Introduction to Real Estate Auction A program by the National Association of REALTORS®

Goal of This Course Help you increase your revenue by introducing auctions to clients and customers as a tool for selling and purchasing property

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

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

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.

Real Estate Buyer’s Agent Council 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

National Auctioneers Association 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

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

What Is Real Estate Auction? Intense and accelerated real estate marketing process that involves the public sale of property through competitive bidding

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

What Is Real Estate Auction? Was typically regarded as sales method of last resort for residential properties in distress

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

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

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.

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.

Benefits to Buyer Motivated seller Reduced time to purchase property, incl. negotiations No contingencies Favorable financing possible

Benefits to Buyer Exciting method of purchase Fairly and open competition Buyers—not sellers, agents, or appraisers—determine property's fair market value.

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

How Agents Can Work with Firms Referring agent/broker refers a seller to auctioneer, then receives a referral fee. Listing agent/broker markets property and represents seller during sale and closing. Buyer's agent/broker registers buyer who buys property at auction and earns a commission.

2. Identifying Sellers and Properties Understanding sellers, properties, and market conditions for which real estate auctions are best suited Applying the two-thirds rule

First Step in Auction Process Analyze: Seller Property Market Conditions

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.

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

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

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

Analyzing the Property Zoning Back taxes Tax assessment Equity and mortgage Property condition

Good Properties for Auction Owner has: At least 25% equity A lot of high carrying costs Property is: Unique Vacant Difficult to appraise

Analyzing Market Conditions Market conditions represent buyer interest. At time of listing, market condition must be considered.

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

Consider Auction for All Properties Residential Industrial Agricultural Apartment buildings Shopping centers Nursing homes New housing developments

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.

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

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

Questions to Ask Answering several questions helps determine if situation is auction candidate

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

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

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

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?

4. Seller Financing Makes a purchase more attractive and affordable Consult with an attorney Also consider offering discounts to buyers who pay cash

5. Property Condition “As is, where is”—without warranties or contingencies Price should be only open issue on auction day

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.

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

Case Studies: Two-Thirds Rule Read case study. Analyze seller, property, and market. Identify whether seller, property, and market are positive (+) or negative (-) candidates for auction. Apply two-thirds rule. List advantages and disadvantages of selling by auction. Answer question "Would you recommend auction for this case 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 125-year-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.

Case Study 1: Estate Sale (+) (-) Seller Property Market                     

Case Study 1: Estate Sale Advantages Disadvantages

Case Study 1: Estate Sale Would you recommend an auction for this situation?   Yes No Why?

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%.

Case Study 2: Business Loss (+) (-) Seller Property Market                     

Case Study 2: Business Loss Advantages Disadvantages

Case Study 2: Business Loss Would you recommend an auction for this situation?   Yes No Why?

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.

Case Study 3: Strip Mall (+) (-) Seller Property Market                     

Case Study 3: Strip Mall Advantages Disadvantages

Case Study 3: Strip Mall Would you recommend an auction for this situation?   Yes No Why?

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

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

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

Three Types of Auctions Absolute auction Minimum bid auction Reserve auction

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

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

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

Other Types of Auctions Sealed bid Dutch/high-low Multi-par, which allows bidding on one parcel or combination of parcels

Online Bidding Continues to grow Today’s buyers more experienced with electronic bidding Online bidding will become more prominent in real estate auction

Online Bidding Falls into two categories: Static―Sale happens at one point with one reporting medium Dynamic―Bids simultaneously reported to all bidding locations

Problems of Online Bidding Deposit requirements Registration procedures Disclosure items Purchase contract execution Licensing requirements

Purchase and Sale Agreement No contingencies Agreement made available at auction Major terms read on auction day "As is, where is"

Progress Reports Put system in place for monitoring marketing Communicate to seller Frequency determined by two parties

Bidder’s Packet Auction firm packages all property information in bidder's packet and distributes to interested buyers

Marketing Costs Most cases, seller is responsible upfront Cover concentrated promotional/advertising effort Illustrate seller’s commitment

Marketing Budget Varies between 1%–10% of sale price. Budget based on: Quantity and type of property sold Number of staff required Local, regional, or national marketing needs

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

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

Buyer’s Financial Requirements Earnest money, usually a non-refundable deposit Lender commitment and/or pre-qualification to register Buyer’s premium is amount paid by buyer to cover seller’s marketing expenses or auctioneer’s fee

Auction Strategy Based on results of marketing plan Response from market Firm plans needed adjustments

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

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

Auction Process in Review Analyze property, seller and market Obtain property information and complete due diligence Develop marketing strategy List property for auction Set sale terms and conditions Prepare sales contract with terms and conditions

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

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

4. Getting Started in Real Estate Auctions Finding real estate auction properties and firms Working with real estate auction firms

Steps Review state laws specific to real estate auction Understand participation methods, responsibilities, and forms used Select real estate auction firms Attend auctions

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.

Step 2: Understand Methods of Participation, Responsibilities, and Forms Used Referring agent/broker Listing agent/broker Buyer's agent/broker

Referring Agent Responsibilities Help analyze needs, property, and market Refer seller to auction firm Cancel previous listing Send notice to MLS Collect referral fee

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)

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)

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)

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

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 pre-qualification process Providing feedback to seller

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

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

Buyer’s Agent/Broker Responsibilities Primary responsibility is finding auction inventory: E-mail lists Web sites Newspapers

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

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

Buyers Need to Provide the Following at Auction: Good-faith deposit Personal check Letter of guarantee Identification

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

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.

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

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

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

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?

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?

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?

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 pre-qualification services to bidders?

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?

Thank you for your participation! Introduction to Real Estate Auction Thank you for your participation!