Introduction to
Real Estate
Auction
A program by the
National Association of REALTORS®
1
Goal of This Course
• Help you increase your revenue by
introducing auctions to clients and
customers as a tool for selling and
purchasing property
2
Table of Contents
1. Real Estate Auction: The
Opportunity
2. Identifying Sellers and Properties
3. Proposal to Closing
4. Getting Started in Real Estate
Auctions
3
Learning Objectives
• Define real estate auction
• Discuss benefits of real estate auctions
• Identify sellers, properties, and markets
for auction
• Explain how to establish alliances with
auction firms
4
Who This Course Is Written For
• Agents who want to introduce real
estate auction to their sellers and
buyers
• This course is NOT intended to
certify or accredit real estate
professionals as auctioneers.
5
Approved Elective for ABR®
Designation
• Successful completion of this course
counts as elective for REBAC’s
Accredited Buyer’s Representative
(ABR®) designation.
• For more info, contact:
Real Estate Buyer’s Agent Council
www.REBAC.net
800-648-6224
REBAC@realtors.org
6
Pursuing Career as Auctioneer?
• Successful completion of this
course counts as 1st day of 6-day
NAA’s Accredited Auctioneer Real
Estate (AARE) designation.
• For more info, contact:
National Auctioneers Association
www.auctioneers.org
888-541-8084, ext. 28
education@auctioneers.org
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1. Real Estate Auction: The
Opportunity
• Defining real estate auction
• Discussing growth of this niche
• Identifying benefits
• Explaining how agents can work
with auction firms
8
What Is Real Estate Auction?
• Intense and accelerated real estate
marketing process that involves the
public sale of property through
competitive bidding
9
What Is Real Estate Auction?
Effective way to:
• Convert real property into cash
• Turn unwanted property into
liquid assets
• Achieve a sale in a specified
time frame
10
What Is Real Estate Auction?
Was typically regarded as sales
method of last resort for residential
properties in distress
11
What Is Real Estate Auction?
Auction beneficial for many types of
real estate:
• New-home construction
• Luxury and vacation homes
• Agricultural land (farms,
ranches, and orchards)
• Commercial real estate
12
Fast Growing Business Niche
Auctions are on the rise:
• From 2003 to 2007, residential
real estate auctions grew 46.6%.
• Land and agricultural real estate
grew 36.3%.
• In 2007, real estate auction as a
whole generated more than 58.4
billion dollars in sales.
Source: National Auctioneers Association
13
Benefits to Seller
• High seller holding costs are
eliminated.
• Seller sets terms and conditions.
• Property sold at true market
value
• Seller knows when the property
is expected to sell.
14
Benefits to Seller
• Reduced time to market and
show property
• Large number of pre-qualified
buyers
• Competition among buyers
• Buyers make a firm decision
about the property.
15
Benefits to Buyer
• Motivated seller
• Reduced time to purchase
property, incl. negotiations
• No contingencies
• Favorable financing possible
16
Benefits to Buyer
• Exciting method of purchase
• Fairly and open competition
• Buyers—not sellers, agents, or
appraisers—determine property's
fair market value.
17
Benefits to Agent
• Opportunity to earn commissions
• Expanded services to sellers and
buyers
• Properties exposed to large pool
of qualified buyers
• Properties sold within short
period of time
• Referrals and repeat business
18
How Agents Can Work with
Firms
1. Referring agent/broker refers a
seller to auctioneer, then receives
a referral fee.
2. Listing agent/broker markets
property and represents seller
during sale and closing.
3. Buyer's agent/broker registers
buyer who buys property at
auction and earns a commission.
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2. Identifying Sellers and
Properties
• Understanding sellers, properties,
and market conditions for which
real estate auctions are best suited
• Applying the two-thirds rule
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First Step in Auction Process
Analyze:
Seller
Property
Market Conditions
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Analyzing the Seller
• Seller motivated?
• Property overmarketed?
• Previous price "labeled" the
property?
• Why has property not sold?
• Seller’s reputation?
• If not an auction, what do you
suggest?
Auction is a commitment and
requires investment from the seller.
