2011- The Year to Sell (and Buy!)

Auction Management Corporation had a busy year in 2010- we started off the year with the continuation of our apartment auctions, where we sold apartments in Michigan, Indiana, Rhode Island, Alabama, Tennessee, Georgia, Arkansas, North Carolina and Texas. As this series wound down, we embarked on selling closed bank branches in Florida, Washington, New Jersey, New York, Missouri, Michigan, and Illinois. We sold everything from a car dealership in Texas to a highrise condo tower in Atlanta to a golf course in South Carolina, a church in Georgia, and houses, lots and land throughout the Southeast. We anticipate 2011 to mark an upswing in auction activity, as banks and other sellers are finally able to write down their assets to current market levels, and some of the huge “shadow inventory” of such assets as lots, land, and commercial investment property begins to make its way to the market. We feel that it is essential to the recovery of our economy that the process of absorption of these assets begins to enable investors to make money again, thus restoring confidence in the real estate market. It is only through investments, from both domestic and foreign investors, that the economic cycle can be restarted. We are ready for a busy and productive 2011!

Auctions vs Brokerage

Auction Compared to Brokerage There are many ways in which these two methods of sale are different. Lets examine the two methodologies side by side, to help understand why they are very different sales approaches. In a brokerage situation, the seller lists with the broker. Naturally, the seller wants to get the highest price he or she can, and the buyers want to pay the lowest price they have to. Thus, there is an adversarial relationship between buyer and seller. The broker’s job is to provide the interface between the seller and the buyer in this adversarial situation. The seller lists higher than they want to sell it for, giving the buyers some negotiation room. The price ultimately paid is bracketed between the high of the asking price and the low of what a particular buyer will pay, with the resultant price being determined by which party is the most motivated. In an auction situation, the seller is not in an adversarial role. He gets to sit out the fight. The opponents in an auction are the universe of bidders who want the property. The auctioneer’s job is to provide a level but highly competitive field so that the bidders, rather than a single buyer and seller, determine the price. By not setting an asking price, we are eliminating any artificial ceiling which may be placed when an asking price is set. As a result, the price attained at auction may far exceed the price that would have been set in a brokerage situation. Auctions are very much a study in reverse psychology. If bidders believe that the seller will sell for the high bid regardless of price, they will participate openly and competitively and drive up the price to its true market value. On the other hand, if bidders believe that the seller is trying to influence their actions (either by participating covertly in the bidding or by having price expectations such that their bids are not honored), they will typically lose interest in the asset. The surefire way to chill an auction is to set a high asking price and expect the bidders to participate in an auction. Bidders must believe that the price will only be determined by competition and not an artificial price, or an auction cannot be successful. Another important difference between auctions and most brokerage sales is the fact that auction contracts are binding immediately upon execution, whereas most brokerage sales have contingencies whereby the buyer can take the property off the market for a set time (often 30 to 60 days or more) then terminate the contract at the end of that time if the buyer discovers something they do not like about the property, or the buyer’s financial situation changes, and often simply because the buyer changed his or her mind! In an auction, when the property is sold, it really should mean it is sold! Whereas often brokerage contracts go to closing perhaps 50% to 70% of the time, an auction contract is typically going to close 95% of the time, or higher. Because the only contingency is seller’s ability to deliver title, the buyer loses their earnest money if they do not close for any other reason, so they almost always close!