This is the clear lesson from a recent Rhode Island Superior Court decision involving the…
Buyers and Sellers Need Protection at Auction
as published in the Providence Business News, February 15-21, 2010
Selling property at auction has become increasingly popular, particular for condominiums and some high end residential properties, given the shattered real estate market.
Sellers include owners of single family residences, usually high-end properties that have sat on a stagnant market for some time, given the limited buyers who can afford a multi-million dollar purchase price. But the largest group of sellers is owners of multiple units, usually condominiums. They may be developers unable to sell in a difficult market, investors who have taken over the developer’s position in the project, or lenders who have either taken the property by foreclosure.
Buyers may be investors but are more likely than not ordinary purchasers who are attracted to auctions by the promise of a bargain.
And while auctions may result in owners finally selling properties they have unsuccessfully marketed for months, or even years, and buyers getting their dream house, perhaps at a substantial bargain, auctions are not without risk for both buyers and sellers.
The first question for a seller is whether or not an auction is the most advisable way to sell the property. Often the market answers that question. Months of unsuccessful conventional marketing often lead a seller to try an auction.
Sellers must then decide what type of auction to hold:
- an absolute auction, where the highest bid wins, with no minimum required;
- a minimum bid auction, where bids below a disclosed minimum will not be accepted;
- the reserve auction, where the seller has ultimate control, with the right to accept, reject or counter the highest bid.
The absolute auction appears the most risky for the seller, as the property could sell for far below its market value. However, many auctioneers say absolute auctions attract the most bidders and the most excitement for just that reason—the possibility of a spectacular bargain. And that excitement and enthusiasm among more bidders can lead to higher bids and a better sale price for the seller.
John Hodnett, who specializes in high end properties for Lila Delman’s Narragansett office and whose firm has its own online auction service, claims absolute auctions are the most successful, although the seller obviously does not know what its selling price will be.
Stephanie Wilkinson, Executive Vice President of Boston’s Accelerated Marketing Partners, which handles auctions across the country, favors the published reserve or disclosed minimum price auctions.
Selecting the right minimum reserve is critical, according to Wilkinson. It must be low enough to get buyers off the sidelines, but fair to the owner if the units do not sell above the minimum.
Auctioneers often set minimums at below what they believe the market will be.
Her company markets and auctions multiple unit projects, today almost all condominiums. In the past year her company has sold approximately 700 units at auction and another 700 units following the auction. She believes the published reserve method gives the best indication of market value, which is important for a seller in seeking to sell the remainder of the units that do not sell at the auction.
Sellers must also be careful to select the right auction company. As Accelerated Marketing Partners’ Wilkinson notes, the success of the auction depends on careful and detailed pre-marketing of the auction, including several weeks of access to the units before the auction. The goal of the auctioneer is to drive a year’s worth of traffic through the project in 3-4 weeks.
Buyers have their own risks. They must do their homework. They must read and understand the auction terms and conditions, as this will govern the sale. They must read and understand the purchase and sale agreement, as if they are the successful bidder they will be expected to sign it on the spot.
Buyers should decide whether to have an inspection of the unit done before the auction, which is an additional expense.
Since most of the auctioned properties are condominiums, it is critical that the buyer investigate and understand the financial health of the condominium association. Certain unit owner delinquencies may affect the ability to get an appraisal of the unit, which may adversely impact financing.
Buyers must also understand what rights the developer retains. Can the developer withdraw property from the project? Must all improvements and amenities shown on the project plan be built?
And both the seller and buyers must be concerned about whether or not the units can be financed through conventional sources.
All that being said, Accelerated Marketing Partners Wilkinson believes that auctions are good for sellers and buyers.
“There is a stalemate in the market today over what is market value”, she says, explaining why it is so difficult to sell properties in this market. “Because of the uncertainty of where the market is, auctions give buyers confidence because they are bidding against other real buyers, in $1000 increments. Value is being confirmed by the other bidders.”
With auctions, the watch words may be” Caveat Emptor” and “Caveat Venditor”—Let the buyer beware and let the seller beware. In which case, both may do well.