I recently had an auction experience with my clients that did not go as planned. I’ve been helping them look for the perfect downsize, retirement home for the past several years. Finally, a beautiful ranch-style home came up for sale in the area they wanted, with lots of entertaining space, and next to an open field with farmland views. We jumped on it and were able to win out against another buyer and get the house.
They had decided to sell their farm through an auction or public sale. They had a lot of farm equipment, furniture, and household items that they would not need. Selling at auction would allow them to sell all of the items and equipment as well as the real estate in one day, which was a big benefit to them.
There was an amount the auctioneer predicted the farm would sell for and an amount my clients were hopeful to get. However, on the day of the auction, the bidding stalled. The auctioneer called a recess then came back out to try again. Despite his attempts to get the bidding higher, the auction did not progress and the farm sold for much lower than anticipated.
Auction properties, or public sales, are common around our area. They are especially popular with the “plain community” of the Mennonite and Amish. Farms are often sold at auction, as well as unusual or distressed properties. There are both advantages and disadvantages to buying and selling at an auction. Let’s take a look at some of these points for whether you are considering buying or selling through an auction.
Advantages of Real Estate Auctions:
Transparency: Auctions are typically open to the public, and all bids are visible, making the process transparent. As you stand in the crowd as the auctioneer sells the property, you can hear what other people are bidding and see who is doing the bidding. Buyers at auctions can see how much others are willing to pay, which can be reassuring to know they are not paying more than they have to in order to purchase the property.
Speed of Transaction: Auctions are typically done in one day. There may be household items, vehicles, or lawn equipment auctioned as well, but the real estate is sold on a certain day at a certain time. The bidders in the audience will continue to bid until the highest price is reached that anyone is willing to pay. The auctioneer lowers the gavel and declares the property sold. Paperwork is done immediately afterward to bring buyers and sellers into contract.
Competitive Pricing: Auctions often drive competitive bidding. The starting bid is usually low, which causes buyers to enter into the bidding war. Hearing what other people are bidding and being afraid to miss out can push the price of the property to market value or even higher, benefiting the seller.
Certainty for Sellers: Sellers often know they will sell their property at a specific time and price (assuming a minimum reserve is met), eliminating the uncertainty of waiting for an offer or price negotiation. The sellers know the exact date their property will sell and are able to plan around that.
Reduced Negotiation: There is little room for haggling or lengthy negotiations. Buyers raise their hand to bid as the auctioneer calls out the number. There is no asking for seller concessions, inspections, or any other terms. Once the hammer falls, the sale is final. This can simplify the process for both buyers and sellers as the property is selling for a certain price in as-is condition.
Access to Distressed Properties: Auctions are often the place where distressed properties and unique properties are sold. Buyers may be able to get properties at a lower price, although there may be risks involved. Buyers can walk through a property to view it before an auction, but there are no inspection contingency on these properties. They are sold as-is, where-is, and in their present condition.
Exclusive Properties: Auctions sometimes feature exclusive properties that aren’t available through traditional listings. This can be especially true of farm properties or properties that appeal to the farming or “plain” communities. If you are looking for this type of property, you may end up finding it at an auction.
Disadvantages of Real Estate Auctions:
Uncertainty for Buyers: Buyers might face uncertainty because they don’t know if they will win the bid or what the final price will be. The opening bid is not indicative of what the property will actually sell for. The bidding process can get competitive, leading to a higher price than initially expected. Buyers may spend the time registering and attending an auction only to be outbid by another buyer. There is no way to predict what the final price will be.
No Room for Negotiation: An auction property is sold as-is, where is, with no inspections or seller concessions. Auctions have specific terms, such as 10% down on the day of the auction by the winning bidder, and the closing must occur within 45 days. Buyers cannot negotiate the price, inspections, or terms, which could be a disadvantage if the buyer prefers flexibility.
Limited Property Inspection: For most auctions, including those for distressed properties, buyers usually do not have the opportunity to conduct a thorough inspection before bidding. This increases the risk of buying a property with hidden issues. Buyers should be prepared for repair and maintenance costs if buying an auction property.
