Insane Seller’s Market Calls for… Auctions?

Since this is earnings week in real estate, with Realogy, Redfin and RE/MAX all reporting… I figured any non-VIP stuff I want to write, I should get in today. And as it happens, there is something I wanted to discuss and explore.

In a crazy seller’s market like the one we have today, why aren’t there more auctions?

The question is the result of a story a friend of mine told me, combined with what I’ve been hearing and seeing over the past few months.

An All Too Common Story

My friend calls me to ask a questions, because he thinks I’m some kind of a real estate expert. Well, I am, but not in this area which is about the brass tacks of real estate practice. But I knew it would resonate with many of you.

Basically, his sister in law and her husband sold their home a few months ago to an investor; because it was to an investor, they had a few months to find and buy a new place, and move out. They have been hitting the market hard — it’s a local move-up situation, so they know exactly the school district and the neighborhoods they want to be in. In the past six weeks, they went and got prequalified and made an offer every single weekend, and had every single offer rejected. This despite, in their minds at least, increasingly ridiculous concessions and offers.

They waived every contingency their agent told them to waive. They kept raising the bids, until the last offer where the house was listed for $350K and they offered $410K with zero contingencies… and lost, apparently to a cash buyer offering the same.

My friend’s question to me was, “Is this normal? Should they just give up and rent?”

I told him to tell his sister in law to ask her REALTOR. He or she is the expert, not me.

At the same time, I also know from being in the industry that buyer agents are working their asses off, writing dozens and dozens of offers, touring home after home, with buyer clients who are getting increasingly dispirited. This insane market is nothing new to anybody reading this post right now.

I honestly think some of the weird anger and tension in the industry today is because so many agents are just frustrated with going to bat for their clients time and again, only to fail and fail and fail.

Which makes me wonder… wouldn’t auctions be a far better system for buyers and their agents in a market like this one?

The Advantage of Auctions: Transparency and Speed

I figure, the biggest advantage of auctions in a crazy seller’s market is (a) transparency, and (b) speed.

Transparency

Transparency is a big one. It isn’t as if buyers are routinely told why their offer — which they thought was insanely over asking, with all contingencies waived — was rejected. Most have no idea why their offer, complete with personal letters, video stories, character witnesses, and homemade brownies, was rejected. My friend’s sister in law was at least told that her last offer was rejected in favor of an equal offer, but all cash. I don’t know that most buyers even find that out.

Most of them don’t know how far they were, so they end up blaming themselves in many cases: “We should have offered more” and so on, without knowing what the actual story was.

In an auction system, you don’t have such regrets. You bid until you decide not to, or can’t afford to. You don’t lose your dream house because you didn’t bid $5K more than the winner; you lose your dream house because the price (or other important terms) got beyond what you can afford.

On the flipside, I can’t imagine an auction would be a bad thing for the seller either. Maybe your listing agent tells you that the CMA says your home is worth $350K, but you should list at $325K to generate multiple bids and drive the price up through shrewd negotiation. And indeed, you get $400K and you’re thrilled!

But what it you could have gotten $450K? $500K? Auctions go until there is a winner; the offer-and-acceptance method we use today does not. It usually asks for “best and final” and goes from there… but how do buyers know what the best and final actually is unless they know what they have to beat?

In slower markets, I could see how a shrewd listing agent can manipulate and negotiate to get the absolutely maximum she thinks she can get. But in a crazy hot market like we have, I don’t know that even seasoned listing agents truly know what that absolutely maximum is.

The major benefit of auctions, then, is transparency. Everybody knows who is bidding what, on what important terms, and everybody walks away knowing that the highest and best offer won, and the seller got the most money possible, period.

The agents win as well in this transparent system. Nobody is left wondering, “Did the listing agent submit my client’s offer?” No disappointed buyer is left wondering if his agent really knows what she’s talking about. There are no weird conspiracy theories, no aspersions cast, no bitter feelings. Everything is on the table.

Speed

The other advantage is speed: the buyer would know pretty quickly if he is in the running or completely outclassed.

Take my friend’s sister-in-law. Say a property comes on the market at $350K. She logs into some online auction platform, where a dozen homes that came on the market around the same time will be sold. She has her heart set on that $350K house, so she has gone and done all of the pre-bidding work she needs to with her agent’s help.

The bidding starts, so she bids $350K, all contingencies waived.

“$360K, cash.”

