There has been news coverage recently about auction houses selling real estate, particularly in the United States and Europe. Several auction houses operate in Canada and make claims about their services, but are these claims really justified?
Are Buyers and Sellers of auctioned real estate really aware of the risks associated with these auctions vs. hiring a licensed full service REALTOR®; listing on the MLS™; and dealing with offers as they come in rather than trying to hold out for offers and creating an ‘auction’?
Here are some of the key risks of selling and buying property via an auction house, etc. vs. with a full service and licensed REALTOR® in a non-auction situation (i.e. as per a typical MLS™ listing):
(1). Risk of losing control of the sale by signing over 100% selling authority to the auction house: When selling real estate with an auction house, the Seller (in advance) signs over authority to the auction house to sell the property on their behalf at or above the minimum bid price selected. Even if there is only one bid and it comes in at the minimum bid price, the Seller is obligated at that point to sell. By selling with a full service REALTOR®, the Seller is represented by their REALTOR® to provide advice with incoming offers, and if the offer comes in below the higher list price the Seller has no obligation to accept and therefore maintains control until an acceptable offer comes in and their property is sold.
(2). Risk of selling under market value: In order to artificially ‘start a bidding war’ (whether it be through an auction house or else using a normal listing and holding out for offers), the only way to do this effectively is for a property to be underpriced. If a Seller needs to set a minimum bid price for the auction house at $25,000 under its perceived market value, the Seller must be prepared for the financial reality that there may turn out to be only one bid and that is exactly what the house sells for. When represented by a full service REALTOR®, the Seller can choose a list price to challenge the market (and then subsequently lower the list price if required) to guard against the risks of selling the property too low.
(3). Risk of not gaining the ‘bump’ from a multiple offer frenzy: When selling with an auction house, it is very common for multiple offers to be very close between the #1 bid and the #2 bid (separated by under $1000 + or -) since the bidders will usually not be eager to ‘extravagantly outdo one another’ to beat out the other bidder for which they know their bid. When selling with a full service REALTOR® in a multiple offer scenario, the listing brokerage collects offers from each of the Buyer Agent REALTORS® and Buyers are submitting their very best offer up front (i.e. not worrying about the lowest amount the Seller would accept but instead are worried about what the other Buyers may offer) which means Sellers can often benefit by a large spread of $5000, $10,000, $15,000 or higher between the #1 bid and the #2, etc. bids.
(4). Risk of appealing to only the high risk investment Buyers looking for a steal: When selling with an auction house, the vast majority of attendees are shrewd investors who will only buy if they can get a ‘steal of a deal’. This should be very frightening to potential auction Sellers because if there are a room full of ‘shark investors’ who will only come up to a certain dollar amount to buy any particular home, there will not be much ‘emotional overspending’ that the Seller may be relying on to justify the auction.
(5). Risk of alienating the vast majority of lower risk Buyers: When selling with an auction house, it is an undeniable fact a very high majority of Buyers will not (and likely should not) feel comfortable at auctions and would rule them out completely due one or more of the following important factors:
(a). Having to make huge monetary; life-changing; and likely irreversible buying decisions on the spot;
(b). Similar to gambling at a casino, accepting the real risk of severe consequences due to sudden ‘on the spot’ emotional actions with future regrets after the reality sets in of what their family has just done;
(c). Losing privacy and confidentiality of their home purchase by having to make their offer in front of others in a public ‘high-pressure auction environment’;
(d). Spending a few hundred dollars (+ or -) up front to the auction house each time to sit as a bidder with no guarantee of any tangible results;
(e). Accepting possible risks of buying a home unconditional without an inspection or financing approval;
(f). Accepting the real risks and possible consequences associated of accepting a property ‘as is, where is, with no warranties, representations, disclosures, or RPR / Compliance provided’;
(g). Accepting the time wasting risk of having to sit through a few hours of property auctions – how many Buyers have a whole afternoon (or likely multiple afternoons) to sit through the sale of 10 or 15 other properties to finally get to the property the Buyer wants to buy? In that same timeframe, the Buyer could easily schedule viewings of 10 or 15 houses and write up to two or three offers with their REALTOR®.
(h). Good deals are available for Buyers in the normal real estate market without having to go to an auction. Buyers who want deals need to be prepared to make offers to find the right motivated Seller.
(i). Most Buyers hate multiple offers situations (and prefer to avoid them at all costs), and do not want to be entering a situation like an auction that virtually guarantees the presence of other competing offers.
(j). In the case where an auction house is not fully cooperating with Buyer REALTOR® Brokerages, the auction Buyer will be required to sign up a complex Exclusive Buyer Brokerage Agreement to have auction representation (and pay the Buyer Agent commission on top of the final purchase price) or else choose not to have representation and lose out on important coaching and advice from their REALTOR®.
When you add up all the % of Buyers who would rule out auction houses completely due to one or more of the reasons above, that is a lot of Buyers! To sell any property for top dollar, Sellers must open their home to the entire market, not just the small % of Buyers who might be comfortable buying a property at an auction. In comparison, Sellers who hire a full service REALTOR® (i.e. fully cooperates with Buyer brokerages and markets on the MLS™) means that their home is open to the entire 100% of the market and any Buyer can make an offer on their home either through their personal REALTOR® (best option) or else by contacting the listing REALTOR® who represents the Seller. Many of these properties do not have multiple offer situations but in cases where such a situation does occur, the Buyer is in control as to how much they spend in making their best offer.
Most non-investor Buyers (i.e. family home Buyers) would not feel comfortable in an ‘auction house environment’ where tens of thousands of dollars decisions are made on the spot and there are only a few seconds to decide before making the next move. Houses can be bought unconditional in auctions, and may be sold ‘as is, where is, with no warranties, representations, disclosures, or RPR / Compliance’ for which the risks and consequences can be extremely harsh. Some wealthy investors may be able to ‘roll the dice’ and take high risks on occasion (until they learn a lesson with a bad experience before coming in at a much lower bid price the next time). However, family home Buyers are best advised to avoid auctions and take the traditional route of contacting a reputable Buyer REALTOR®; view the home; make and negotiate an offer to purchase with financing, inspection, etc. conditions; getting all their representations, warranties, Real Property Report and Compliance, etc. as per the standard AREA REALTOR® purchase contract; and getting important approvals in place before removing conditions and closing their purchase.
In summary, while auction houses can be effective for Sellers or Buyers to sell or buy smaller depreciable equipment such as lawn, snow, and other work equipment and vehicles, for the reasons mentioned in this article there are a wide range of scenarios where real estate auctions are likely not in the best interests of either Sellers or Buyers. To best avoid encountering many of the serious risks identified and headaches that come with real estate auctions, Sellers and Buyers are advised to contact a reputable and qualified full service REALTOR® to assist them on any upcoming property sale or purchase.
[Article written and ©2013 by Kelly Grant, M.Eng., ABR, NCSO, P.Eng. - REALTOR® at MaxWell Realty in Edmonton, AB]
Disclaimer: for those readers not currently represented by another licensed REALTOR®, to obtain more information on this topic and / or if you are serious about selling or buying in the Greater Edmonton Area, call Kelly at 780-414-6100 (pager) or send Kelly an email to SOLD@KellyGrant.ca to schedule a confidential appointment.