COUNTRY LIVING MAGAZINE - Country Property - Dollars and Sense
By John H. Ingersoll
As seen in Country Living Magazine
In 1980, auctioneer Jerome J. Manning, of Boston, Mass., convinced the owners of a waterfront estate on Cape Cod to sell their property at auction instead of selling it conventionally through a real estate agent. To the owners' surprise and joy, their estate sold quickly in a little over one month and they got the price they'd hoped for.
Suddenly Manning was heading into a new phase of his auction business, an enterprise that saw him sell more than 40 premium homes (he calls them "trophy" properties) at auction in 1996.
In the auction world, "premium" or "trophy" denotes homes for sale that are not distressed properties or weighed down with liens-homes the owners could very well turn over to a real estate agent (or try to sell on their own) but choose instead to sell at auction.
These days, prices of auctioned homes range from less than $100,000 to $500,000 or more, according to auctioneer William B. Kurtz, of Owensboro, Ky., president of the National Auctioneers Assn., in Overland Park, Kans.
And selling premium real estate at auction is a significant trend. Auctioneers in all 50 states handle premium properties. Although the number of houses sold at auction remains a mere blip in total U.S. home sales, the fact that this is happening at all makes the concept worth serious consideration.
When to Go for the Gavel
The image most people have of real estate auctions involves a desperate owner anxious to unload a distressed property.
While this still goes on, selling attractive real estate, free and clear of liens, has proved exciting and profitable for both auctioneers and owners.
One reason for the auctioneer's expanding role is that "more and more real estate agents are bringing properties to auction,"
Kurtz says. Agents get involved because they share in the proceeds when a client's house is sold at auction, especially when the sale goes through quickly. The auctioneer and agent split the commission.
"People don't want to wait," Kurtz notes. "Few families are in a position to pay mortgages on two houses. Once they've decided on a new house, they're ready to sell and move."
Auctions save money and time. For each year a house remains on the market unsold, the owners pay out 20 percent of its market price in taxes, Insurance, mortgage interest, and upkeep. That's often a big chunk out of equity needed for a new house.
It's not unusual today in most areas of the nation for a house to stay on the market for 12 months. When a potential buyer finally makes a bid, negotiations could stretch on for another couple of months. Compared to that kind of frustrating wait, an auction usually wraps up a sale in about a month.
During that month, the auctioneer advertises the house auction, invites inspection of the property by prospective buyers, and may bring in work crews to touch up dull woodwork and make minor repairs.
Fear of Failing
"But we'll never get our price!" and "It's too chancy!" are reasonable first reactions of homeowners who have never considered putting their house on the auction block. The truth is, say the pros, that with a half dozen or so sincere bidders in the audience, competition drives the winning bid up to market price.
It pays to keep in mind that market price means selling price, not the asking price. In ordinary real-estate transactions as in the final bids at auction, a property is worth exactly what a sincere buyer is willing to pay for it.
Auctions arrive at the figure the market will bear in a different manner. During conventional negotiations through real-estate agents, buyers try chipping away at the list price. At auctions, bidders outdo one another in raising the price.
Smart bidders sincerely interested in a property may have had the house and property appraised, a step that is perfectly legal and encouraged by auctioneers. Yet when the auction heats up, even well-informed bidders may be swept up in the excitement and bid higher than the appraised value.
Who's in the Pool
In an effort to locate bidders, auctioneers pump out information about upcoming premium house auctions in newspaper ad, posted flyers, mailed announcements, and signs erected on the property. Robert Glass, a veteran auctioneer in Streling, Conn., is among the many auctioneers who now regularly notify local real-estate agents, urging them to bring potential buyers around for a viewing.
"We usually spend from one percent to two percent of the house's value for advertising and promotion," Glass says. "The money comes from the owner."
Who Pays the Auctioneer?
In most cases around the nation, the seller pays the auctioneer about six percent of the selling price, according to William Kurtz. "When a trophy property is up in the $500,000 category, this percentage is sometimes a shade lower," he explains. "At a lower selling price, the auctioneer's percentage may be slightly more to cover promotional expenses."
In contrast, both Manning and Glass charge a standard auctioneer's "buyer's premium." That means the buyer pays the selling price and a sum generally 10 percent of that price to take part in the auction. In such cases, the seller pays, if anything, a relatively small sum to the auctioneer to cover promotion cost. This amount is usually reimbursed from the proceeds of the sale.
Knowing that he or she must add an extra 10 percent onto the purchase price of the property may motivate a buyer to stop bidding at a figure 10 percent less than the conceived house value. "That happens," says Manning, "but not as often as one might expect. When competition is hot, the price is often driven up to a sum very close to what the seller wants."
But suppose only one bidder shows up? If the marketing program has been effective, that won't happen. "If only one bidder shows up," Manning explains, "I advise the owner to cancel and reschedule. There's time, because legally no auction begins until the auctioneer calls for bids."
For added peace of mind, sellers can set a minimum price. "That's called a reserve," explains Manning, "and it's sometimes kept silent between seller and auctioneer. If bidders don't reach the reserve, auction of the property is canceled."
Like most realestate auctioneers, however, Manning isn't happy with setting a reserve. "I urge everyone of my customers to auction their property 'absolute,' which means without reserve," Manning declares. "Selling absolute often triples the number of bidders that attend, and that usually translates into 10 to 20 percent more money for the seller."