She knows right there that she’s probably not going to win that, right? She makes an attempt anyhow.

“$400K, 20% down.”

“$410K, cash.”

That’s the ballgame. She knows right away that she can’t win against a cash buyer unless she goes way, way, way over budget… and she might not be prequalified for that much. Her buyer agent, being an expert, might even advise her, “Look, don’t go past $410K — there are other homes that are equivalent that won’t go for that much.” That’s value added service right there!

Plus, the buyer agent did not have to spend hours upon hours writing up offer after offer after offer complete with all of the routine “Please Pick Me” letters and such. She just has to show up at the auction with her client and advise her appropriately. Lots of time and effort and heartache saved.

The Disadvantages of Auctions

I… don’t know. I can’t think of one, at least in an insane market like this one.

Again, in a slower, more balanced market or in a buyer’s market, I could see the listing agent being able to use the offer-and-acceptance method to negotiate for her client and manipulate offers for maximum benefit. But in a market with 14% YOY price appreciation, and next to no inventory? What could you possibly do that an open auction won’t or can’t do?

Back in 2011, I wrote a post wondering why we don’t see more auctions in real estate. I thought maybe financing was an issue for real estate auctions. But 2011 was a very, very, very different market than 2021; mortgage technology in 2021 is not what it was a decade ago.

Plus….

Auctions Are Common in Australia

It turns out that auctions are a very common way for houses to be bought and sold in Australia. According to JustLanded.com (a site for expats), auctions are a common way to buy houses in Australia and in some areas, “it is impossible to purchase property except by bidding at auction.”

I’d love to hear from our Aussie readers on how that’s done. JustLanded gives us the following:

Whilst some states provide for cooling off periods in property transactions these usually do not apply for sales by auction. The sale is made “at the fall of the hammer” i.e. once nobody offers a higher price, and the auctioneer declares that the property is sold at the price last offered. If the front door immediately falls off its hinges – tough! This means that whenever you attend an auction with intention to make a bid you need to do all your research before hand.

Building inspections, pest inspections, surveys, outstanding land tax, outstanding rates etc. all need to have been investigated and these can be very expensive. If you miss out on a couple of homes against which you were bidding the whole process starts to get quite expensive. On the subject of pest inspections these can be very serious. White ants, termites etc. can be a huge and costly problem because they can devour complete rafters or joists which are out of sight. They can devour the door frame leaving only the outside coat of paint.

It may be that the vendor is prepared to offer written guarantees. If so, read them carefully and retain a copy in case you need it.

At the “fall of the hammer” the deposit is required which is usually 10% of the sale price. The contract is usually the standard Real Estate Institute issue and the settlement time four to six weeks hence. All your finances need to be in order.

I imagine there are a lot of details missing here, so whatever information you can supply for our edification, the better.

For example, I have to imagine that there are ways for the bidder/buyer to rescind the deal if it turns out that there was significant fraud or failure to disclose on the part of the seller… but how does that work? How does inspection and title work in an auction setting?

Possible Modifications

After discussing this with my recovering broker wife, I thought perhaps we could use a couple of modifications to make auctions work here.

Non-Monetary Terms

We know that certain terms of an offer are important to the seller. For example, lease-backs to give the seller more time to move, or waiving contingencies, etc.

One is to allow the seller to place monetary value on non-monetary terms. For example, if there are two offers, but one is giving the seller more time to move out, there is value there. So maybe the seller can list something like, “Each month we can stay in the house is worth $5K to me.”

The seller can also dictate the value of certain other key terms, such as an all-cash offer. What’s that worth to the seller? Let the seller decide, and let the bidders know.

Investors, Yes or No

I also believe that the system should allow sellers to refuse to entertain bids from investors. Obviously, that would happen in consultation with the listing agents who could advise them as to the pros and cons, but we could see a situation where a seller would prefer that the next owner be a family, not a Wall Street hedge fund.

I say we let seller’s decide what kind of buyers they are willing to entertain, as long as those decisions are in compliance with Fair Housing and other laws.

Buyer Confidentiality

In a crazed hot market, I do think it is important to have the buyer’s identity be protected if the buyer desires it. Perhaps the buyer agent and the auctioneer know some details about the buyer, but otherwise, it should be kept secret.

