Going once, going twice … Sold! The changing role of auctions in real estate sales

by Jason Porterfield

Auctions are a vibrant part of the national economy. We know them as an exciting and efficient way to liquidate valuables, furniture, antiques and art. Whether it’s a live event featuring an attentive audience wielding numbered placards or an online sale in which bidders race a ticking clock, sellers can often expect to walk away with cash and buyers experience the euphoria of outbidding their competitors.

Real estate auctions, however, sometimes have unpleasant associations for buyers and sellers. The idea of using an auction to sell a home may conjure up images of Dust Bowl farms taken over and sold by lenders during the 1930s, or of the foreclosure crisis that exacerbated the housing market crash that stretched into the 2010s.

While distressed properties are part of the auction scene, they are far from the only homes sold that way. According to the National Association of Realtors, the majority of real estate auctions do not take place due to financial distress. Instead, those sellers that use auctions are typically seeking a fast, cost-effective way to get the best price possible for their homes. 

“Probably the biggest distinction with an auction is that there’s a date that’s certain for a sale,” said Rick Levin, president of Rick Levin & Associates, an auction company based in Chicago. “Instead of just dragging out for weeks, months or years, the sale can occur at a date that the seller chooses. That really frees the seller up to make that determination when they want to sell their property.”

agents and auctions

Real estate professionals are often an integral part of property auctions, whether they take place at live events or exclusively online. By working with auctioneers, agents can expand their business and better serve their clients by providing them with a quick and profitable route to a sale.

Agents may be reluctant to turn to an auction company out of concern that they will be cut out of a sale or that the auctioneers are their competitors. Trayor Lesnock, president and founder of Platinum Luxury Auctions, said that agents and brokers play key roles in nearly all of his company’s transactions. One of his company’s challenges is convincing the real estate industry at large that it’s a collaborative relationship, rather than a competitive one.

“For almost every transaction we do, and I’m talking 97 percent or above, we are doing the transaction in cooperation with the existing listing agent or broker,” Lesnock said. “In other cases, we actually go ahead and bring one on, if one’s not there, to be our market partner and also to take care of certain licensure and legalities that need to be covered in a given county or state.”

Lesnock noted that he sometimes hears agents warn clients away from auctions because they see the buyer’s premium as an additional cost, but in general the premium functions as a way to pay agent commissions, closing costs and other fees seen in a traditional transaction.

When there’s not a buyer’s premium attached to an auction sale, any payments should follow the terms of whatever agreement the agent had with the seller. Texas agents are protected by the Residential Buyer/Tenant Representation Agreement, which mandates that the buyer has to pay the agent’s commission, as set forth in the original listing agreement. The agent has to discuss that fee with the buyer first. 

“Most professionals do not have a problem paying,” Confait said of his investor clients. “But not everybody’s like that. So make sure you do your homework and protect yourself. Get something in writing, an agreement that states if I’m going to go to auctions with you, and identify these properties and I’m doing all this work for you, I would like to get paid. Have it arranged in advance.”

Concierge Auctions works to educate agents about the auction experience and how they can make money through auctions. Agents play a vital role in the process through their knowledge and networks of connections. 

“A lot of agents, if they don’t know us, consider us competition and don’t understand that we always protect our agent commission,” said Laura Brady, founder and president of Concierge Auctions. “While we have real estate brokerage licensure in most of the markets that we do business, we don’t operate as the broker. We always rely on them for their local market expertise.”

The nuts and bolts of auctions

The dated notion that auctions are associated with tragedy or misfortune is perhaps the greatest hurdle agents and sellers have to overcome. In fact, there are many reasons a buyer may want to sell a property at auction. Luxury homeowners in particular often have properties in the multimillion-dollar range that are hard to move through conventional channels. Those homes could sit vacant for years while waiting for a sale to occur, and extended vacancy may lead to price drops. Auctions often force sellers to think realistically about the value of homes like these.