22
NOT Good Seller Candidates
• Over-motivated
• Legal issues, eg, lis pendens
• Unrealistic expectations of the
property value
• Litigious
• Unwilling to level with you
• Multiple owners with differing
goals
23
Good Seller Candidates
• Have high holding costs
• Need immediate cash
• Are retiring
• Partnership or marriage break-up
• Moving out of the state
• Want to liquidate an estate
• Are auction minded
• Listing about to expire
24
Good Seller Candidates
• Never been listed
• Already purchased another house
• Know auction will bring true
market price
• Financial problems
• Time sensitive—“just want it
sold”
• Can’t/don’t want to maintain
property
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Analyzing the Property
• Zoning
• Back taxes
• Tax assessment
• Equity and mortgage
• Property condition
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Good Properties for Auction
Owner has:
• At least 25% equity
• A lot of high carrying costs
Property is:
• Unique
• Vacant
• Difficult to appraise
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Analyzing Market Conditions
• Market conditions represent
buyer interest.
• At time of listing, market
condition must be considered.
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Favorable Market Conditions
• Dull market—too much
product, some buyer interest
• Seller’s market―high demand
and a lot of competition
• Emerging market—kick off
sales program of new
developments
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Consider Auction for All
Properties
• Residential
• Industrial
• Agricultural
• Apartment buildings
• Shopping centers
• Nursing homes
• New housing developments
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Consider Auction for All
Properties
• Property in good condition and
desirable location usually sells.
• Even property that needs rehab
or construction can sell if there is
positive demand for it.
31
Negative or No-Demand
Properties
• Cannot be given away
• Examples are properties:
 Where list price
established the upper
limit
 Have been on the market
for a long time
32
Two-Thirds Rule
•
Used to analyze market, property,
and seller
•
If two out of three are favorable,
auction should be offered to seller
as a sales option
33
Questions to Ask
•
Answering several questions helps
determine if situation is auction
candidate
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1. Seller’s Motivation
• On a scale of 1 (low) to 10 (high),
rate seller's motivation
Auction creates a sense of urgency;
important that seller feel comfortable
with this situation
35
1. Seller’s Motivation
Sellers more motivated when:
• Need quick cash
• Must sell property to finance another
• Under severe personal pressures
• Have high holding costs
• Have excess real estate
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2. Seller’s Debt-to-Equity Ratio
• Estimate possible sales price, hard
costs, auction expenses, mortgage,
and other debts
• Establishes how flexible seller will
be in adjusting sales price
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3. Lender’s Position
• Type of mortgage and interest
rate?
• Mortgage amount more than
property value?
• Lender willing to release property
for sale by auction?
• Lender allow assumption of
mortgage?
38
4. Seller Financing
• Makes a purchase more attractive
and affordable
• Consult with an attorney
• Also consider offering discounts
to buyers who pay cash
39
5. Property Condition
• “As is, where is”—without
warranties or contingencies
• Price should be only open issue on
auction day
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As Is, Where Is
• Property sold with all faults, as it is
and where it is
• Buy what you see and do not see
“As is, where is” does NOT mean
caveat emptor. Full property
disclosures are required by law.
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6. Demand Factors
• If strong interest in a property type,
better chance of achieving a good
sales price. For example:
 Last view lot in a prestigious
subdivision
 Prime highway location in
busiest commercial area of
town
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Case Studies: Two-Thirds Rule
1. Read case study.
2. Analyze seller, property, and market.
3. Identify whether seller, property, and
market are positive (+) or negative () candidates for auction.
4. Apply two-thirds rule.
5. List advantages and disadvantages of
selling by auction.
6. Answer question "Would you
recommend auction for this case
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study?" and explain why.
Case Study 1: Estate Sale
• Jan is moving into a nursing home.
• Husband died 5 years ago, and she
has not been able to maintain 125year-old house and 8 acres of land.
• Children need to sell estate to pay for
nursing home.
• Property is located 12 miles outside
town.
• Real estate market is soft.
• Neighbors have expressed interest in
property.
44
Case Study 1: Estate Sale
(+) (-)
Seller
(+) (-)
Property
(+) (-)
Market
45
Case Study 1: Estate Sale
Advantages
Disadvantages
46
Case Study 1: Estate Sale
• Would you recommend an auction
for this situation?