Reserve Prices: Sellers may set a reserve price, which is the minimum they’re willing to accept. If bidding doesn’t meet this amount, the property may not sell, leaving buyers with no chance to buy unless the seller decides to list the property at a lower price. This can also leave the seller with a property they wanted to sell. The reserve price is not disclosed at the auction, only if it is met or not.
Upfront Costs for Buyers: Most auctions require a large deposit by the winning bidder, and buyers may be required to pay additional fees (like auction fees, legal fees, or closing costs), which can add up. Most auctions require the buyer to pay both sides of the PA transfer tax (2% of the sale price). Some auctions also charge a buyer’s premium, which can be as high as 10% of the purchase price.
Risk for Sellers: While auctions can generate competitive bids, there’s no guarantee that the property will sell at the desired price. If bidding doesn’t meet expectations, the property may go unsold or sell for less than anticipated. It all depends on who is attending the auction at that time and ready to buy. This could mean the sellers have to sell for less than their desired price.
Limited Buyers: Not all buyers are willing and able to purchase a property at an auction. They may be uncomfortable with the “on the spot” decision making and bidding out in the open against other buyers. They also may not have the 10% down required by the auction company even if they are pre-approved for the purchase amount from their lender. This can eliminate many qualified buyers.
Emotional Bidding: In a competitive auction environment, buyers can sometimes get caught up in the excitement and bid more than they initially intended, potentially overpaying for a property. It is important for buyers to set a maximum amount that they are willing to bid up to and stay firm at that ceiling. They also need to make sure they have enough funds to cover their top amount, whether buying with cash or with a mortgage.
Comparison To A Tradition Listing:
List Price Is Set: Buyers do not have to guess at how much the property will sell for. Although buyers may offer over or under the list price, the realtor and the seller work together to set the price at a fair market value. A buyer knows from the list price if they have the funds needed to purchase the home, and if it is less or more than they are able to spend. There is no guessing as to what the property price will be.
Time to Make A Decision: Buyers have time to view a property, talk with their lender about the costs, and make a decision on whether or not they want to write an offer. The buyer can think through the terms they would like to offer. If there are other offers, they can discuss winning strategies with their realtor, such as offering over list price, covering the appraisal gap, or paying both sides of the transfer tax. There is time to make a well thought-out decision.
Time to Receive Multiple Offers: An auction is sold on the spot to the buyers who are present. With a listing, there is time to leave the property on the market and set an offer deadline in the future. This allows more buyers to view the property. It allows buyers from out of the area, or buyers with busy schedules, time to see the property and submit an offer. Buyers can still use escalation clauses to push offers higher, which is much like an auction without the time crunch.
Time to Negotiate: Once offers are submitted, the sellers and their realtor review the offers. They can negotiate different terms, such as the contract price or deposit. The buyers also have the ability to negotiate with the sellers on the offer terms, such as inspections. Both sides have the time and ability to negotiate terms prior to entering into an agreement for the home purchase.
Larger Buyer Pool: A traditional listing can attract more buyers. Many buyers are uncomfortable with the auction platform where a decision has to be made on the spot, under pressure, with a crowd watching. Some buyers do not have the 10% down that most auction companies require on the day of the sale. The buyers may be completely able to purchase the property with their financing in place, but they may have a lower deposit.
Buyer Financing is Verified: When offers are submitted, each buyer must also submit either a pre-approval letter from their lender, or a proof of funds if they are cash buyers. The listing agent will verify with the lenders that the buyers are indeed pre-approved and ready to purchase. The listing agent will also review proof of funds to confirm they are current and sufficient to cover the offer amount.
Can Still Sell As-Is: Some sellers choose an auction because they want to sell as-is and think they can’t do this with a listing. That is not accurate! A listing can be sold as-is just the same and this is clearly written in both the public and agent notes. Many properties are sold as-is through traditional listings, including distressed properties, hoarder homes, and estates.
In summary, real estate auctions can be a great option for buyers and sellers who want speed, transparency, and competitive prices. However, they also come with risks, such as uncertainty, lack of inspection opportunities, and potentially higher costs or a lower sale’s price. Whether the auction route is the right choice depends on your goals and risk tolerance.
By Launch Kits