NATIONAL ASSOCIATION OF REALTORSO

National Real Estate Auction Committee

AUCTION ADVANTAGES

Seller Benefits

Offers the seller another option

Creates competition among buyers ‑‑ auction price can exceed the price of a negotiated sale. An auction generates excitement and heightens buyer interest.

Exposes the property to a large number of pre‑qualified prospects

Requires that potential buyers pre‑qualify for loans

Accelerates sales ‑ the property can sometimes be sold within six weeks of listing

Eliminates high seller carrying costs ‑‑ (such as interest, taxes, maintenance)

Auction brings interested buyers to a point of decision ‑‑ they must act now or lose an opportunity to purchase

Auction is a true market forum ‑‑ the highest buyer pays the lowest price a seller will accept

A seller knows exactly when the property will sell

A seller sets the terms and conditions of the sale, maintains control of the property throughout the auction (depending on auction type), and actively participates in the sale process

Auction reduces the time the property is on the market

Auction eliminates numerous and unscheduled showings

Auction takes the seller out of the negotiation process

Auction is an aggressive, advance marketing program that increases potential interest in and awareness of a property

Seller is able to obtain liquidity

Seller is able to move on to other investments and free up capital

AUCTION ADVANTAGES

Agent Benefits

Provides a list of ready and qualified buyers

Increases profits

Offer clients and customers new selling and purchasing options

Increase market share and revenues ‑‑ new business opportunities are added

Enhance company's image

Develop your own market niche ‑‑ able to offer new products and services other agents aren't providing

Exposes the property to many potential purchasers

Auctions appeal to people ‑‑ it brings them in to look at all the listings you hold, not just the auction listing

Auctions cause referral and return business

Able to build rapport with auction firms

Learn new business techniques and skills

Agents don't have to be auctioneers to earn commissions ‑‑

* earn referral fees as referring agent/broker * work as cooperating agent/broker * work as listing agent/broker

"A GUIDE TO REAL ESTATE AUCTIONS11

Introduction

Real Estate Auctions have gained credibility and popularity among the general public over the past few years. The NATIONAL ASSOCIATION OF REALTORS40 believes real estate auctions are an innovative marketing tool which can benefit buyers and sellers in good times and bad and, under the right circumstances, they are a viable alternative to conventional marketing programs. Auctions can accelerate a property sale and maximize a property's selling price. Auctions are another means in which to bring buyers and sellers together.

Why Auction? There are many reasons why the auction method of marketing should be considered. Here are a few:

Auctions produce a quick sale. High carrying costs can be avoided. Value can be demonstrated and market prices can be found. The auction method draws attention to the property. A sense of urgency to buy a property is created.

As a broker, you can get involved in auctioning property in several ways:

0 Referring prospective sellers and getting a fee.

Registering prospective buyers for an auction and earning a commission.

Joint‑venture with an auction company.

Start an auction division within your firm.

The following is a compilation of questions and answers prepared to assist you in more fully understanding the real estate auction process. This document is not all‑encompassing. Should you have further questions relating to real estate auctions, please forward them to the NAR Auction Department and an answer will be provided. Contact: NATIONAL ASSOCIATION OF REALTORSO, Real Estate Auction Department, 430 N. Michigan Avenue, Chicago, IL, 60611‑4087. Comments may be faxed to 312/‑329‑8338.

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"A GUIDE TO REAL ESTATE AUCTIONS11

1. WIM T IS A ‑REAL ES TA TE A UCTION?

A Real Estate Auction is a method of buying and selling reaj estate. It is an intense and accelerated real estate marketing process that involves the public sale of property through open, competitive bidding.

2. WH4T ARE THE BENEFITS OF AREAL ESTATE AUCTION?

The real estate auction is definitely a win‑win proposition for everyone involved. The seller disposes of properties quickly and efficiently, thereby saving long‑term carrying costs such as interest, real estate taxes and maintenance. For the buyer this can mean a smart investment, since properties are usually purchased at fair market value through competitive bidding. Because the auction sale is conducted in an open forum, both motivated buyers and motivated sellers have the assurance of watching the property's true market value emerge as the bidding process progresses. For both buyer and seller, fair market values for the property prevail. An auction creates competition among buyers and exposes the property to a large number of pre‑qualified prospects. Because it is an accelerated sale, property can often be sold within 6 weeks of listing. For the agent, auctions can mean an increased client and customer base as well as increased profits.

3. KIM T FA CTORS DE TERMINE THE S UCCESS OF AN A UCTION?

A) The desirability of the property being sold. This includes location, condition and surrounding properties.

B) An aggressive marketing and advertising plan geared to prospective purchasers.

C) Realistic expectations on the part of the seller.

D) Selecting the type of auction that best suits the property and the seller's needs.

E) Conducting the auction in a professional manner and following up through closing.

F) Undertaking due diligence ahead of time so buyers are knowledgeable and the only issue that remains is price.