Yes

No
• Why?
47
Case Study 2: Business Loss
• Shanes own a home in NM and an
antique business in CA.
• Only have 6 weeks to sell home
• Adobe-style house in historic part of
town.
• Property appraised at $450K. Equity
is 40%.
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Case Study 2: Business Loss
(+) (-)
Seller
(+) (-)
Property
(+) (-)
Market
49
Case Study 2: Business Loss
Advantages
Disadvantages
50
Case Study 2: Business Loss
• Would you recommend an auction
for this situation?

Yes

No
• Why?
51
Case Study 3: Strip Mall
• Been on the market for over 5
months
• Owner cannot keep up with costs of
managing property.
• Owner has 25% equity.
• Four out of six storefronts still under
5-year leases.
52
Case Study 3: Strip Mall
(+) (-)
Seller
(+) (-)
Property
(+) (-)
Market
53
Case Study 3: Strip Mall
Advantages
Disadvantages
54
Case Study 3: Strip Mall
• Would you recommend an auction
for this situation?

Yes

No
• Why?
55
3. Proposal to Closing
• Understanding components of
auction proposal and listing
agreement
• Differentiating between types of
auction
• Discussing tasks involved in
marketing and conducting property
inspection
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Proposal Components
• Auction schedule
• Recommended type of auction
• Advertising and marketing budget
(paid by seller upfront)
• Agreed-upon terms by seller and
broker
• Name of recipient of earnest money
• Length of listing agreement
• Broker/auction firm commission
information
57
The Listing Agreement
•
•
•
•
•
•
•
•
•
•
Terms of sale
Broker commission
Date/ time of auction
Earnest money/recipient
Names of listing broker
Advertising/marketing expenses
Auction location (not mandatory)
Proof of a good and marketable title
Length of listing (60-90 days)
Escrow fees and payer of those
expenses
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Three Types of Auctions
1. Absolute auction
2. Minimum bid auction
3. Reserve auction
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Absolute Auction
• Also known as auction without
reserve
• No minimum bid
• Property sold to highest bidder,
regardless of price
• Advantage: More buyers, more
participation and excitement
• Disadvantage: No safety net for
seller
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Minimum Bid Auction
• Also known as minimum published bid
• Minimum bid pre-determined by
auction firm and seller
• When bidding reaches minimum
amount, property sold “absolute”
• Advantage: Safety net for seller
• Disadvantage: Limits number of
interested buyers
61
Reserve Auction
• Seller reserves right to accept or reject
highest bid within a specified time
period.
• Time period may be immediately after
auction to 72 hours after close.
• Advantage: Seller not obligated to
accept bid
• Disadvantage: No guarantee to buyers
that seller will accept bid
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Other Types of Auctions
• Sealed bid
• Dutch/high-low
• Multi-par, which allows bidding on
one parcel or combination of parcels
63
Online Bidding
• Continues to grow
• Today’s buyers more experienced
with electronic bidding
• Online bidding will become more
prominent in real estate auction
64
Online Bidding
Falls into two categories:
1. Static―Sale happens at one point
with one reporting medium
2. Dynamic―Bids simultaneously
reported to all bidding locations
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Problems of Online Bidding
• Deposit requirements
• Registration procedures
• Disclosure items
• Purchase contract execution
• Licensing requirements
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Purchase and Sale Agreement
• No contingencies
• Agreement made available at
auction
• Major terms read on auction day
• "As is, where is"
67
Progress Reports
• Put system in place for
monitoring marketing
• Communicate to seller
• Frequency determined by two
parties
68
Bidder’s Packet
• Auction firm packages all property
information in bidder's packet and
distributes to interested buyers
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Marketing Costs
• Most cases, seller is responsible
upfront
• Cover concentrated
promotional/advertising effort
• Illustrate seller’s commitment
70
Marketing Budget
Varies between 1%–10% of sale price.
