Archive for April, 2007

Absolute Auction: An Industry Mystery

April 29th, 2007 by PA - Bloger

The auction terms “Absolute” and “Reserve” bring to mind different responses based on a person’s personal experience.
Buyers love real property auctions billed as absolute auctions because they believe they will slide into a great deal potentially securing property at less than market value.

Sellers have mixed emotions about absolute real property auctions. If their motive is quick turn around and asset liquidation, absolute real property auctions are a great tool. They may simply want to court a big crowd, hoping that the resulting feeding frenzy will push the hammer price higher than an auction advertised with reserve conditions or terms. Of course the seller stands to lose if the highest bid doesn’t cover the investment and expenses.

The National Auctioneers Association takes ethics and auctioneer transparency seriously. They produced a great position paper on the concept of absolute versus reserve real property auctions. Many sources cover the ins and outs of real property auctions advertised as “Absolute”. Every state in the USA has auctioneer regulations requiring auctioneers to “announce, give notice, display or disclose terms and conditions of the sale “. If an auctioneer is suspected of misrepresenting an auction in any way, buyers may have legal recourse. If the auctioneer is a member of the National Auctioneers Association, membership sanctions and penalties based on the position paper referenced above may be invoked.

An “Absolute Auction” is called an absolute auction because the buyer with the highest bid absolutely wins the sale, period. No hidden terms, no secret agreements and no restrictions of any kind maybe used during an auction billed as an absolute auction. If any terms or conditions appear that limit the size of the opening bid or limit the sale price in any way, you are not at an absolute auction no matter what it’s called.

We have seen so many variations over the years of the absolute auction, particularly in the real estate sector. The absolute “bait an switch” is our favorite: The auctioneer advertises the auction as absolute, to be sold regardless of price. The auction day comes and the sale is cancelled due to lack of interest however the auctioneer, not to disappoint, opens the auction and offers the property to the buyers with reserve. Other issues surrounding this method of sale include the way in which absolute auctions are advertised. For example the terminology, “to be sold absolute, subject to a minimum bid” is often used but what does that really mean?

Unethical auction practices are uniformly illegal throughout the USA. Steve Proffitt in Auction Law and Ethics: Absolute Remedies covers many of the issues regarding absolute auctions and references real estate auctions as being the most affected.

Trust is the key factor for any auction. Knowing the auctioneer and seller’s reputation has as much to do with a positive outcome as any label used to advertise the auction.

Auctions Reward Buyers and Sellers of Vacant Land

April 19th, 2007 by PA - Bloger

Vacant Land

While residential and commercial property real estate auction trends continue growing, the flexibility inherent in auctioning vacant land offers great deals for buyers and quick liquidity for sellers using auctions.

The stigma of distressed property sales for sellers or risky “rip-off ranchos” haunts the idea of buying vacant land at auction but with a few savvy steps, buyers can shop for vacant land auction deals with confidence. According to Will McLemore of McLemore Auction Company, LLC, in Nashville Tennessee, “ Real estate auctioneers can do more for sellers of a tract or tracts of subdivided land than they can for any other type of property. Auctioneers can market the entire property to purchasers interested in buying all the acreage and they can market individual parcels of the entire tract to buyers who either can’t or aren’t interested in buying the whole thing. Real estate agents can market both ways, but they face a challenge in deciding how to deal with overlapping offers. Auctioneers don’t have this problem. They can conduct an auction that allows all bidders, even bidders for overlapping combinations of tracts, to compete to purchase the assets for sale that day. “

Buyers can bid on parcel sizes fitting their budgets and sellers can quickly complete sales for tracts with multiple buyers.

“Property auction [land] has great appeal to sellers. Many non distressed sellers hire auction companies to conduct sales to capitalize on the fact that they can sell the entire property in a single day and yet engage both large and small tract buyers.” according to McLemore.

Auctioneers usually advise buyers to do the following: due diligence upfront: Visit the property. Do additional research even if you make a trip to see the land. Local title companies and the county courthouse assessor’s office may give you ideas about area land values. Call the local government, county, town or both. Talk to the zoning, building and land use regulation departments to make sure your plans for the land fit the permitted uses. Ask about special regulations that might apply to the land, like subdivision, septic tank, water and sewer connection, setbacks, and equipment storage rules to avoid surprises after your purchase. Find out what type of deed you will get and make sure you understand the details about utility access, road access, mineral rights, water rights and all of those other pesky details that can haunt you later.

Buyers should know these details before buying any vacant land no matter which method used. The best results go to those that do their homework when shopping for vacant land at auction. To avoid buying that “River Front Property” that’s really swamp land or that “Mountain Retreat” with access only by parachute, auctioneers advise clients to shop wisely.

