SJREI Association Article - http://issuu.com/sjrei/docs/sjrei_journal_2nd_all/10
Incorporating Online Auctions Into Your Disposition Strategy
It’s no secret that people are buying more and more commodities through online auctions, and real estate is no exception. Even Tax Collectors from counties like Alameda, Santa Cruz, and Merced, which used to hold tax sales on the courthouse steps, now utilize online auctions for faster, easier, and more scalable disposition. For sellers looking to run a fully integrated marketing campaign that reaches a large number of buyers and maximizes the sale price, online auctions may be an ideal platform.
Why Online Auctions Make Sense
In fall 2008, USA Today cited that “80% of all real estate searches now begin on the internet.” This is understandable, since the internet reaches tens of millions of homes, offices, and mobile devices and savvy buyers are constantly searching the internet for buying opportunities around the country. Whereas on-the-ground auctions traditionally limit the buyer pool to local buyers, expanding the outreach creates more competitive bidding. This spring Kern County had a tax-defaulted manufactured home that they hoped to receive $14,300 for. By conducting the sale via online auction, bids were submitted from Kern, Orange, Riverside, and Los Angeles Counties and the property sold for $47,200.
Economists view auctions as efficient price setting mechanisms. A well-marketed online auction allows all potential buyers to bid against each other until only one remains. This price should accurately reflect market price, as it will be sold to the buyer with the highest willingness to pay. In many auctions the seller will enjoy a producer surplus, which is the difference between what the buyer pays for the property and the minimum price that the seller would have actually accepted.
For larger volume sellers, online real estate auctions are also highly scalable. Some years San Bernardino County has auctioned over 2,000 properties concurrently via the internet. Imagine the logistics of trying to carry this out in-person!
How to Use Online Auctions
Preparing to sell your home or investment property via online auction begins much like selling it through traditional means. Clean your property as thoroughly as possible, both inside and out, being sure to remove all debris and clutter. Take clear photographs; they are crucial for selling property online. Remember that out-of-town buyers may be bidding on your property, so pictures will “tell the story” better than any text and can make or break a sale. Finally, disclose all terms of the sale, including settlement terms, any applicable fees, and whether the property is “free and clear”.
Register on the online auction website and upload your pictures and property information. Once your auction is live on the website, interested parties will email or call you with questions. Try to answer promptly and earnestly to establish open communication and trust. If your auction is successful, the website will provide you the buyer’s contact information so that you can arrange settlement.
Auction Pricing Strategy
There are essentially three different ways to set up the terms for your auction. Finding the right strategy is crucial to maximizing bidding activity and, therefore, maximizing sale price.
The first strategy is to use an “absolute auction”. In an absolute auction, the minimum bid is set low and there is no reserve price (a reserve price is the minimum amount a seller will accept for an auction and is generally hidden). This method is highly effective, as it guarantees a sale and greatly encourages bidding wars. The risk in this strategy is that the property owner may wind up receiving a lower price than he or she had hoped for. This strategy is effective for sellers who need to sell a property quickly or have properties in a neighborhood with an oversupply of inventory.
A second strategy is to set the minimum bid low and use a reserve price. The low minimum bid attracts many potential bidders. This method is also risk-free for the seller, because a sale does not occur unless the reserve price is met. While this strategy may be attractive to many bidders, the reserve price may deter some potential buyers from participating. This strategy is one of the most common approaches to online auctions and works for a variety of properties.
A third possible strategy is to set the minimum bid at the asking price and remove the reserve price. This method can be appealing to buyers, because they know exactly what the property’s asking price is. It also appeals to sellers, because they can set the price wherever they desire and only need one bid to ensure a successful sale. A limitation of this strategy is that the high minimum bid may cause some buyer hesitation (fear of being the “first bidder”). This strategy can be a good approach in a stable market with predictable sales prices.
Auction Glossary
Absolute Auction: An auction in which a property will be sold to the highest bidder, regardless of the winning bid amount.
Bid (a.k.a Proxy Bid): A potential buyer’s maximum offer on an online auction. While individual websites may vary, most online auction sites use proxy bids. Proxy bids hide the bid amount confidentially in their system, using only as much of the maximum bid as is necessary to maintain the bidder’s high bid position or to meet the reserve.
Bid Increment: The minimum necessary bid amount over the current bid. If an auction has bids, the next bid placed must be at least the current bid plus the bid increment.
Buyer’s Premium: A fee that covers the costs associated with an auction. It is added to the winning bid amount and is included in the total purchase price paid by the buyer to the seller.
Feedback (a.k.a Seller Feedback): While this varies by site, many online auction websites have some type of feedback system that buyers use to evaluate their experience with a particular seller. This can help potential buyers form an impression of a seller’s professionalism and trustworthiness before they place a bid.
Minimum Bid: The floor at which bidding begins. Online auctions cannot accept a bid lower than the minimum bid amount.
Online Auction: A webpage on the internet that lets potential buyers review information and place bids. Online auctions have gained widespread popularity over the last decade for their convenience, cost-effectiveness, and breakdown of geographical constraints.
Reserve (a.k.a Reserve Price): The minimum dollar amount a seller will accept for an auction. This amount is not disclosed publicly, but bidders can usually see on an online auction when the reserve price has been met.
Sealed Bid Auction: An auction that allows bids to be placed confidentially for review by the seller. This lacks the competitive nature of an auction, in that bidders cannot see what other bidders have offered.
Stalking Horse Auction: An auction in which a seller solicits (or has already received) an offer to purchase the property. This offer is used as a minimum bid that prospective buyers must beat; otherwise, the property may go to the original offering party (the stalking horse).
SJREI members can use the promo code SJREI when listing an auction and will pay only $1 for the listing fee. Other terms and fees still apply. Offer good through 12/31/09.
Jesse Loomis
Bid4Assets.com
Jesse Loomis is the Vice President of Business Development at real estate online auction company Bid4Assets.com. In his tenure at Bid4Assets, he has been instrumental in the sales and marketing of over $250,000,000 in real estate sales. Mr. Loomis is president of J D Loomis Investments, a real estate investment firm.
Bid4Assets.com is the leading online real estate auction company and has sold over 60,000 properties for banks, government agencies, and the private sector.
jloomis@bid4assets.com
(301) 562-3421
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