Real Estate Auctions – The New Land Rush

On a sunny afternoon in Florida, an energetic crowd gathers on the lawn of a high end luxury estate. A loud and eager banter between an auctioneer, a group of bidders and bidder assistants fills the air. For several minutes the auctioneer asks for the next highest bid and the bidders respond. Suddenly the bidders grow silent. The high bidder holds his breath in anticipation of winning the auction. The auctioneer calls for one more bid. In a loud clear voice which rolls over the audience he says, “Fair warning, last chance” the auctioneer pauses, “SOLD!” And in less than 10 minutes another multimillion dollar estate has changed owners.Successful real estate auctions like the one above are happening all over North America and the Caribbean. Recently real estate auctions have been on the rise, the increase in popularity is partly driven by growing inventories and fading buyer confidence. Properties that were selling in weeks using traditional methods are now languishing on the market unable to attract buyers even as seller’s lower prices. Many say the real estate boom is over but savvy buyers and sellers are profiting from real estate auctions.Real Estate Auctions Work in Up or Down Markets. Regardless of trends or market cycles, real estate auctions provide an open and transparent process for buyers and sellers. Properly conducted real estate auctions attract ready and willing buyers and motivate them to act now.The auction method removes the “wait and see” attitude which serves to further depress real estate values. Buyers are always concerned about overpaying. Buyers gain confidence with their purchases at real estate auctions because they can see what others are willing to pay.When market demand is high and inventories low, real estate auctions can deliver selling prices well above what a willing seller would have accepted in a negotiated private treaty sale. In good selling climates many property owners using traditional real estate methods; negotiating with one buyer at a time, leave thousands of dollars of equity on the table. During up markets real estate auctions are the best way to establish top market price.Evaluating Your Real Estate for Auction Not every property or seller for that matter makes a good candidate for auction. First of all sellers must be ready to sell now and for the current market value. Also a real estate auction will not fix problems caused by a downturn in market value of your property, if you owe more than a willing buyer will pay, be prepared to come to closing with your check book.Properties that do well in real estate auctions have a high uniqueness factor. Ask your self, “What makes my property different from most others?” Maybe you own a resort property or high end luxury home, commercial properties and land do very well at auction. Real estate auctions thrive on uniqueness. If your property is like everyone else’s, the best thing you can do is offer the most competitive price.Most importantly sellers must be reasonable about setting a minimum bid. A seller must look at the lowest, most current comps and price below that to generate the interest and urgency necessary for a successful real estate auction. Once the auction begins and qualified bidders start competing against one another you can watch the selling price increase.Locate a Qualified Real Estate Auctioneer Start by checking with the National Auctioneers Association, the best real estate auctioneers belong to this organization. These real estate auctioneers are well trained and adhere to a standard of practice and a code of ethics. Many attend the annual International Auctioneers Conference where the latest techniques and innovations in the real estate auction industry are presented.Find out if the company you are interviewing is a full time real estate auction firm. Many real estate agents are getting auction licenses yet have no experience with the auction method of marketing. Conducting a successful real estate auction is nothing like (private treaty) traditional real estate sales. Go with a real estate auction pro.You’re probably better of with an auction house that specializes in real estate auctions. There are many qualified auctioneers who have generations of experience selling personal property; furniture, dishes, lawn equipment and the occasional rare painting. Selling real estate at auction is a complex matter that should only be attempted by full time experienced real estate auction professionals.Commissions and fees may vary, sellers must pay all marketing expenses up front and buyers typically pay 10% of the sales price to the auctioneer of which a share goes to participating real estate agents.Types of Real Estate AuctionsAuctions are effective because they create a seller’s market. Professionally conducted real estate auctions create urgency, a reason to buy today and competition for the property. Terms and conditions of sale are established ahead of the auction. Real estate auctions will follow one of these three approaches:Absolute Auction The property is sold to the highest bidder regardless of price- using this process often returns the highest sale price.Minimum Bid AuctionSeller agrees to sell at or above a published minimum bid price – this method is useful for internet auctions.Seller Confirmation or Reserve AuctionWith a reserve auction, the seller “reserves” the right to accept or decline any bids usually within 48 hours of the auction. Reserve auctions are used when there is a lien on the property from a lender or a court ordered sale with a minimum selling price.

