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San Carlos Real Estate May 24, 2012

Real Estate Auctions: Are They Suitable for Mainstream Real Estate?

by Chuck Gillooley

Sold!

When I hear the term “real estate auction” the image it conjures up in my mind is that of downtrodden, foreclosed properties being sold to investors on the courthouse steps.   Up until recently, that was really the only segment of the real estate market where the auction process has been used with any regularity.  But I sat through a rather interesting presentation this week by a company who has brought the auction process to the other extreme of the market pendulum:  The ultra high-end luxury market.

According to the folks at Concierge Auctions, the auction is becoming an innovative way to sell unique and high-end properties.  Here’s how it typically works.  The home is listed in a traditional fashion, with a listing brokerage and an listing agreement that specifies the compensation for both the listing and buyer’s brokerage.   But where the process differs is that the house is then sold in an on-line auction format.  Potential buyers plunk down a hefty deposit (usually around $100K) and go through a healthy vetting process to be “approved” and registered to participate in the auction.

The company then sets a starting bid price and an auction close date, and the bidding begins.    Every registered bidder gets to see what the other bids are, and can adjust their price accordingly.   According to the website, this method has proven effective at generating critical visibility to high-end properties that have not been successfully sold with traditional marketing.   Even Cher’s home in Hawaii was sold this way, according to their literature.

There’s a Catch.

While there is certainly an appeal to this innovative way of marketing homes, there are some catches involved.   First, these homes are sold as-is and completely non-contingent.  So in other words, you can tour the house as much as you like, but you don’t get to conduct your own inspections on the property before you decide to proceed with the sale (Concierge says that they provide an extensive set of inspection reports as part of the buyer’s packet.)

The second catch is the cost.   Like a normal home transaction, the sales commission in this scenario is paid for by the seller out of the proceeds of the transaction.  But that does not cover the fee of the auction company — with Concierge Auctions, that fee is paid by the buyer, and it’s usually as much (or more) than the standard sales commission on the home!     So essentially, the buyer is paying a significant cost to be able to potentially get the house well below its list price, and to be able to see what the other bids are.

Ready for Mainstream?

As I sat through this presentation, I kept trying to envision how this approach might work in the more “mainstream” real estate market like San Carlos.   There aren’t too many $7M mansions in the City of Good Living last I checked — at least not this week.     But it doesn’t take a stretch of the imagination to see where it could gain some traction.

By far, the #1 complaint from buyers in a multiple offer scenario (which is just about every sale these days) is that they have no idea what their competition is offering.  Operating in such an information void forces the buyers to speculate on what price it’s going to take to win the house — and that makes it very easy to significantly overspend.  I’ve been on both sides of the table and have seen this exact thing happen.    Home buyers would absolutely love it if buying a home were as transparent as buying Legos on eBay.   (um, perhaps that’s not the best example, but you get the idea…)

But there are significant shortcomings to this approach.  Namely, somebody has to figure out how to incorporate terms and conditions into an auction.   Buying a home is not as black and white as shopping on eBay, and not every buyer is comfortable with a non-contingent, as-is offer.   Second, an auction process potentially opens the door to buyers who are less than serious and are just “throwing sh*t against the wall”, which also serves to drive up the price.     But in an age where transparency in real estate is sorely needed, it has the potential to be something huge if someone can figure out how to make it work.
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