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4. ARE ALL PROPERTIES SUITABLE FOR AUCTION?

Most properties, but certainly not all, are saleable by auction. Residential property (including town homes, condominiums, cooperative apartments and single‑family homes), commercial property, vacant land ‑ even boat slips ‑ are sold at auction. Some sellers try to sell unsuitable or unmarketable property through an auction. This is property that perhaps has been on the market too long, causing prospective buyers to consider it "tainted". Perhaps the project itself was poorly constructed or planned. These types of properties don't do well at an auction and most reputable auction marketing companies would not accept them.

One method used by auction firms to analyze the market, property and seller situations is the two‑thirds rule. A general explanation of the rule is that if two out of the three parts (market, property, seller) lean favorably toward auction, then auction should be offered to a seller as a sales option.

5. IF A PROPERTY DOESN'T SELL A T A UCTION IS IT POSSIBLE TO STILL MARKET IT?

Yes. The auction marketing method has exposed the property to a large segment of the buying public. Many times a buyer who wants the property but is uncomfortable with the auction process will make an offer after the auction date. In other instances offers to buy the property prior to the auction date are made and accepted.

6. WIL4T IF THE SALE DOESN'T CLOSE?

* well conducted real estate auction by its very nature minimizes such failures. There are generally only three reasons buyers will back out.

* They think they've been misinformed. If the marketing plan spells out all information, buyers won't experience feelings of this sort. 0 They think they've overpaid. An auction demonstrates price in a clear, concrete fashion; a second highest bidder made a bid just below the buyer's. 0 An act of God can take place.

Failure to close can happen, but it isn't frequent. If the rare failure to close occurs, a seller may be in a better position than someone facing a collapsed close with the private negotiated method. The private negotiated seller may have to return to square one in a search for a new buyer. The auction seller can turn to the next highest bidders, who demonstrated their willingness to pay nearly as much as the buyer who failed to close.

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7. WIMT HAPPENS TO THE FARNEST MONEY IFA BUYER DECIDES ATA L4 TER DA TE NOT TO B UY THE PROPERTY?

Many of the same things happen in an auction situation as in any other real estate transaction. The earnest money deposit is forfeited if the high bidder is unable to consummate the sale regardless of the reason. If the seller fails to close because of defective title, etc., the buyer's deposits will be refunded immediately.

8. DON'T REAL ESTATE AUCTIONS DEPRESS HOME VALUES?

Not at all. Real estate auctions reveal the true market value of a property because auctions are conducted in an open forum where all bids are known, and participants are given immediate feedback on the property's value. At auction, values settle at the level the market can bear, neither elevated nor deflated.

9. WIL4 T IS A B UYER'S PREMIUM?

A buyer's premium is an additional charge to the purchaser of the property. It is usually expressed in the form of a percentage of the high bid. The typical buyer's premium in a real estate auction is 2% to 10%. You need to refer to the terms and conditions of the specific auction to ascertain the amount of the buyer's premium. The prospective buyer must consider the impact of the buyer's premium when deciding on the amount to bid for the property.

10. IS A B UYER'S PREMIUM AL WA YS CHARGED IN REAL ES TA TE A UCTIONS?

No. Always check the terms and conditions of the specific auction to see if a buyer's premium is applicable.

11. WH4 T ARE THE VARIO US ME THODS OF A UCTIONING TIM T A SELLER MAY CHOOSE FROM?

Essentially, there are three different types of auctions:

0 ABSOLUTE AUMON ‑‑ (Or Auction without Reservation.) The property is sold to the highest bidder, regardless of the price. The main advantage

of an absolute auction is

that it generates maximum response from the market place. Since a sale is guaranteed regardless of the price, buyer excitement and participation are heightened. Because this type of auction generates an ideal response, many financial institutions and government agencies have begun to use it in greater frequency. Despite the fact this type of sale attracts a larger number of buyers, the guarantee of a sale at the highest bid, regardless of price, often makes a seller feel nervous and at risk.

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11. 7YPES OF AUCTIONS (continued)

0 MINIMUM BID AUC71ON ‑‑ The auctioneer will accept bids at or above a disclosed price. The minimum price is always stated in the brochure, in the advertisements and is announced at the auctions. An alternative approach is to post a "suizaested opening bid", but that opening bid does not commit the owner to sell at that price. An advantage to selling via the minimum bid method is that it creates a safety net for the seller that does not exist in the absolute method. The seller's risk is limited in that the price that the property sells for will fall above a minimum acceptable level. Disadvantages to this method are that the seller limits interest in the auction to only those buyers who are willing to pay the minimu bid price, and the fact that there is a minimum bid may make it difficult to generate the proper excitement.

