Let’s Talk Honestly About Real Estate Auctions

There is an underlying belief by Real Estate Brokers that the Auction method of marketing a property does not have their clients best interests in mind. When more of the issue is that the Auction Method of Marketing is not in their best interests. Really – think about it – if your not a real estate auctioneer – then what do you lose?

This is why many real estate brokers will come up with excuses as to why a real estate auction will not fit the clients needs. Truthfully, if they are not making the most in commission, they won’t even allow you to consider it as an option for you.

The broker’s fiduciary duty must come first

If a home seller believes he or she would be best served by the agent with the most thorough understanding of his or her specific needs and property, then it is the brokerage’s fiduciary duty to act in the best financial interests of that client. If your agent does not support auctions, then it might be time to find another agent.

Inexperienced Real Estate Brokers believe that all homes sold at auction are dilapidated foreclosures you have to pay cash for on the spot. Think again. Real estate auctions are becoming more and more popular because they offer good deals on a variety of properties in a consumer-friendly environment. It has become the most used trend to sell high-dollar properties over a million dollars in value. Nevertheless, plenty of myths surrounding the process abound. Here are some of the most popular misconceptions about real estate auctions and the facts behind them.

Myth 1: All homes at real estate auctions are foreclosures and/or distressed properties.

Fact: Some are and some aren’t. Either way, potential buyers have ample opportunity to determine a property’s history and condition before the auction. More and more homes at auction today are brand new homes that builders are unloading. Some are even luxury homes. “People think there is something wrong with the home if it is in an auction, but I’ve sold many homes that are in move-in condition,” says Tim Gray. The fact of the matter is that if you have to have the property sold on a particular date, then the property will sell on that date.

Myth 2: If I buy a home at auction, I must buy it sight-unseen, without an inspection.

Fact: Most auctioneers hold open houses before the auction date. In some cases, they will set up special inspection times and schedule the tire kickers before the auction. Buyers are invited to bring a contractor or inspector with them. However, judicial auctions or Sheriff’s sales (properties auctioned off by your county) typically do not offer a chance to inspect the inside of the home before bidding. If no access is granted to a home, or it is obviously in poor condition, that is reflected in the price.

Myth 3: Buying a home “as-is” is full of risk.

Fact: It is true that auctioned homes are almost always sold as-is, with no contingencies and no attorney review period. However, a good auctioneer will have inspection reports available beforehand for each property it is selling. In other cases, the buyer is responsible for the inspections and generating their own reports. Some sellers (not the auctioneer) even offer home warranties. “We put together a complete due diligence package including a home inspection, a survey of the property, water/sewer, and a complete list of utilities (if available) so bidders have all the facts,” says Matthew Price, Fuquay Varina Auctioneer and 2018 President of the Auctioneers Association of North Carolina. “We encourage them to take offer to purchase contract to an attorney before the auction, which includes the terms and conditions.”

Myth 4: Buyers must pay in full with cash at real estate auctions.

Fact: Buyers must bring a deposit, usually about 5-10 percent, which is treated like earnest money. Buyers typically have 30-45 days to secure financing and close. If not, they forfeit their deposit to the auctioneer, and they will likely not be able to register again for the property. One exception is a judicial auction or “Sheriff’s sale.” These auctions typically require the entire purchase price payable at the auction or shortly thereafter.

Myth 5: Buying a home at auction is “taking advantage of another’s misfortune.”

Fact: Occupied homes, as opposed to empty ones, improve the economy and the community. When there is a house sitting vacant, there is no one paying the mortgage or the property tax, or utility bills. Additionally, there is no one taking care of the maintenance of the property, which affects other property values in the area. A perfect example is a home that is for sale because of a death in the family, and sits for 5 years or more. Not only does the property value drop because of mismanagement, but It is susceptible to burglary and squatting and it generally becomes the neighborhood eyesore.

“When we sell that property, someone purchases it and someone starts fixing it and making it livable,” says Rick Weinberg of REDC, a national auction firm.

Myth 6: Only experienced investors can really compete at real estate auctions.

Fact: Auctions are open to the public. It is the intention of the auctioneer to place a person in the home, however, if an investor comes in – the individual buyer will generally win. Due to the popularity of auctions today, and the proliferation of residential estate auctions in areas like Fuquay Varina, many attendees are everyday homeowners. Most typical customer has never been at a live real estate auction before. “The buyer at these events is not some large investor, it’s John Q. Public. So you’re competing against someone just like yourself interested in living at the property,” said Price.

Myth 7: If I sell my home at auction, it will cost me a lot more in commission than if I hire a Realtor.

Fact: Auctioneers say the cost is comparable, usually slightly more. However, auctioneers say the seller saves money in the long run. “The inherent efficiency in the auction process enables the seller to eliminate long-term carrying costs including maintenance and taxes,” says Rick Levin of Rick Levin & Associates in Chicago.

Moreover, an auctioneer will charge a smaller commission, and a buyers premium, which is added to the price of the property and that is the contract price, so the sellers costs are lowered to nearly marketing costs alone, which if the auctioneer is also a REALTOR, they can enter it into the MLS, which is additional cost savings.

Myth 8: If I sell my home at auction, I will get a lower price than market value.

Fact: Auctioneers believe an auction is the best way to determine the true market value of a property, particularly when comparables are scarce. “When you group 20 people in a room, and they’re all bidding on the same property at the same time, you get true market value,” says Brian Kuzdas of RealEstateAuctions.com.

Furthermore, with current bidding wars over properties, you get market value. And one other piece of information: The Supreme Court ruled that market value is not something based on sentiment or comparable, but it is determined in what a buyer is willing to offer a seller, and if the seller accepts it, it is the market value.

Myth 9: There is no place for Realtors or brokers in real estate auctions.

Fact: Many auctioneers pay commission to a Realtor who brings a client to an auction after that client wins the property. Normally that can be as low as 1%, or as high as 3%. The percentage is dependent on what the seller negotiated in the auction contract.

Some Real Estate Brokers attempt to micromanage the auction and attempt to unethically bid in what is called shill bidding for their clients. That is the process of bidding without the intent of purchase, or to drive the price higher as a punishment to other bidders. “Real Estate Brokers want to ensure they are not involved in that criminal act. Much like taking silent bidding at open houses, the minute the broker attempts to manipulate the price higher, they can be found in violation of the Sherman Anti-Trust Act, or worse, in violation of the State Auction Laws,” said Matthew Price. “Shill bidding can cost you 10 years of your life or $250,000.”

Myth 10: If I can’t make it to the auction, I’ll lose the opportunity to bid.

Fact: Many auctioneers conduct online bidding simultaneously, so bidders can bid from home. Bidders can sometimes place a bid online before the auction date — or simply buy the property outright. And if the in person and online options are not available, some auctioneers will take absentee bids and bid on your behalf up to and including the highest amount, or one increment higher.

The important piece here is to ensure you know what your broker is telling the auctioneer, as you may have said to bid $500 over the highest price, which if the highest price is already above your maximum, the auctioneer will continue to bid until you win, when you meant to bid one time over the highest price at $500.

Myth 11: Auctions are the last desperate resort for sellers.

Fact: That isn’t the case anymore in today’s tough real estate market. Selling a home by auction is becoming a viable option for owner-occupied homes. It’s an option that, when successfully executed, can get a home sold in as little as 30 days and in most cases in about 60 days from the advertisement of the auction to the closing date. In some cases, if individuals are paying cash, it may be in as little as 14-21 days. A real estate auction can even some cases be less stressful than the “Guaranteed Offers,” and can ensure you have money in your pocket before moving out of the house.

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