Budget based on:
1. Quantity and type of property sold
2. Number of staff required
3. Local, regional, or national
marketing needs
71
Marketing Tasks
• Promotion
• Brochures and property information
packets
• TV, radio, and newspaper ads
• Media planning and public relations
• Preparing signs
• Scheduling
• Direct mailings/e-mail campaigns
• Property inspections and pre-auction
seminars
72
Property Inspection
Auction staff:
• Registers all attendees
• Presents brochures
• Provides bidder packets
• Answers questions
• Monitors interest and preparedness
of buyers
• Communicates buyers’ interest to
seller
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Buyer’s Financial
Requirements
• Earnest money, usually a nonrefundable deposit
• Lender commitment and/or prequalification to register
• Buyer’s premium is amount paid by
buyer to cover seller’s marketing
expenses or auctioneer’s fee
74
Auction Strategy
• Based on results of marketing plan
• Response from market
• Firm plans needed adjustments
75
Closing
• Similar to closing in negotiated
sale
• Documents vary from state to state
• Attorney or title company
representative usually attends
closing
• Earnest money can be held in
escrow account until transaction
closed
76
Split Commission
• Common for brokers and auction
firms
• Must be included in listing
agreement
• Licensed broker, not agent, accepts
a split commission from auction
firm
77
Auction Process in Review
1. Analyze property, seller and
market
2. Obtain property information and
complete due diligence
3. Develop marketing strategy
4. List property for auction
5. Set sale terms and conditions
6. Prepare sales contract with terms
and conditions
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Auction Process in Review
7. Monitor marketing results and
communicate to seller
8. Compile and package property
information
9. Prepare real estate broker
agreements
10. Begin marketing property
11. Hold property inspections and
pre-auction seminar(s), if
necessary
79
Auction Process in Review
12. Pre-qualify buyers
13. Develop auction day strategy
14. Sell property on auction day
15. Close sale
16. Pay commissions
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4. Getting Started in Real
Estate Auctions
• Finding real estate auction
properties and firms
• Working with real estate auction
firms
81
Steps
1. Review state laws specific to real
estate auction
2. Understand participation
methods, responsibilities, and
forms used
3. Select real estate auction firms
4. Attend auctions
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Step 1: Review State Laws
Specific to Auction
• Laws that pertain to selling real
estate by auction
• Auction licensing requirements
• How to obtain education
Members of the National
Auctioneers Association may check
state license laws at
www.auctioneers.org.
83
Step 2: Understand Methods of
Participation, Responsibilities,
and Forms Used
1. Referring agent/broker
2. Listing agent/broker
3. Buyer's agent/broker
84
Referring Agent
Responsibilities
• Help analyze needs, property,
and market
• Refer seller to auction firm
• Cancel previous listing
• Send notice to MLS
• Collect referral fee
85
REALTOR® Code of Ethics
Standard of Practice 16-4
REALTORS® shall not solicit a listing which is
currently listed exclusively with another broker.
However, if the listing broker, when asked by
the REALTOR®, refuses to disclose the
expiration date and nature of such listing; i.e.,
an exclusive right to sell, an exclusive agency,
open listing, or other form of contractual
agreement between the listing broker and the
client, the REALTOR® may contact the owner
to secure such information and may discuss the
terms upon which the REALTOR® might take a
future listing or, alternatively, may take a listing
to become effective upon expiration of any
existing exclusive listing. (Amended 1/94)
86
REALTOR® Code of Ethics
Standard of Practice 16-6
When REALTORS® are contacted by the client
of another REALTOR® regarding the creation
of an exclusive relationship to provide the same
type of service, and REALTORS® have not
directly or indirectly initiated such discussions,
they may discuss the terms upon which they
might enter into a future agreement or,
alternatively, may enter into an agreement
which becomes effective upon expiration of any
existing exclusive agreement. (Amended 1/98)
87
REALTOR® Code of Ethics
Standard of Practice 16-3
Article 16 does not preclude REALTORS®
from contacting the client of another broker for
the purpose of offering to provide, or entering
into a contract to provide, a different type of
real estate service unrelated to the type of
service currently being provided (e.g., property
management as opposed to brokerage) or from
offering the same type of service for property
not subject to other brokers’ exclusive
agreements. However, information received
through a Multiple Listing Service or any other
offer of cooperation may not be used to target
clients of other REALTORS® to whom such
offers to provide services may be made.
