Wednesday, June 11, 2008

What's the Deal?

This week's what's the deal article will discuss real estate auctions! What is an auction? Well an auction is a process where you bid against other potential buyers for a property. Just as in any real estate transaction there are two sides to each auction. There's a buyer's side and there's a seller's side. Let's tackle the buyer's side first.

Buyer: Why would I go to an auction to buy property? If the property is one that is only be offered through an auction and it's a property that you really would like to buy, then the auction might be the only way to buy it. Now if it's a true absolute auction and you're the only buyer there you might walk away with a steal! The beauty of auctions for buyers is the search for a deal. Just like buying from Ebay, you're looking to get a better deal than paying full price for something. Think about it. If you want to buy a golf club, you can go to a golf store and pay full asking price, but at auction, you might be the only person bidding and you might walk away with that golf club for pennies on the dollar! What should you be aware of when buying at an auction? Usually the auctioned property is as is where is, so your chance for inspections and financing contingencies have gone out the door. You have to be ready to buy and you will usually have 30 days to close on the property. Watch out for the DUMMY in the corner! ????? A Dummy Bidder (sometimes called a plant, a shill) is a bidder that has been placed in the crowd by the auctioneer to drive bids up. So you might be the only buyer at the auction but you can be tricked into bidding more for the property. So, should you buy at an auction? Sure! I've purchased properties at auctions and if you know what you're doing it can be an exciting venture where you can buy property for less than market value, but if you need experience on your side, you can always contact a REALTOR to act as a Single Party Broker on your behalf and assist you through the auction process.

Seller: Why would I sell my house at auction? Well maybe you HAVE to sell the property and it's an unusual piece of property that will attract more than one bidder. That is the key to being able to have a successful sale at an auction, you have to have more than ONE motivated buyer! Sure there will be 10 or 20 people at the auction, but most of them are looking for the steal. You have to have two buyers that are willing to pay at least full price or else you might end up taking a bath. Well, what about the fact that I will sell my property faster at an auction? Sorry, that's not a fact at all, it's a myth. In reality some properties will sell the same day that they are listed because salespeople keep a list of all of their prospects that want a property just like yours. So it is possible that you would have sold your property faster using a typical real estate company. How about the line that it won't cost me as much because the auction charges a 10% buyer's premium instead of charging me a listing fee. Hmmmm, let me see, I'm bidding on a piece of land that is worth $100,000, I guess my maximum bid will be $90,000 now that I'm paying a premium on top of my bid. That didn't take long to do the math now did it? How's that workin for you now? You just walked away with $90,000 less advertising and abstracting expenses. Sure you didn't have to pay a commission, OR DID YOU???????

Auctions are appropriate for some properties, but when you consider that the definition of market value as provided by the FDIC:
(g) Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

So was the property exposed for a reasonable time? One day is not reasonable, yet an auction is typically advertised for 30 days.

My opinion is that if you are considering auctioning off your property, first consider listing it on the open market for at least 30 to 90 days to see if you can get full price for it. If you are considering buying at an auction, first consider entering into an agreement to allow a real estate broker to represent YOUR interests at the auction.

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