Ethical Homes

Ethical Homes is proud to announce the addition of a new service for listing agents: agent-friendly real estate auctions, where you can keep your listing (regardless of which broker you work for) and protect your commission while helping your clients get their hard-to-sell property under contract quickly, contingency-free, and for the best possible price.

Unlike so-called “courthouse steps” foreclosure auctions, where the goal is simply to get the property sold as quickly as possible, regardless of price, these auctions—more akin to those held by Sotheby’s and Christie’s, and sometimes referred to as “alternative sales”—are ideal for properties that are hard to sell using traditional methods for a variety of reasons. Answers to many frequently asked questions from agents about auctions are listed below; if you are a listing agent (with any DC-area brokerage) with a hard-to-sell property, contact us and our Certified Auction Specialist would be glad to answer any questions that you might have.

• What properties are suitable for sale at auction?
• What happens to the original listing when a property is auctioned?
• Is there any incentive to an agent for referring a property
  to auction?
• What is expected of me as a listing agent with a property in auction?
• Are there different types of auctions?
• Does every property sell when listed for auction?
• What happens if a property doesn’t sell at auction?
• What is the first step in introducing this idea to my seller?
• Who will present the details of the auction to my seller?
• Does the auction representative need to view the property in person and meet with the seller?
• How are agents and the auction company compensated?
• For what sales is the buyer’s premium due?
• When and where will the auction be held?

What properties are suitable for sale at auction?

There are three basic types of situations where auctions are an appropriate sales tool: when the seller is under time pressure, when there is a dispute over fair market value, or when the property itself is for any reason challenging to sell in the current market. Some examples include:

• Homes on market for extended period of time, especially those “stranded” by peaking/volatile markets
• Upper bracket/luxury homes
• Unusual/Extraordinary properties, especially those with few appropriate comps
• Estate/Divorce sales, especially when heirs cannot agree on market value of the property
• Bank/REO properties
• Relocations/Retirements
• Overbuilt/underbuilt properties
• Properties with restricted access
• Sellers requiring as-is condition/no contingencies when market will no support those requirements
• Properties hurt by factors outside of property bounds (e.g. nearby industrial areas or abandoned buildings)
• Stigmatized properties

What happens to the original listing when a property is auctioned?

Many agents are leery of suggesting auctions to their clients, especially if they have prior experience with typical auction firms that require the seller to cancel their listing prior to entering the auction. The auction firms that we work with, on the other hand, are “pro-broker”: all sales associates continue to stay involved in the transaction regardless of the brokering company, and the listing agent keeps the listing, continuing to advertise it in the local MLS, with commissions of 3% for the listing agent and 2% for the buyer’s agent (if any).

Is there any incentive to an agent for referring a property to auction?

The biggest incentive is that an auction can be the best tool for an agent to get their client’s property sold now. Other benefits to the listing agent can include:

• providing listing agents with a “double-sided” transaction (as
  the majority of buyers at auction are unrepresented)
• salvaging listings with sellers prepared to go to another brokerage
• exposing the listing agent to many unrepresented buyers looking to
  go to settlement quickly

What is expected of me as a listing agent with a property in auction?

The listing agent is very important to the auction process. During the pre-auction phase, you will be expected to hold the property open (usually 3 times) and run classified ads and place signage (provided) to promote those open houses. Your name and contact numbers will be listed in the ads and in the catalog, so you will be receiving the majority of the calls about your property, and will be expected to respond to them as diligently as you would for any other listing. Finally, you will also need to be present on the day of the auction itself. Remember that the more you do in conjunction with the auction marketing, the more you increase your probability of success.

Are there different types of auctions?

There are three basic types of auctions: “absolute” auctions, “reserve” auctions, and “minimum bid” auctions.

In an absolute auction, the property will be sold to the highest bidder, regardless of price; there is no “floor” price established, and no minimum bid. This is a “pure” auction, and generates the maximum amount of competition among buyers; however, although the final “gavel price” at an absolute auction is usually higher than for other auctions, sellers at absolute auction must be prepared to cover any deficit between the gavel price and the mortgage amount if the gavel price is lower than the payment amount on the mortgage. As a result, absolute auctions are usually best for high-end properties (whose owners usually have the resources necessary to cover any deficit) or very low-end properties (which usually have minimal mortgage balances), or for risk-seeking sellers.

