According to the National Association of Realtors (NAR), one in five homes in the U.S. will sell via auction in the next five years. Most of us think: auctions? Aren’t auctions just to sell foreclosures and other distressed properties? Not necessarily. In the last few years, a new trend has emerged: selling and buying high-end non-distressed properties via luxury property auctions.
What is an auction? Simply put, auction is a method of offering goods and services for sell through the bidding process. Auctioning involves taking bids and selling the property usually to the highest bidder.
Today, the most commonly used type of auction is Open Ascending Auction, also known as English Auction. In this type of auction, participants openly bid against each other by putting higher bids and highest bidder wins the auction. That’s when the famous gavel falls and the auctioneer announces: Sold!
There are two basic types of auctions: Reserve Action and Absolute Auction. Under the Reserved Auction, the seller will establish a minimum price (disclosed or undisclosed) for which the property must sell in order for the auction to be valid. If the highest bid does not reach that price, the auction is void. On the other hand, the Absolute Auction has no minimum price (Reserve), which needs to be met.
Why luxury auctions? Properly marketed and executed luxury actions have several advantages for the sellers:
- Property sells for the highest market price, typically within 60-90 days
- Price can exceed the price of a traditionally negotiated sale
- Auctions generate more competition and interest among qualified buyers
- Property is sold “as is” with no contingencies and with high certainty of closing
- Auctions significantly reduce sellers’ expenses (carrying costs, price reductions, and opportunity cost).
However, sellers are not the only beneficiaries of auctions. There are several distinctive benefits for the buyers as well:
- Bidders (buyers) set their own purchase price
- They compete fairly and openly on the same terms with other buyers
- No need for lengthy price negotiation process
- Buyers know that the seller is committed to sell
- Buyers can review property’s Due Diligence Package before the auction
In most parts of the U.S., the luxury residential real estate market (properties over $1M) is struggling. While low and moderately priced homes are selling relatively quickly nowadays, the high-end properties can linger on the market for many months and sometimes even years.
The sellers of luxury properties are faced with substantial carrying costs, price reductions, and opportunity cost, which can add up to hundreds of thousands of dollars. Recently, I have previewed a luxury home in one of San Diego’s most luxurious coastal communities. The sellers had lost over $1M in carrying costs and price reductions since the property was listed for sale almost two years ago,
Compare that to a luxury property auction, which typically sells a property for the highest market value within 60-90 days. How do the sellers know that their property had sold for the highest market value? They know because correctly marketed luxury auctions generate the highest number of qualified buyers and ultimately the buyers, not the sellers (or their agents), determine the market value of any property.
So, what’s the “secret sauce” of the luxury auctions? For the luxury auction to be successful, it must be properly marketed by a company which specializes in that type of auction. We live in a global economy where goods and services are sold across the country borders, and high-end real estate is no exception. The most successful luxury auctions, involve extensive and well executed marketing campaigns, often with both domestic and global outreach.
As a result, it is not uncommon that luxury auction open houses will attract 150 to 450 buyers eager to preview the property. In some cases buyers, who fly in from all over the planet, are allowed to make an offer on the property before the auction day (so called “pre-auction offer”). Such offer can be accepted, declined, or countered by the seller, depending on the price and motivation.
On the auction day, there are typically 10-50 buyers, who are ready, willing, and able (have certified funds) to compete to purchase the property. This is in stark contrast with traditionally marketed luxury listings, which typically generate much less interest and fewer, if any, buyers.
However, luxury auctions are not for every property and every seller. First of all, the property itself needs to qualify. Typically, the auction firm’s representative will preview the property to make sure that it meets certain criteria to be considered suitable for a luxury auction. Some of the criteria include: price point minimums, architectural design, location, condition, and the overall quality.
Secondly, the sellers need to qualify too as they need to be realistic about the value of their property. Auction is a terrific tool to sell a luxury home or estate, but it is not a “silver bullet” to sell grossly over-priced or over-encumbered properties. For instance, if the sellers want to sell their property for $5M, but the market value is around $2M, the auction is most likely not going to help.
Lastly, the seller must be committed to sell, because once the property is marketed and the auction properly executed, the odds are high that the property will actually sell. In fact, one luxury auctioning company boasts a success rate of 98%.
So, the luxury auctions are not suitable to just “test the market” as some sellers do with conventional real estate agents when they list their properties to see if there is any interest.
In conclusion, luxury property auction can be hugely effective tool in both selling and buying high-end properties. Properly marketed and executed luxury auctions sell properties for the highest market value, in the shortest amount of time, with a success rate as high as 98%.