Buyer’s Premium Dynamics

April 17th, 2007 by PA - Bloger

BP – Buyer’s Premium – A “Buyer’s Premium” is a fee charged by the real property auctioneer in addition to the successful bid or “hammer price” according to the rate defined in the real property auctions sale terms and conditions. Every Real Property auctioneer and those interested in real property auctions should read an article by Steve Proffitt about Auction Law and Ethics. His article Don’t You Just Love the Buyer’s Premium? offers an historic review of the auction process bringing out the details from the last century of auctioneer history to explain the pros and cons of the buyer’s premium.

The buyer’s premium, expressed as a percentage of the winning bid, is an additional cost to the purchaser and is payable by the purchaser as part of the total purchase price. This is the auctioneer’s fee and a portion of it is sometimes used to help pay for some of the auction marketing expenses that the seller may not have covered or as a payback to the seller for their initial outlay for marketing. In addition, this fee may be used to pay cooperating brokers that bring their clients to an auction who successfully make the purchase. It should be noted that in some areas of the country such as Colorado and Minnesota, local auctioneers are charging the seller the auctioneer fee similar to the standard broker’s commission. However, the trend for auctioneers has certainly been to switch to the buyer’s premium.

The North Carolina Auctioneer Licensing Board offers this detailed definition and regulation of the BP in their Auction Terminology section of their website.
“Buyer’s Premium”
A fee charged to buyers at some auctions. The buyer’s premium is a percentage that is added to the last or final bid amount to determine the actual selling price. If the item selling is personal property, the sales tax is figured on the bid price plus the premium. If the item is real estate, the sale price (what is recorded on the deed) is the bid price plus the premium. Using the buyer’s premium is the seller’s decision and should be clearly stated in the auction contract. The buyer’s premium is paid over to the seller, unless the seller transfers this right over to the auctioneer or auction firm in the auction contract. At all auctions that include a buyer’s premium, the amount of the buyer’s premium shall be announced at the beginning of the auction and a written notice of this information shall be conspicuously displayed or distributed to the public at the auction site.

As Steve Proffitt explains, today’s auctioneer faces overhead and marketing costs for the seller that might discourage a seller from using real property auction to move their property. By charging the seller a smaller fee for the marketing and auction expenses, the auctioneer, “still covers expenses and makes a reasonable return or profit by adding the BP”.

Home Builders Turn to Real Estate Auctions to Move Inventory and Make Margins

April 8th, 2007 by PA - Bloger

It’s no secret that new housing sales suffer from the same difficulties challenging the real estate industry in all categories. Long drawn out transactions make both seller and buyer suffer needlessly. Alternatives exist with tangible financial benefits for buyers and new home sellers alike.  Real estate property auctions offer satisfaction for both sides. We predict builders and buyers will increase their use of real estate property auctions as they experience the results and value of this service.

According to an Associated Press article at MSNBC,  D.R. Horton, CEO, Donald J. Tomnitz, reported that his company will build 35 percent fewer homes this year and will struggle to find buyers for much of their inventory.

The U.S. Department of Housing and Urban Development issued a February press release covering new residential sales estimates for January 2007,  20.1 percent lower than January 2006 sales estimates. They go on to say that the current inventory, “… represents a supply of 6.8 months at the current sales rate”. Their prediction makes for a long wait for sellers to hang on for market adjustments.

Auctioneer, David V. Johnston, President of the Fort Lauderdale area Hammersmiths Auctioneers Inc., sounds optimistic about the role that real estate property auctions will play in the future for home builders. He features a new construction offering that languished on the market with a broker for over three months. He says this well respected new home builder holds additional inventory that he expects to auction if the April 14th auction goes well.

Johnston feels that there maybe enough new housing in his market area to meet the need for several years with construction of townhouses and condominiums still going strong. As a result, Johnston sees more interest from builders and feels that auctions offer builders “good margins for their efforts”, even in a slow real estate market.

We asked Mr. Johnston if he expected the seller to offer any special concessions due to the slow market and he replied, “No, not yet although there is always room at the auction to include incentives from the seller. Due to the local situation buyer discounts are possible”.
He still sees new home builder real estate property auctions as a growing trend in his area. “Yes, absolutely things are going to get better and better for auctioneers”, according to Johnston.

Builders are increasingly turning to real estate property auctions across the country and their ability to turn inventory into cash quickly. With Hammersmiths Auctioneer’s new home auction just weeks away, Johnston said the paint was drying, “as we speak”. Good construction planning matched with a well timed real estate property auction adds one more reason to check into this increasingly popular way to clinch the deal and leave buyers and sellers smiling at the end.