“When you go in for a listing presentation, your goal is to show that person what their property is actually worth,” said Arthur Confait, an agent with Coldwell Banker United in Sugar Land. “You could go into 100 listing presentations. Maybe 10 out of those 100 people are going to trust you that the value that you’re setting on their property is actually what their property is worth. Most of the time, you have to turn around and show them data, show them a bunch of numbers, before they believe that their property is not going to sell for that number they assumed in their mind.”

Homes are typically sold at three types of auctions: minimum bid, reserve or absolute (auction without reserve). In a minimum bid auction, a threshold price is established. If no one bids at that price, the sale does not take place. Reserve bid auctions function in much the same way. The high bid functions as a purchase offer, though the seller has the option of rejecting all bids. The seller has to decide whether to accept or turn down bids within a certain time frame, often 72 hours.

An absolute auction is an auction in its purest form. In these auctions, the property is going to sell as long as someone places a bid. While there’s a danger that a home may sell for much less than it is worth, Levin noted that these types of sales often bring the most interest and highest prices.

“Some sellers get concerned about doing that, but it brings the highest number of bidders because buyers know that there will be a sale for sure,” Levin said. “If there is going to be a sale for sure, all the buyers want to get there so they can determine the price they want to pay. If all the buyers are there, it’s more likely that the price achieved will be the highest price available to the seller.”

Buyers benefit from auctions, too. Brady said her company works hard to ensure that purchasers have access to quality homes and that sellers are sincere in their intentions. Buyers also don’t have to negotiate a price because the highest bid stands. 

“For buyers, that transaction is a very easy process,” Brady said. “The buyers who come to our auctions know that we work very hard to curate the properties that are in our marketplace. Properties that are listed for sale on our site have gone through a very strict vetting process of making sure that it’s quality merchandise and that the sellers are sufficiently motivated and ready to accept whatever the buyers say that the property’s worth. So when the buyers come forward, they know that it’s a motivated, realistic seller.”

Confait cautioned agents on the buy side of auctioned properties to do their homework so that they know what they’re getting into with the homes their clients want to purchase. Buyers who are not disciplined can easily overpay on a home that requires substantial work and a major financial investment before it’s ready to be sold again.

“Emotions get the better of them,” Confait said. “They think something is a great deal, so they keep bidding. Before you know it, what was a great deal ends up being a money pit.”

Confait described a visit to a property in an area where homes typically sold for about $220,000. The front of the home didn’t look too bad. A look inside, however, revealed that the wiring had been pulled out and there was substantial damage to the interior.

“We went to the auction knowing all of this stuff about the property and knowing what we would be willing to pay for in the market,” Confait said. “I think our number was around $75,000 for this property. It ended up selling for $135,000. There is no way the person who bought that property knew what was inside that house, or what was going on in there. That’s an expensive mistake.”

The technological shift

The ever-evolving nature of technology touches auctions, too. Many auctions are now held online. Some auction companies handle properties that are almost exclusively targeted toward iBuyers, would-be bidders who use online auctions to find homes.

Levin’s company offers a model that combines real-time sales with an online auction component to bring in iBuyers. In this hybrid model, a live auction takes place that iBuyers can watch online as it occurs. They can see the bids that people in the audience are placing and they can enter their own bids. With both audiences bidding, the seller can often get a better price than if the auction was exclusively online or strictly a live event.

Concierge Auctions features a digital component in all of the company’s auctions. Brady said the company developed an online platform in 2010, but it was retired soon after its introduction because there weren’t enough buyers interested in bidding online at the time. The company launched a new incarnation of its bidding software in 2015 that proved more successful, partially due its mobile component.

“Within the first year of us launching it in 2015, we thought maybe half of our auctions that year would be conducted online, and the other half would be live auctions,” Brady said. “The public acceptance of it in 2015 was so undeniable that that year we had 80 percent of our auctions conducted digitally-only. So now 100 percent of our auctions have a digital component.”

That doesn’t mean the live auction is going anywhere. 

“I still love live auctions,” Levin said. “But internet auctions and that technology have really expanded the use of residential auctions. Because more and more people are going online and searching for their real estate needs that way, more people are likely to see it. When they see it, that might be the right time for them to want to buy it.”

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