Marty's Auction Blog

Why do auctioneers use a “secret” reserve selling price?

This question has been posed to me many times usually by a real estate agent or broker.  And now that auctions are becoming a much more popular way to sell real estate, I am beginning to see some “auctioneers” publish their reserve selling prices.  If they do it’s a pretty good tip off that this is someone new to the auction business or they don’t use auctioneers but sell through a seal bid auction format or they are a real estate broker getting into the auction business.  The reason being is that Realtors have a very difficult time working with out a list price. If they have been in the brokerage business for any amount of time at all, a “list price” becomes part of their DNA. For many Realtors, selling a property without a disclosed “list price” is like walking a tie rope without a net. For example a group of ReMax real estate brokers file suite with an auction company in Southern CA for fraud because they did not advertise the reserve selling prices of the properties they were auctioning. When their clients high bid was rejected by the seller and the reserve was revealed the ReMax agents accused the auction company of a bait and switch scheme.  They evidentially did not hire an attorney with much auction experience however, it would have been a very simple matter for their attorney to consult the US Universal Commercial Code ( UCC - the law governing all auctions) to realize that the auction company and their sellers were within their right to accept, reject or counter the high bid if it did not meet the seller’s reserve selling price.  A reserve selling price may or may not be made public, there are no laws requiring it to be made public.  Another part of the UCC that buyers should be aware of, but may not, is the difference between an absolute auction and one with reserve. Absolute auction means the property will absolutely sell to the highest bidder regardless of the high bid price.  Also the term Absolute auction or auction without reserve must appear somewhere in the advertisement for it to be an absolute auction.  If the advertising does not contain one of those phrases the auction is assumed to be with reserve. Nowhere in the advertisement must the auctioneer advertise the auction as a reserve auction in order for the property to be sold with reserve - disclosed or otherwise. So if you do not see “Absolute Auction” in the ads then the property will sell with reserve.

Has your Realtor become an Auctioneer?

Realtors use a static pricing system to present a property to the market.  Typically a list price is determined, based on comparable sales data, appropriate adjustments for time, and in this market an awful lot of guess work.  The property is advertised and placed on the local MLS and probably Realtor.com. Open houses are scheduled and a realtor usually sits in an empty house for the better part of a Sunday afternoon.  Then they wait, and wait and possibly wait some more for the phone to ring.  You start to see why I’ve call it a static pricing system. Without a mechanism to encourage competition or create urgency on the part of the buyer, the seller can feel as if they are being circle by sharks waiting for a sign of weakness.  Therefore, most Realtors will suggest to their sellers they reduce the list price by 5% or so every month or two until a buyer bites, pun intended.  In effect they have become auctioneers.  Wait a minute doesn’t an auction start with a low bid and work its way up?  In a traditional or western style auction they do, but there is an auction that works the other way around. It’s call a reverse auction or Dutch auction, where the price comes down so much over a given amount of time, until the first buyer to raise his hand becomes the winning bidder. That’s what realtors are asking their clients to do in the current buyers market.  It appears safe but its reactive and allows the buyer to drive the transaction, without I might add any form or competition between buyers, just first hand in the air (or signed offer) becomes the winning bid.  

NOT AN AUCTION BUYER ??

We auctioned a home and acreage the last weekend in June and it did not sell at the auction. It was really a bank ordered auction but a complicated sale due to the local bank loan being guaranteed by the FmHA (the Feds). Which means that decisions are not usually made fast enough, but in our case they did a pretty good job of working with us and our time line.

After the high bid at the auction was rejected $96,000 (we knew it would be) we put an ad in the local paper and advertised it at FmHA's reserve selling price of $110,000.  So the list price was a take it or leave it price, but it was about 25K less than anything else even closely related to our property currently listed. The bank was motivated and it was a reasonable reserve selling price.  We had a ton of calls on the ad, I showed it 14 times last week, and we received a full cash offer within the week, but of course we would accept nothing less.  It's been a while since I've had to work as a Broker (I'm licensed in three states), which reminded me why I don't do listing and it refreshed my memory concerning a couple of things we should be doing at our opens.

Red Flags

I do a lot of training with, new to the business, auctioneers. Most are excited about being in this new profession and approach it as a real estate agent would approach booking new listing. Problem is, in this business we are all about selling and not about obtaining new listing. I have a complete section in my Real estate Boot camp on qualifying sellers.

Additionally, I put together a, sort of down and dirty, way to determine if in fact we can be of any help to a particular seller.  You see, I'm not in this business to see how many listing I can book, or conducting auctions that I know we have no hope of selling or spending tons of my clients money just to see my company's name in the newspaper.  I'm in this business to help people solve a particular problem AND I know that for 75% of some people (residential sellers) I won't be the right choice, and for 95% of other people (Ag land sellers) I'll be their best choice.  Anyway, here's my list.

BANKS MANAGE RISK ?