Because if Buyer Smith bids $410K with no contingencies on 123 Main Street but loses out… the next seller and the listing agent know exactly how much Smith could afford. So instead of it being “Buyer John Smith bids $410K” it could be “Buyer 822 bids $410K.” The agent would, of course, be bidding on behalf of her client at the auction, while communicating live with the client on what to do.

If we can do it for artwork and cars, we can certainly figure out how to do it for houses.

A very nice side effect, I think, is that buyer confidentiality would dramatically reduce the charges of Fair Housing violations, racial discrimination, and the like that has become such a problem for the industry the last couple of years. No one knows the race, gender, sexual preference, or whatever of the bidder… and that’s the way it ought to be.

Guarantors/Underwriters

Since the Australian system imposes significant costs on the buyers for doing due diligence ahead of the bidding, perhaps we could allow certain institutions to do that for buyers and offer some guarantees.

For example, maybe Big Title like First American or Fidelity or some new kind of entity — a third party that everyone could trust to be neutral and dispassionate — could offer a “Buy with Confidence” package that includes a thorough home inspection, title search, land surveys, environmental hazards, etc. backed up with a warranty that will make the buyer whole if any of those turn out to be wrong or incorrect. That would lower transaction costs and due diligence costs for all buyers.

Either the seller could pay for this package, or the auction house could pay for it and have it come out of the auctioneer’s fees. Or maybe some larger brokerages and franchises would pay for it as an incentive for sellers to list their homes for auction with their agents, and take it out of the agent’s commission.

Seems like a decent business to me — a kind of a “deal insurance” product, if you will.

The MLS

Of course, we’d need to create some kind of an “Auction” category in the MLS so that listing agents can let the marketplace know that Property XYZ is going up for auction on such and such a date with such and such an Auction House. Cooperation and Compensation can be maintained, because at the end of the auction, there is a sale of the house, and the listing agent and the buyer agent have both provided services deserving of compensation.

Perhaps the MLS could also work with the various Auction Houses to ensure compliance with rules, provide accurate and timely data, and protect customer privacy, Fair Housing, and the like. I could see it.

What Say You?

I know, we’re way past the point of speculation at this point. But I genuinely think that auctions might be a solution for the kind of crazy seller’s market we’re living through. I think it could be a win-win-win for everybody involved, while saving a lot of heartaches for buyers and headaches for agents. The seller would know that he got the absolutely top dollar possible, since open auctions are what they are. The buyer would know quickly whether he’s in the running or out of it. The agents would get the maximum commission, while saving a ton of time and energy and avoiding frustration.

The technology to do these already exists, and a lot of them have been accelerated due to COVID.

Why aren’t we trying auctions?

-rsh

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

2 thoughts on “Insane Seller’s Market Calls for… Auctions?”

  1. Rob, I’ve been asking myself this since entering the industry in 2004. Based on first hand experience, I can tell you the single (powerful) reason auctions aren’t happening, or at least more often: the MLS. More on that in a bit.

    Your premise is spot on: auctions are often the best way for sellers AND buyers to transact. Sellers, because they ensure top dollar, and the seller KNOWS it’s top dollar because they can clearly see that the highest bidder was, well, the highest bidder for that home. If everyone even moderately serious lined up and all participated together, there can be no way a seller can suppose that there might be a better buyer out there somewhere. It becomes the ultimate proof of what the market value for the property is. And it’s best for buyers too, because just like you described, it’s the buyer that knows to what point they can no longer participate. No “what-if-we’d-offered-a-bit-more” anxiety or regret. Each home becomes each bidder’s home to lose, essentially. And it’s not just great for white-hot markets, it’s also great for slow markets as well.

    In 2007 it became hard to sell a listing. Very hard. A growing consensus of buyers were beginning to conclude that the market was probably not going higher, but lower. And so they essentially “walked out” like a union strike. Only the best (lowest) priced homes sold. For sellers the question became how much should I reduce my price? You’d rather receive a confidentially low offer and negotiate then capitulate if needed. To constantly reduce your price every week or two is to signal your desperation, and in buyers’ markets like 2007 where they hold all the power, it merely confirms to buyers that they should continue to wait. And yet, some sellers can’t wait, or at least don’t want to. And so in 2007 I began researching a way to dispose of listings via auction.

    After discovering and reading a book on “How To Sell Your House In 5 Days,” I modified it for MLS purposes. Here’s how it worked.

