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!