Is an Auction your best marketing strategy: The Two-Thirds Rule
One method to determine if auction is the best marketing strategy is the Two-Thirds Rule. This involves analysis of the market, property and seller situation. Generally, if two of the three parts (market, seller, property) lean towards auction, then auction should be considered by the seller as a sales option.
Market (Buyers) -- A good auction situation is one where the market is:
- A changing market
- A dull market; too much product but buyer interest is expressed
- Not enough of the property type (unique, lake front, etc.)
- An emerging market -- new developments could kick off a sales program, once some of the properties were auctioned
- A seller's market where there is known high demand and a lot of competition can take place
Seller -- A good auction situation is one where the seller: - Needs immediate cash
- Has a partnership or marriage break-up
- Is moving out of the state
- Wants to liquidate an estate
- Is retiring
- Is an auction-minded seller
- Has a listing that is about to expire
- Has already purchased another house
- Knows the auction will bring a fair market price
- Has financial problems
- Has high carrying costs on the property
Property -- A good auction property is one that: - Has a lot of equity (25% or more)
- Is unique -- there is enough buyer/market interest to encourage competition (unique properties are difficult to appraise)
- Has a lot of high carrying costs for the owner
- Is vacant -- vacant properties may encourage vandalism
- Is difficult to appraise
BENEFITS TO THE SELLER:
- Buyers come prepared to buy
- Quick disposal reduces long-term carrying costs, including taxes & maintenance
- Assurance that property will be sold at true market value
- Exposes the property to a large number of pre-qualified prospects
- Accelerates the sale
- Creates competition among buyers - auction price can exceed the price of a negotiated sale
- Requires potential buyers to pre-qualify for financing
- The seller knows exactly when the property will sell
- Eliminates numerous and unscheduled showings
- Takes the seller out of the negotiation process
- Ensures an aggressive marketing program that increases interest and visibility
BENEFITS TO THE BUYER:
- Smart investments are made as properties are usually purchased at fair market value through competitive bidding
- The buyer knows the seller is committed to sell
- In multi-property auctions the buyer sees many offerings in the same place at the same time
- Buyers determine the purchase price
- Auctions eliminate long negotiation periods
- Auctions reduce time to purchase property
- Purchasing and closing dates are known
- Buyers know they are competing fairly and on the same terms as all other buyers
- Buyers receive comprehensive information on property via due diligence packet
TYPES OF AUCTIONS
ABSOLUTE AUCTION (or auction without reserve)
- The property is sold to the highest bidder, regardless of the price.
- Since a sale is guaranteed, buyer excitement and participation are heightened.
- Generates maximum response from the market place.
- Many sellers, including financial institutions and government agencies have begun to use this method more frequently.
MINIMUM BID AUCTION
- The auctioneer will accept bids at or above a published minimum price. This minimum price is always stated in the brochure and advertisements and is announced at the auction.
- Reduced risk for seller as the sales price must be above a minimum acceptable level.
- Buyers know they will be able to buy at or above the minimum.
- The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, and therefore it must be low enough to act as an inducement rather than a hindrance.
RESERVE AUCTION (or an auction subject to Confirmation)
In this scenario, the high bid is reduced, in effect to an offer not a sale. A minimum bid is not published, and the seller reserves the right to accept or reject the highest bid within a specified time -- anywhere from immediately following the auction up to 72 hours after the auction concludes. Sellers predetermine the price at which the property will be sold and are not obligated to confirm a sale other than at a price that is entirely acceptable to them. The main disadvantage of a Reserve Auction is that prospective buyers may not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder.
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