Auction Method vs. Traditional Listing
There are obvious differences between the auction method and the traditional listing real estate method. Many properties are suitable for the auction method of marketing compared to the traditional listing real estate method—sometimes referred to as “private treaty” sales. There are advantages and distinct differences in each method, but there is one common goal shared by both the Auctioneer and Real Estate Professional: to successfully sell the real estate and meet the needs of the seller. By understanding what each method has to offer, Auctioneers and Agents can take the “team approach” to serve the seller’s best interest.
When using the auction method, there is a defined time to sell the property with a determined sale date. By specifying a sale date, a sense of urgency is created with potential buyers and this becomes a catalyst for the entire sales process. The auction method places multiple qualified buyers together in the same competitive marketplace, at an established time of sale. The seller is in control of time, thus controlling the financial impact of carrying costs.
With a traditional listing in a slowing market, it is possible that the property will remain on the market for months or even years, leading to price reduction to encourage buyer interest and activity. A property that remains on the market for an extended period can become a serious drain on the seller and his/her equity. Mortgage payments, maintenance, taxes and insurance can add up to thousands of dollars a month for some property owners. In addition to carrying costs, the time value of money is a cost that might be overlooked. If the seller is in a position to sell the property quickly due to time and/or carrying costs, the auction method may serve his/her needs more effectively.
If a property fails to sell at auction, the high bid is considered as a valid offer on the real estate. Negotiations can begin between the high bidder and Seller to determine a sale price agreeable to both parties. In the case an agreement is not reached, the Auctioneer generally has a pre-determined time period following the auction to try and sell the property. This time period can range anywhere between 30 days and six months and should be stated in the listing contract. During this time, the Auctioneer may decide to sell the property using the traditional real estate listing method.
To list the property first before utilizing the auction method is not recommended. When a property has been on the market prior to an auction, a ceiling price is already established. When that price has been publicly advertised, it affects the psychology of the potential buyer and could remove the outcome of current market value. Auctions work best when bidders are allowed to make their own decisions regarding a property’s worth instead of a predetermined amount based on the seller’s expectation. If, after the competitive bidding process of the auction, the final outcome should fall short of the seller’s predetermined expectations, the seller still has the advantage of accepting the offer within the specified time resulting in the sale.
Early in the process of a traditional listing scenario, the seller may turn down an offer lower than the listing price only to regret the decision later.
When using the auction method, the property is marketed separately, and exclusively showcased throughout the marketplace providing maximum visibility among those interested in the property. It is a personalized marketing approach, targeting an audience with a higher percentage of interest.
With a traditional listing, the property is one of many properties listed on the Multiple Listing Service (MLS). MLS is an effective tool for Agents/Brokers because it allows information on the property to be distributed to competing Agents/Brokers. This approach exposes the property to a large number of people, but not necessarily the “target market” for the property.
In the auction environment, the price of the property is negotiated through the competitive bidding of interested buyers. The current market value of the real estate is what a buyer is willing to pay at the time of sale. Auctions establish this value and eliminate guesswork in determining the asking price through negotiating multiple offers one at a time, eliminating the hassle of unscheduled showings and long negotiation periods.
The seller determines a set asking price, with the risk of overpricing and seeing little interest, or under pricing and selling for less than the property is worth. The actual selling price is negotiated over a long period of time, with the maximum selling potential limited by the asking price.
The marketing strategy for the sell of real estate property at auction differs from the strategy of selling by listing. Using the auction method, the accelerated marketing campaign requires an up-front investment from the seller. This targeted and direct approach is designed to build value and awareness in the property. It should be considered an investment rather than an expense. This marketing campaign contributes greatly to the success of selling the property. In a traditional listing, the Agent/Broker typically markets the property along with other real estate listings.
When using the auction method, the property is generally sold “As-Is, Where-Is.” The seller benefits from a contingency-free transaction. The sale of the property is not subject to financing or repairs because the Terms and Conditions of Sale are pre-set by the seller. The seller is always in control. With a traditional listing, post contract contingencies need to be met before the sale is final, or the sale may be contingent on the buyer’s financing.