(Amended 1/04)
88
Listing Agent Responsibilities—
Before Auction Day
• Providing lead
• Canceling previous listing
• Sending notice to MLS
• Providing fact sheet on the
property
• Performing market analysis
• Providing local licensing
information
89
Listing Agent Responsibilities—
Before Auction Day
• Completing due diligence
• Conducting property inspections
• Obtaining signs, photos, and keys
• Getting bids for maintenance and
prop mgmt
• Assisting bidders with prequalification process
• Providing feedback to seller
90
Listing Agent Responsibilities
On auction day:
• Accompany successful bidder to
sign the contract
After auction day:
• Help buyers with post-auction
inspections, insurance, financing,
etc.
• Assist in pre-closing events
• Attend closing
91
Listing Agent Responsibilities
Forms used:
• Listing agreement between the real
estate broker, auctioneer, and seller
• Auction contract to supersede
listing agreement
• Pre-auction agreement outlining
responsibilities of each party
• Special auction sales contract and
addenda
• Prospect registration form
• Bidder's packet
92
Buyer’s Agent/Broker
Responsibilities
Primary responsibility is finding auction
inventory:
• E-mail lists
• Web sites
• Newspapers
93
Web Sites to Research in Addition
to Local MLS
•
•
•
•
•
•
•
•
•
•
REALTOR.com
RLIland.net
Auctioneers.org
NAArealestateauctions.com
realtybid.com
foreclosure.com and foreclosures.com
Landandfarm.com
Landbook.com
Tranzon.com
Marknetalliance.com
94
Buyer’s Agent/Broker
Responsibilities
• Showing auction inventory to
prospects
• Reading the property information
package or bidder's packet
• Helping prospects determine market
value of property prior to sale
• Registering bidder prior to auction
• Assisting bidder with choices and
auction strategy
95
Buyers Need to Provide the
Following at Auction:
• Good-faith deposit
• Personal check
• Letter of guarantee
• Identification
96
Forms for Buyer’s Agents
• Buyer registration for open houses
• Bidder registration for pre-auction
• Broker registration day of the auction
• Broker memorandum as part of the
auction sales contract
97
Buyer’s Agent Compensation
• Established in writing by auction
firm in advance of auction
• Buyer's agents need to determine
if commission is paid on bid
price, bid price plus buyer's
premium, or some other amount.
98
Step 3: Select Real Estate
Auction Firms
Auction firm should:
• Be a REALTOR® firm if selling real
estate
• Specialize in real estate auctions
• Have track record in auction business
• Be staffed with persons with
professional designations
99
Step 3: Select Real Estate
Auction Firms
Auction firm should:
• Have staff for research, marketing,
and public relations
• Provide references
• Established and financially secure
• Explain company charges and
services
• Exhibit familiarity with market
100
Step 3: Select Real Estate
Auction Firms
Auctioneer should:
• Have experience selling similar
properties
• Be able to tell you how many, what
type and what price properties he or
she has sold
• Be able to explain percentage of units
sold that have actually closed
101
All Real Estate Professionals
Should Ask
• Offering broker participation?
• Offering a referral fee or
commission?
• What are contingencies and what
disclosure documents is seller
providing?
• Will sale be absolute or will seller
have right to reject bid?
102
All Real Estate Professionals
Should Ask
• Type of deposit required of buyers?
• Is property as is? If so, what
representations re condition, title,
etc.?
• Closing period?
• What else is expected of the buyer
or seller in the agreement?
103
Buyer’s Reps Should Ask
• What are registration requirements for a
buyer's agent?
• Is it necessary to have registration form
signed by buyer in advance?
• Is a pre-bid necessary?
• Should I attend auction with my buyer?
104
4. Attend Auctions
• Is sales contract available for review?
• How easy is registration process?
• Do staff stimulate maximum bidding
potential?
• Can bidders understand cadence of
auctioneer?
• Does firm provide financial or prequalification services to bidders?
105
4. Attend Auctions
• Environment clean? Décor pleasant?
Restrooms available? Food and
beverages provided?
• Quality photos, slides, or video of the
property used during the auction?
• Auction recorded?
106
Introduction to
Real Estate Auction
Thank you for
your participation!
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