The Subprime Lending Crisis Hits Home For Auctioneers and Real Estate Investors

April 8th, 2007 by PA - Bloger

The controversy swirling around subprime mortgage lending has grown so intense in recent months that it has escaped the confines of the real estate industry, attracting widespread media attention and prompting a congressional investigation.

Those who support subprime lending argue that this practice makes the dream of homeownership possible for the credit-challenged buyers who comprise a growing percentage of the American population, while also boosting the national economy in the process. Opponents of subprime lending believe that these practices exploit the poor and other marginalized groups, also arguing that the economic gains fueled by subprime mortgages may prove to be short-lived and illusory.

Recent regulatory changes in the once strictly-controlled mortgage lending industry have given rise to an array of questionable lending practices, according to industry analysts. Most alarming is the increasingly common practice of approving credit-challenged buyers for interest-only loans without considering the buyer’s ability to cover the full interest and principal payment that will apply after the introductory period.

At the current juncture, it is estimated that as many as 12-15% of all subprime mortgages that have been granted in the last two years have already entered the foreclosure process. According the Center for Responsible Lending, an industry watchdog group, the foreclosure rate for subprime mortgages could skyrocket to nearly 20% by the end of 2007.

No matter which side of the subprime lending debate you agree with, one thing is irrefutable — the current crisis in the mortgage lending industry is likely to result in a flood of foreclosed properties that will be heading to auction in the near future. In some major metropolitan areas, it is now common to see 3,000-4,000 foreclosed properties hit the auction block each month, a significant increase from the per-month averages seen even a year ago.

If there’s a silver lining to be found in all of this, it may be that the increasing rate of auctions could offer unparalleled opportunities for investors adhering to the age-old formula of “buy low, sell high.” The sheer variety in the stock of properties now available in many areas of the United States will likely benefit investors who focus on this niche market.  Auctioneers will also be afforded an increasing amount of opportunties to assist the lending industry in the disposition of assets in the accelerated format.  Where in the past, lenders depended on a very tight network of brokers to sell the assets, now they will need to move these properties at a much quicker pace. Lenders have found that real estate auctions are the most efficient method of doing this and are using this option more and more.

Also, although the current situation looks grim for subprime lenders, most experts expect that the long-term damage to the housing market and the larger economy will be minimal. In a recent interview, Roger Cole,  director of the Fed’s banking supervision and regulation division, reported that little or no “spillover effects” related to the imploding subprime lending market had yet been observed. Indeed, many industry observers contend that a return to more stringent lending practices will probably prove to be a net benefit for the housing market’s long-term earnings and stability.

Real Estate Auctions Continue to Gain Acceptance Nation Wide

April 6th, 2007 by PA - Bloger

If you thought real estate auctions where only for emergency liquidation, foreclosure or bankruptcy, think again. In today’s challenging real estate market real estate property auctions are a growing trend and one of the fastest growing weapons in the quiver of tools that home builders, lenders, developers, as well as single family home owners can use to get the price they want, faster and with less worry then ever before. 

Real estate property auctions are the fastest growing method of real estate transactions in the USA. Any negative stigma is changing due to a combination of trends that impact the way people think about auctions. The quip, “Yeah, I bought it on E-Bay”, has become a party joke punch line, yet it tells of a growing acceptance of auction as a legitimate way of doing everyday business and finding what you want at a price you want to pay.

On March 25th, Arizona Republic reporter Dianna M. Náñez wrote, “More than 50 percent of the 88 Valley homes up for auction Saturday in downtown Phoenix got bids that met or exceeded the sellers’ minimum price.” According to Náñez, all sellers got to approve the final bids.  “As traditional real estate sales came under pressure in the recent slowdown, property auctions for houses have become one way for sellers and brokers to generate both buzz and, hopefully, closings.” Prior to any slowdown, auctioneers reported that a non distressed real estate auction communicated to the buyers properly fair just as well, if not better, than a traditionally negotiated transaction through a real estate broker and certainly a lot better than a for sale by owner.

RSI Media reports that real estate auctions are coming of age in Maine. The RSI Media article offered auction enthusiasts positive comments. “With an auction, you get a higher price — fair market value or better,” said Farmington real estate broker and auctioneer Adrian Harris, owner of Harris Real Estate, Appraisal and Auction Service. The report went on to say that, “His wife, Debra, said many sellers prefer the auction method. It eliminates having to constantly show your property. There are two open houses and a showing on the day of the auction and that’s all. People like that.”

While the traditional real estate broker contract and MLS sales listings won’t disappear any time soon, real estate property auction is a real estate sales technique that is here to stay, in good times as well as bad. Now when you show your new home to admiring friends, in the middle of the tour of the master suite and that clever built-in entertainment center, you may find yourself saying, “yea, I bought it at a property auction”.

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