To Auction or Not to Auction? That is (Often) the Question
The article posted below was originally published on DailyProperties.com in January, 2014…
Auctions are traditionally considered an end-game strategy for the sale of residential real estate, especially for luxury properties. Typically, a seller first checks other strategies off the list – whether they are price reductions, a change in listing brokerage, or other methods – before deciding to offer the property for sale at auction.
There are many reasons real estate auctions are viewed in this fashion when it comes to the sale of multi-million-dollar properties. After all, auctions were the chief tool used to liquidate many properties during the Great Depression, and the images of those sales on the courthouse steps have burned deep and lasting impressions into America’s memory. Additionally, financial institutions and courts still hire auction companies to perform ”bulk” or “liquidation” sales in order to clear excess real estate inventory or to jettison unwanted or non-performing real estate assets, mostly at very low price points.
However, there has always been a relatively small, but strong contingent of the real estate auction marketplace dedicated to the sale of multi-million-dollar properties on behalf of sellers who are not in any type of financial distress. In recent years, the niche occupied by these firms has been growing, as more wealthy property owners begin to understand the important role auctions play in luxury real estate markets.
Despite the growth of these firms, there is still some debate about the real estate auction process, and how it compares to the traditional listing process. While there are many metrics by which these methods of selling real estate can be compared, the following are the chief points on which a simple comparison can be made. (Keep in mind this analysis is primarily geared towards the sale of multi-million-dollar properties, which come with their own unique considerations that may not apply to the broader real estate market).
1. The “Time Value of Money.” While this principle has been explained in many different ways, it essentially focuses on the value (or buying power) of money today, versus the value (or buying power) of that same amount of money in the future. In many luxury marketplaces, especially secondary home or vacation areas, listings languish on the market for extended periods of time. Unfortunately, time literally is money, as there are significant costs to carry and maintain these properties, which over time chews into the total amount of cash the seller ultimately gains upon sale. In an auction, a sale is often achieved within 4 to 6 weeks, with the closing 3-5 weeks thereafter. This dramatically reduces the seller’s costs of carry and in turn, increases the cash in his pocket upon sale.
2. Certainty. In the traditional listing process, there is almost no sense of certainty. After the For Sale sign is placed in the front yard and the initial burst of brokerage marketing is completed, even the best agents often resort to playing the waiting game until a buyer (hopefully) comes along. There is no ticking clock and no time pressure on the buyers to perform. In an auction, there is a specific date of sale and a well-defined timeline on which the property is marketed to the public. This creates tremendous time pressure, which forces buyers to perform when they otherwise might have sat back and waited for yet another reduction in the listing price.
3. Confidence in Finding Real Market Value. Often times, it is difficult to identify the market value of unique luxury properties. As such, real estate agents and sellers often list properties at the highest potential price (a figure which is rooted largely in guesswork rather than in verifiable data). This places them out of touch with real buyers, who always view the seller’s property through a different lens. As a result, offers from buyers are rare, and when they do come, they are likely based on the buyer’s best attempt at a metrics-based price, which is often not aligned with the seller’s potential price. In a properly staged auction, buyers are encouraged to name their own price for the property. When the thorny issue of asking price is removed from the equation, previously disinterested or hesitant buyers become excited about the opportunity to place their own value on the property without worrying about market metrics or what the seller wants. This results in a pool of buyers who are vying for the property at the same time (that is, Competition: every listing broker’s dream). Through the competitive bidding process, the true market value of these unique properties is discovered. And because many buyers have competed to pay the (presumably) highest and best price their competition will bear, it creates a quite literal definition of the term True Market Value, giving the seller confidence that he has sold for the right price.
4. No Negotiations. No Contingencies. No experienced luxury real estate professional ever counts his money until the closing has occurred. This is because high-net-worth individuals are especially shrewd negotiators. They’re also particular about their inspections and due diligence. As a result, more than half of the contract offers for luxury properties never make it to closing. In an auction, there are no such negotiations or contingencies. The terms of the sale are generally very straightforward, and much of the due diligence has been done in advance for the buyer’s review. The buyer then owns the property once “the hammer falls” at the auction, and risks a default and significant financial penalty if he does not close on the property. Because of these stiff penalties in a buyer default, it’s extremely rare for an auction buyer to rescind on a purchase.
5. The Best of Both Worlds. One of the most important points to consider when comparing auctions to the traditional brokerage process is in fact not a point of comparison at all. Most luxury auction companies endorse a “Best of Both Worlds” approach in which the auction firm and the existing listing brokerage cooperate for the auction sale. This offers the seller a myriad of benefits, such as two streams to source buyers, two marketing prongs, and additional manpower. Not to mention, as most auction firms operate at a regional or national level, they do not possess the intimate, nuanced knowledge that is required to effectively operate in some of these luxury niche markets. The “local” agent can therefore bring his precise market knowledge into the auction program, amplifying the auction firm’s procedural expertise with his geographic market expertise.
About the Author: Trayor Lesnock is the president and founder of Platinum Luxury Auctions, a market-leading auction firm based in Miami, Florida. Throughout more than $325 million in completed luxury auction sales to date, Mr. Lesnock has been dedicated to upholding the highest standards of excellence and integrity in every transaction. This approach has become a hallmark of the Platinum team. The firm focuses exclusively on the sale of multi-million-dollar properties on behalf of wealthy, non-distressed sellers. Learn more at PlatinumLuxuryAuctions.com.