Editor’s note: This is the first in a two-part series. Read Part 2.

Agents are constantly searching for great ways to market their listings online. Nevertheless, when you say, "auction," the normal response is, "That’s not for me." If you haven’t considered using auctions in your business, recent innovations may very well change your mind.

You may not realize how much you already know about the auction process. For example, have you ever bought anything on eBay or on any other site where there was online bidding? If so, you are already familiar with how the online auction process works. Auctions have become a popular way to market just about anything, including real property.

Most agents know that auctions can be an effective way to assist a developer in moving a condo project or new development. Furthermore, auctions also can yield higher prices to the sellers because of the competitive nature of the auction itself.

Nevertheless, the notion of holding an auction on one of your listings is pretty much a turn-off to most agents. The reserve and bidding process, as well as how the fees are determined, are all a mystery.

Basic concepts

Before exploring the various auction models that are out there, it’s important to be familiar with some basic terminology.

From the seller’s perspective

In virtually all auction models, a key decision the owner must make is to decide whether there will be a "reserve." The term "reserve" means that there is a minimum price that the seller must receive; otherwise the seller will not sell the property. "No reserve" means that the owner has agreed to sell at whatever the highest bid is at the auction. Auctions where there is no reserve usually garner the most interest.

In the traditional auction model, the auction company handles the marketing as part of its fee. For the online models that work similar to eBay, the owner or an agent generally handles the marketing. The same is true with probates. The agent usually handles the marketing, while the court handles the overbids and sale process.

From the buyer’s perspective

In terms of the buyer, the auction may be held as a live event with live bidding. A second way to purchase is through a "buy it now" price that the owner sets up (much like on eBay) or the owner will take the best offer. The third model involves the owner setting a fixed price at which he or she will consider selling. Although Zillow is not in the auction business, the "Make Me Move" section of Zillow is modeled upon this approach.

In virtually all auction situations, including probate, bidders must do their own due diligence prior to the auction. Using probate as an example, there are no loan contingencies, no inspection contingencies or any other way out of the deal, except to forfeit your deposit, which is normally 10 percent. Bidders are required to arrive at court (or the auction) with a 10 percent cashier’s check made out to themselves.

The successful bidder immediately signs over the 10 percent nonrefundable deposit and signs a contingency-free contract agreeing to close within 30 days. The actual price is usually composed of the sales price, closing costs, and in many cases, a buyer’s premium that is added to the high bid.

What are the benefits to the buyer and the sellers of doing an auction? According to Realtor.org, benefits to the seller include:

  • Buyers come prepared to buy.
  • Quick disposal reduces long-term carrying costs, including taxes and maintenance.
  • Assurance that property will be sold at true market value.
  • Exposes the property to a large number of pre-qualified prospects.
  • Accelerates the sale.
  • Creates competition among buyers; auction price can exceed the price of a negotiated sale.
  • Requires potential buyers to pre-qualify for financing.
  • The seller knows exactly when the property will sell.
  • Eliminates numerous and unscheduled showings.
  • Takes the seller out of the negotiation process.
  • Ensures an aggressive marketing program that increases interest and visibility.

In terms of benefits to the buyer:

  • Smart investments are made as properties are usually purchased at fair market value through competitive bidding.
  • The buyer knows the seller is committed to sell.
  • In multiproperty auctions, the buyer sees many offerings in the same place at the same time.
  • Buyers determine the purchase price.
  • Auctions eliminate long negotiation periods.
  • Auctions reduce time to purchase property.
  • Purchasing and closing dates are known.
  • Buyers know they are competing fairly and on the same terms as all other buyers.
  • Buyers receive comprehensive information on property via due diligence packet.

Because many auction models actually highlight working with a Realtor, this can be one of the quickest ways to earn a commission.

See Part 2 on Monday to learn how to integrate auctions into your business.

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