By Tony A. Isbell
Even before the real estate market began to slow, real estate auctions
were gaining popularity across the country. Residential property auction
sales saw a 39.2 percent increase from 2002 to 2005 — from $10.2
billion to more than $14.2 billion annually, according to a special
report published in 2006 by the National Auctioneers Association. Now
that residential sales have decelerated, this figure is likely to rise.
But what does this growth in the use of auctions mean for
practitioners, who have traditionally viewed the auction as an
adversary? And what are the legal ramifications for an agent when a
client becomes involved in an auction?
A new look at auctions. Auctions have always provided benefits to both
the buyer and the seller. The buyer has the opportunity to bid on a
property and often purchase it at a discounted price. Buyers also have
the comfort of seeing market value established at the auction.
From the seller’s perspective, an auction provides an expedited sales
process, control over the terms and conditions of the sale, and highly
intense promotion that isn’t generally associated with conventional
retail sales methods. Because of its timeliness, an auction also creates
immediate interest in a property from buyers who might otherwise sit
back to see whether sellers will make further price reductions.
Recognizing those benefits and the need for greater flexibility in a
slower market, some real estate salespeople have begun to explore
auctions, both in person and online, as a marketing strategy open to
them. Many are finding that auctions work well if you have a motivated
seller and proper advertising exposure. At the same time, some auction
companies are beginning to see real estate practitioners for what they
are — a wealth of information and professional allies in selling a
property at auction.
The Legal Lowdown
If you’re intrigued by the possibilities of an auction as a marketing
option, it’s time to get up to speed on the legal differences and
similarities between an auction and a traditional sale.
Licensure. Some states require an auctioneer to hold
an auctioneer’s license to conduct any live auction. States may also
require a real estate license. If so, rules such as including the
broker’s name and license number in advertisements and making proper
disclosures to buyers about the property apply to the auctioneer. Check
with the department that issues real estate licenses in your state to
see whether an auctioneer must have a real estate license to sell
Compensation. Almost all auctioneers will generally
pay a licensed real estate agent a set fee if that agent brings the
buyer to the auction property. Any fee offered is typically listed in
the auction brochure, in the Internet listing, and in the auction terms
and conditions of sale distributed before the auction begins. If a
property is still listed in the MLS, the auction date and the fee
offered to a buyer’s agent should be listed in the comments for the
property. The auctioneer is legally required to pay any fee that’s
advertised in promoting the auction.
In many cases, there are restrictions that the buyer’s agent must meet
to receive a fee. For example, the agent may have to attend the
pre-auction open house with the bidder, notify the auction company in
advance of the agency relationship with the bidder, and attend the
actual auction. In addition, the fee to buyer’s agents may vary,
depending on whether the buyer submitted an opening bid before the
auction. Auction firms are often willing to pay a premium amount to a
buyer’s agent for submitting a fair and reasonable starting bid in
advance of the auction date, because such a bid sets a price floor. This
speeds up the sales process on auction day and allows the seller to
gauge the initial interest in the property. Be sure to read the auction
terms and conditions regarding all fees.
Fiduciary responsibilities. Auctioneers who work
directly with sellers are typically licensed as a real estate broker in
the state where they conduct business. In such cases, the auctioneer has
the same fiduciary responsibilities to the seller as does a traditional
real estate broker. The auctioneer also has the same responsibility for
disclosures regarding the property and its condition. Even if the
property is sold “as is,” that doesn’t safeguard the auctioneer and the
seller from liability for false statements or misrepresentations about
Inspections and due diligence. Almost all auctions
require that the buyer inspect the property before bidding at the
auction. Most buyers are also required to sign a contract addendum
stating they’ve seen and inspected the property, or they waive their
right to do so. A few auctioneers allow a modest post-auction inspection
period. In most cases, the bidder can purchase a due diligence package
about the property before placing a bid. Those packages are usually
available via e-mail or at a scheduled open house for the property. The
package will typically include additional property photos, a survey, a
plat map, location and topography maps, a floor plan, neighborhood and
school information, tax information, an appraisal, a property inspection
report, and a title report.
These days many forward-looking real estate sales associates are
exploring online and offline auctions as ways to sell slow-moving
listings. But as with any new business venture, be sure you understand
your legal positions before you get involved.
Bidwin.org is an online real estate auction website based in Canada with head office in Calgary, Alberta. Bidwin.org’s online bidding program is designed to keep the listing agent at the center of the real estate transaction.