Real Estate in the Age of the Internet Volume 8

Critique of Traditional Real Estate Brokerage Compensation ModelGiven the apparent paradox between real world endurance and academic/political criticism the current real estate brokerage compensation model, a review of recent literature on the topic provides a structure for parsing out the relative merits of the current percentage-based split commission model as well insights as to how it may evolve in the future.In their 2007 paper, “Is the Compensation Model for Real Estate Brokers Obsolete?” authors Miceli, Pancak and Sirmans (2007) argue the traditional percentage-based split commission model for brokers has become obsolete, given contemporary legal agency relationships and technology-driven information availability. As a result, they conclude buyers and sellers experience substantial transactional inefficiencies during the two primary phases of the real estate transaction, matching and bargaining. They then proceeds to mathematically model the existing compensation model and identify alterations, which would mitigate the inefficiencies he describes. Finally, Miceli et al. (2007), proposes a list of policy actions, which if undertaken, could facilitate the emergence of the compensation model they propose. This paper reaches some useful conclusions in terms of policy actions, however some of the assumptions upon which the supporting argument is made, may neglect certain functional roles of real estate brokerage. In addition, the proposed the compensation model, while elegant, does not address the fundamental basis for why real estate brokerage services, have, up until this point in time, been delivered wholesale. Never the less, Miteceli at al. (2007) is an useful in formulating a vision of how compensation in real estate brokerage may evolve.The main assumption Miceli et al. (2007) make upon which their central argument is made, is in oversimplifying real estate brokerage services into two all encompassing functions: matching and bargaining. While doing so allows Miceli et al. (2007) to formulate an economic model of broker compensation, it excludes many of the functions brokers perform, which have economic value, but which have here to fore lacked independent pricing due to the existing bundled service model.As discussed previously, the agent provides a range of services, not only subsequent to the matching and bargaining phases, but within these phases as well, which are omitted by Miceli et al. (2007) in the interest of modeling broker compensation. For example, decisions regarding pre-listing activities such as level of property fix-up (requiring monetary investment) and home staging decisions are often critical in the matching phase and can have substantial impact on the final sales price. Alternatively, decisions involving choice of appraisal company can influence property valuation, thereby influencing the probability of a successful a bargaining phase. In the Miceli et al. (2007) model, these types of services are essentially considered to have zero economic value, as Miceli et al. (2007) advocate for a collective listings aggregations model in lieu of the process by which brokers search for listings: “we will argue however, that unlike an unimpeded search for buyers, competition for listings is unproductive in that it does not increase the likelihood of a sale…” Miceli et al. (2007). It is precisely within this process that brokers and agents market their skills (compete) in the aforementioned examples and affect sale price. The underlying supposition in the Miceli et al. (2007) analysis is that all seller brokerage services are commodities.Another potential weakness in the Miceli et al. (2007) broker compensation model, is in their economic overvaluation of the role of the broker during the matching phase as associated with property search. Miceli et al. (2007), argue the emergence of information technologies has allowed buyers to search through property listings information independently of the real estate agent, which they juxtapose to the era when agents controlled access to such information. Their argument posits that free and unfettered public access to listings information should have resulted in a reduction in broker compensation, to reflect the reduced value add of the broker: “The traditional compensation model for brokers has not evolved to reflect their diminished role in the matching stage” Miceli et al. (2007). In reality, the persistence (growth) of the traditional percentage-based split commission compensation model in the face free listings information on the internet and disaggregated real estate service providers reveals a fundamental truth: for-sale property listings information in and of itself has little economic value; access to information was used as an inducement to enter into a formal agency relationship, during which value added services were provided. It follows from this, that use of traditional brokerage service would remain steady and no reduction in broker compensation would be seen when such information is made freely available. And in fact, this has been the case, as is demonstrated in the reduction in the rate of FISBO’s seen since 1987 and persistence of brokerage commission rates over the same period. “Between 1998 and 2005, the real median real estate broker commission per transaction grew by 25.5%. However, commission rates remained relatively stable during that time irrespective of market conditions, home prices, or effort to sell a home (US Government Accountability Office (GAO), 2006).”Perhaps the most instructive oversight in the Miceli et al. (2007) argument is in their lack of treatment of the true economic justification of the current compensation model, which is based on risk and reward. Currently, in real estate brokerage, agents and brokers assume 100% risk in the transaction purchase sale and sale process. They incur tangible and intangible expenses throughout the entire process without guarantee of payment. Buyers and sellers on the other hand assume no risk and only make payment upon successful consummation of a transaction. In this respect, the real estate brokerage model exhibits attributes of an insurance model, with wholesale payment for services rendered upon successful transactions required to compensate for expected losses on unsuccessful transactions. In order to justify his compensation model, Miceli et al. (2007) make the leap to a future point in time when the provision of disaggregated brokerage services are proven to be independently economically feasible and more importantly, to when the provision of such services does not undermine the structural “insurance” dimension of real estate brokerage; the attribute which allows buyers and sellers to incur no upfront expense in the purchase and sale of real estate.The traditional percentage-based, split commission compensation model in real estate brokerage is still prevalent today because it crudely, yet none the less effectively, compensates brokers and agents for their direct and indirect expenses. While there is evidence the industry has engaged in anticompetitive behavior on an institutional level, these actions are a rational given the potential unintended consequences associated with undermining the economic underpinnings the industry. However, while anti-trust proceedings continue to move forward, the very same trends the industry has sought to curtail, such as unfettered access to MLS listings by the public and the emergence of limited service discount brokerages, have taken place none-the-less. And yet, wholesale real estate brokerage remains the dominant business model and the percentage-based, split commission compensation model continues to endure. The main conclusion which can be drawn from these circumstances is that the primary value agents and brokers bring to the real estate value chain is not associated with information control but rather, with information management. In the long and complex real estate transaction, agents and brokers collect, analyze, interpret, and transmit data. Given the relative infrequency of sales transactions, the public at large does not attain the collective skills to engage in these activities, wholly or partially. The risks and costs associated with engaging in these activities motivate the public to contract with traditional wholesale brokers and agents as opposed to experimenting with alternative models.However, the information intensive nature of real estate makes the industry particularly susceptible to advances in information technology. The efficiencies to be gained from technologically enabled agents and brokers will result in competitive advantages, which will magnify over time (to be discussed in Section 2). Ultimately, disaggregated service offerings will be available to the public on a per fee basis, but the bulk of these services will be offered by traditional wholesale service brokers and agents, who have developed economically-feasible technologically-enabled partial service models within the context of their full service practices.