    Listing Agreement stipulated that the seller would agree to have the list price field in MLS be a figure that represented about 1/2 of what we believed market value to be (e.g. $150,000 for a home valued at $300,000), but that they would ultimately reserve the right to determine what price and terms they were willing to accept. Home then was listed in MLS at $150,000 with agent instructions that there would be an open house 10am-5pm Sat and Sun. I set up a website of instructions, which were these. Anyone wishing to participate would write their name, number and initial bid on an open house sign in sheet. No buyer premium, no evidence or upfront amount needed in order to participate. Only rule was that your bid had to be at least $1,000 higher than the previous entry. So, the first buyer writes their name/number and $150,000. Next entry was $151,000, etc. We had about 20 participants, bringing the price up to about $170,000.

    At the conclusion of the second day’s open house, I took the list and went back to my office, starting with the first bidder. I thanked them, told them that there were 20 bidders and the highest was $170,000 and did they wish to increase their offer by $1,000 and stay in the bidding for the next round. After calling all first-round participants, I’d then call back the first bidder for the following round: there were now 8 bidders, highest bid is now $201,000 – do you wish to increase your bid by at least $1,000 higher? Great, I’ll call you back for the next round. Note, often it was the buyer agent wanting to be the recipient of the call, but I really pushed for the right to call the buyer directly just for purposes of asking that one question. Typically it would come down to 2-4 “true” bidders that would go multiple rounds until ultimately there was only one bidder left – the winner. Terms were to be the same for all bidders, representing an as-is sale, close in 30 days, seller and buyer each paying customary closing costs for the area. The winning bidder would have until 5pm Monday to produce a written purchase agreement reflecting the winning terms and their preapproval. If not, we’d simply go to the runner-up and give them 24 hours to do the same thing based on their highest bid (likely just $1,000 less than the winner). I did it on 3 or 4 listings in 2007. Each time it was a success, in that the home got sold in a week, and for full market value. Each seller accepted the outcome of the auction. As I recall I think only once did the winning bidder not follow through with their purchase agreement, so we just sold it to the runner up for $1,000 less. I was written up in the local newspaper for doing something different. RISMedia did a blurb on it as well.

    The experience put a target on my back, however. Other agents were livid: how DARE I list something in MLS with a list price of $150,000 when we all know the seller won’t accept a full price offer for that amount! So what, I said. There’s no true guarantee of that happening regardless of what listing price is offered. And it’s purely theoretical, because by the time the auction is concluded I can pretty well guarantee the price won’t be $150,000 – it will be something that is, or approximates market value.

    Resenting the innovation and the extra explanation it required them to give to their buyers, while surrendering their phone number should they choose to participate, I got to be on a first-name basis in the Compliance Dept at my local MLS. While they didn’t have a specific rule saying you couldn’t do something like that, they used the semantics of how they chose to define the intent of proper use of the list price field. In short order, the MLS Rules were updated to make it an official violation, and my ability to innovate came to an end.

    What every auction needs in order to be a success is maximum visibility. It doesn’t yield market value unless the marketing and exposure are wide enough. Which means it has to be able to be listed in the MLS, or it won’t work. The problem is when the MLS wants to standardize everything–“standardizing” away innovation along with it.

    This is similar to the fate suffered by Prudential Real Estate’s proprietary Value Range Marketing pricing, or PVRM. (See 2006 NAR article, https://www.nar.realtor/rmomag.NSF/pages/feat2jan06) In that program, rather than a fixed asking price you’d list a price range that was wide enough to bring in a category of buyers without specifying a particular number expectation, in order to draw in buyer interest and find out who wanted it (e.g. “Seller will consider offers between $369,000 and $428,876”). I worked at a Prudential office at that time, and they had modeled their program on real estate marketing practices in Australia as well. It was a great concept–but again–it ultimately failed because MLS’s nixed it. Their best accommodation was to require the top number as the list price, and a secondary price field for the low value. Problem was, no public-facing websites picked up the secondary price field, resulting in PVRM listings just looking really overpriced while hoping the buyer would read the marketing description that would say “Seller will consider offers between $369,000 and $428,876.” But that doesn’t help when a buyer inputs a price ranch search of say $375-400k and the list price is $428,876. But I digress.

    I love, and am passionate about, innovations that better serve our clients and that make it easier for buyers and sellers to find one another. Problem is, the powers that be feel threatened by change and would instead prefer to stifle innovation as a way of preserving their precious status quo.

    Reply

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