0 AUC71ON WITH RESERVATION ‑‑ A minimum bid may or may not be posted, 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's conclusion. The owner predetermines the price at which the property will be sold. The advantage is that the seller is not obliged to accept a price other than one that is entirely acceptable. The main drawback of such an auction is that many prospective buyers do not want to invest the time and expense of investigating a property when they have no certainty they will get the property even if they are the high bidder. The high bid is reduced, in effect, to an offer, not a sale.

12. REAL ESTATE AUCTIONS ARE OFTEN THOUGHT OF AS A "FIRE SALE" FOR SOMEONE WHO CANNOT MEET HISIHER MORTGAGE PAYMENTS. IS THIS TRUE?

Unfortunately, although most other forms of auctions, like art auctions, have a very positive image, real estate auctions have suffered from a poor image. A majority of auctions today don't result from individuals' repossessed properties, but rather are the result of the smart seller, usually a builder or financial institution, who chooses the cost‑effective, accelerated method of selling a development rather than laboring for months or years to sell the units of the development one by one. This accelerated sale allows the developer to eliminate virtually all long‑term carrying costs. These cost savings to the developer are passed along directly to the purchaser in the form of reduced prices. It is truly a win‑win situation. Developers can move on to their next project, and buyers can purchase quality properties at fair market value.

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13..UNDER WIL4 T TERMS DOES A PROPER 7Y SELL AT AUCTION AND WHO SETS THE TERMS?

The seller sets the terms with the advice of the auction company. It is necessary to have "balanced" terms ‑‑ terms and conditions set by the seller under which buyers bid and under which the winning bid is established. If terms are not set with buyers in mind, there will be none. Once terms are set, there are no contingency clauses on auction day. Usual terms are that the high bidder deposit earnest money (either a percentage of the purchase price or a stated set amount) and enter into a purchase contract immediately following the auction with the balance of the purchase price due usually within 30 to 60 days at the closing. The seller generally provides title insurance. Properties generally sell "as is" with no warranties expressed or implied. Since the only issue left is price, due diligence is done in advance of the sale such as preparation of information packages and inspection reports.

14. KHO US UALL Y B UYS A T REAL ES TA TE A UCTIONS?

Anyone can benefit from buying at a real estate auction. Many people who buy are first‑time homebuyers who may otherwise be shut out of the real estate market. For them, the auction is a realization of a dream. Empty nesters and investors also comprise a large segment of the auction buying public.

15. HOW ARE PROPERTIES ADVERTISED FOR AUCTION?

This varies greatly depending on the type and value of the property being sold. One of the essential underpinnings for a successful auction is a highly aggressive marketing program. Each auction has its own powerful promotion and advertising. Auction marketing is an intensive effort and a well‑timed plan to create massive interest in the properties available for sale. The advertising budget is established according to specific properties and the type of market that's needed to be reached. That budget is then broken down into various forms of advertising that will best target the market for that auction. The various forms of advertising are: sale bills or brochures mailed directly to prospective purchasers and posted in public places, newspaper advertising in local and possibly regional or national papers, ads in trade journals and magazines, radio ads, signs posted on the property and possibly television and cable ads, and phone solicitation. A qualified and experienced auction company knows which forms of advertising are best for a particular type of auction and its location and will facilitate everything from preparing the advertisements to placing them in the desired forms. The aggressive advertising hits large groups of buyers that will come and competitively bid on property thereby yielding true fair market value for a seller's holdings.

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16. KHO PAYS THE AD VER TISING?

Most sellers that employ the Auction Method of Marketing are both motivated to sell and realistic on property value. The shortened marketing time and reduced holding costs allows them the luxury of an aggressive marketing program ‑‑ usually in the form of brochures, direct mail, newspaper ads ‑ display and classified, trade journals, signage and possibly TV and radio ads. Depending on geographical location, value of the property and size of the marketing area (local ‑ regional ‑ nationwide), the advertising budget can run from 1 to 4 percent of the estimated proceeds.

Once the budget for advertising is agreed upon between the seller and the auctioneer, the auctioneer prepares, coordinates and places all advertising. The advertising expense is the responsibility of the seller and is usually collected at the signing of the auction contract. In most cases, the auctioneer does not get paid unless the property sells. However, on larger auctions where there is an extensive amount of work and preparation for the auction, there may be a no sale fee or minimum to offset the time and expenses incurred. Sellers are willing to pay advertising expenses to produce a fair market sale in a short time period, usually 4 to 6 weeks.

The auction method of marketing is a direct barometer of the activity in the market place. The aggressive advertising informs and draws the buyers to the auction to compete for the property. A properly advertised auction will bring all interested buyers together at one time to do business, thereby producing the optimum results in a condensed time period and on a day, date, and time that suits the seller's time schedule.

17. HOW LONG DOES IT TAKE TO MARKET THE PROPERTI~ HAVE THE AUCTION AND CLOSE THE SALE?

The time frame varies depending upon the type of property auctioned. Generally, the process takes 45 to 90 days from listing to closing. The auction itself may take anywhere from five minutes on a single property to all day on a multi‑property auction.