Everyone knows by now that we are in a housing “correction” to put it nicely. The price of homes has been in a free fall for the last twelve months (at least) and the market for new home construction is, well, ugly. The largest builder in Iowa closed its doors a few weeks ago and told its employees to go home. And it had over 200 homes in various stages of construction.

In a recent meeting I had with a senior banker he indicated that his bank did in fact have  foreclosure inventory on the books and would have more. But the Polk County Sheriff’s office was backed up four months due to the high volume of properties going to sheriff sales. WOW that is saying something especially for a conservative (financially) state like Iowa.

The Puzzle

A few days ago I had an email conversation with one of my students from the last session at auction college. I asked him what he thought was the most important component of a real estate auction. I had a pretty good idea what his answer might be, as I’ve asked the same question to many new graduates and usually get very similar answers.

He said, “If I had to choose two of the most important it would be marketing to the correct buyers to get them there and then connecting with them on sale day”. 

The reason I ask recent auctioneering graduates this question is that most are very excited about the opportunity to get in front of a crowd and “do their thing”. Therefore, they usually answer something or another about being a good and effective bid caller, etc. However, this student's thoughtful answer demonstrated some insight into the business side of real estate auctions. Here’s the parts to the puzzle as I see them and through working with many other very successful auctioneers over the years.

Bid Assistants, Who need’s em!

I attended a friends auction the other day. He was selling 240 acres of farm land that he was dividing into four tracts through a Multi-Par method.  I went mainly because he was using a buyer’s premium which is becoming more & more accepted in the area but not completely accepted. So I wanted to see what the buyer reaction might be to the BP. You can read about my views on the BP in my "Smoke and Mirrors" post.

The BP seemed to be a none issue, but what surprised me was that he was conducting a real estate auction without using bid assistants or ringmen.  Not only was it a RE auction but a Multi-Par real estate auction to boot.( Multi-Par auction formats allow the bidders to pick and choose which parcels or combinations of parcels to bid upon. It’s a wide open format and may take up to 6 hours to complete.)

Smoke and Mirrors Marketing

No Commission ??
The seller will pay no commission to the Auctioneer, the buyer will pay our commission through a buyers premium.  Read carefully, and see if you can find who really pays the auctioneer.

The use of the buyers premium (BP) by auctioneers has been in practice since the 1960s. It’s charged by the auctioneer and when used, the seller pays no sales commission, ya right !

The reason I subtitled this entry, “smoke and mirrors marketing” is due in part to the way in which most auctioneers explain or “pitch” the BP to prospective sellers.  Most, incorrectly, pitch the BP to sellers as a way to sell their property without paying the auctioneer a sales commission.  The second incorrect statement made by most auctioneers, is the auctioneer charges the BP. The pitch usually goes something like this;

SOLD in 45 to 60 days

SPEED
Faster is always better? Usually there is a penalty for more speed. In Aviation more speed requires less drag, less weight, more lift and more POWER-Thrust. Usually one must give to get, but that’s not always the case.

If I could sell your property for 30% less than your last list price in 45 to 60 days, what would that time be worth to you?

Let’s use a real world example. A commercial building, light assembly to be exact, is listed for $2.1M.  Most local experts predict time on the market through an ordinary sales method to be approximately 14 to 24 months.  Total monthly holding cost for our sample building are $27,000.  If I sell this building in 60 days for $1.5M, (which we did) the owner would have to sell this building at full list price ($2.1M) within 22 months in order to achieve the same value that we delivered. (Do the math).

Did we sell this client TIME ? Absolutely. Did he understand, Time Value of Money ? Absolutely. Did he understand the opportunity cost associated with waiting an additional 22 months to sell his building ? Absolutely.  Could the commercial broker guarantee that his building would sell 22 months later for full list price ? Absolutely NOT.

 
I have just used a technique called Dollarization.  Until your potential client can see dollars and cents, you’ll have a hard time convincing her that you are bringing value to the proposition.
This  is also referred to by Jill Konrath, “Selling to BIG Companies” as your value proposition.  Until the potential client sees your value proposition, you’ll have very little chance selling our method of marketing.

Numbers Only you say?

Download NumbersOnly.mp3

I've been in the auction business as an auctioneer for the last 17 years and involved in the industry for 26 years and teaching at an auction college for the last 5 years.

As a trained teacher (I have a BA in Secondary Ed, and a coaching lic.) I look at the skills necessary to become an auctioneer a little differently than a typical bid calling instructor. Over the years I've worked with a number of the very best auctioneers in the country. What I've learned from my experiences and my mentors is, if we get rid of all the minutia and cut right down to the quick, bid callings is all about communication. As bid callers or auctioneers (although there is a difference) we must gain rapport with a potential bidder, win their trust and convince them to bid on the item offered in a matter of seconds. If we are not communicating with that potential bidder in an effective and powerful way our efforts are lost and the potential bidder refuses to participate in the auction process.