In a reserve auction, the auctioneer will negotiate a “release” or “reserve” price with the seller, above which they agree to sell the property, and this price is not published in the MLS or during the auction; the high bid will be presented to the seller in contract form and the seller will reserve the right to accept or reject that bid without penalty. Though on the surface this appears to be the “safest” auction, it often generates less interest, as buyers are hesitant to agree to put in an offer without an assurance that it will be accepted if it is the high bid; occasionally, this can even result in no offers above the reserve price. As a result, it is usually best for use in a hot seller’s market when the property has not been listed previously.

In a minimum bid auction, the auctioneer will propose a minimum starting point for the auction before the seller signs up. This number is not a suggested sale price, and is instead used to generate interest in the property, allowing buyers to bid the price of the property up to the desired level while still providing some measure of reassurance for the seller in terms of a minimum price for which the property could sell. These auctions are best suited for slowing markets, and in particular for existing, unsold listings.

Finally, for all auctions, note that all sales are non-contingent, with properties delivered in as-is condition, the buyer paying all legally allowable closing costs, and with settlement within 30 days after sale.

Does every property sell when listed for auction?

No, not every property will sell through the auction process. The biggest factor limiting the odds of sale at auction is the presence of a reserve price below which the seller may back out of the sale; although most auctioned properties usually sell for more than the reserve price that a seller would choose, the presence of the reserve price discourages buyers, and often actually results in a lower final price, or occasionally in a property not selling at all. By holding an “absolute” or “minimum bid” sale (using the minimum bid recommended by the Auctioneer), you are almost assured that the property will be sold, with settlement taking place within 30 days of the auction.

What happens if a property doesn’t sell at auction?

Many properties don’t actually sell at the auction itself, because an auction listing is a process, rather than an event; in 2005, for example, 60% of properties actually sold in the pre-auction phase, and 25% sold at the auction itself. If a property is unsold after the day of auction, we will go back to all interested parties and attempt to negotiate an offer that is acceptable to the seller; although there are no guarantees, almost all properties do get sold post-auction.

What is the first step in introducing this idea to my seller?

Contact us for our Auctions For Home Sellers booklet, which you can share with your sellers and which offers them a detailed overview of the process.

Who will present the details of the auction to my seller?

Because auctions are very different from traditional sales, it is important to make a careful presentation to the seller as well as provide the seller with an opportunity to get answers to all of their questions. Once you have introduced the basic concept of auctions to your seller, then, and provided them with our Auctions For Home Sellers booklet, we will coordinate with you to have one of our auction professionals talk directly with your seller to explain the details of the program. After the auction representative has spoken with your seller, they will update you on how the discussion went; it will then be your responsibility to follow up with the seller to determine if there is any interest in pursing the auction process for selling their home.

Does the auction representative need to view the property in person and meet with the seller?

Again, we consider the listing agent to be an integral part of the process, and expect that agent to provide the expertise in the micro-market of an individual neighborhood; as a result, the auction representative usually does not view the property in person. With regards to meeting with sellers, remember that the most effective auctions are ones with no reserve price, which some sellers can be hesitant to choose; in our experience, having the presentation of the auction option occur by phone actually makes the discussion more about the auction process than about the sellers’ property, which in turn creates some “distance” that allows sellers to more easily accept the preferred auction programs.

How are agents and the auction company compensated?

Once a property is listed for auction, the seller is no longer on the hook for paying their agent’s commission; all commissions in auction listings are paid through a “buyer’s premium”, usually paid solely by the buyer to the auction company and then split with the listing and buying agents. Buyer’s premiums can vary greatly in the industry, with upscale auction houses such as Christie’s and Sotheby’s charging 22% of the final “gavel price”; the auction company with which we work charges only a 10% buyer’s premium, which local auction buyers have proven more than willing to pay.

For what sales is the buyer’s premium due?

The buyer’s premium will be paid on any sale that is consummated from the date the seller enters into the auction program and through 60 days following the auction, including those sold during the pre-auction phase. Note that offers to purchase that are received during the pre-auction phase can come in two forms—some contain language confirming that the buyer will pay the buyer’s premium separately, while others contain no such language, in which case it is assumed that the buyer’s premium is included in the offer price, and the seller is obligated to pass that premium on to the auction company—so it is incumbent on the listing agent to make sure that the seller understands which pre-auction offers “include” the buyer’s premium and which ones do not; this is only a concern for pre-auction sales, as buyers pay the premium directly to the auction company for all sales at the auction itself.

When and where will the auction be held?

The auction will generally take place between 5-6 weeks after the seller has signed a marketing agreement. So-called “ballroom” auctions at off-site locations have proven to result in a more “clinical” attitude among buyers, and thus in more conservative bidding; thus, auctions generally take place just outside of the property, and to maximize buyer interest, multiple auctions are usually held on the same day.