PRICING AUCTIONS
Disclaimer: Examples provided are intended to be used for illustrative purposes only. In accordance with state and national real estate laws and in compliance with legal guidance regarding price fixing, United Country Real Estate Inc., its affiliates or any of its management team or representatives do not establish, recommend or influence in any way the agreed upon arm’s length commission rates negotiated between its brokers or agents and their clients for the provision of real estate sales, marketing, brokerage or auctioneer services.
Market Value and Highest & Best Use
While a formal appraisal report is not often required, it is necessary to have some idea of market value prior to listing a property for sale at auction. The market value will aid you in advising the seller, setting reserves and knowing where to begin the bidding. Market value is defined as “the amount for which something can be sold on a given market.” An appraiser typically uses a “value in exchange” concept to help arrive at the market value. Answering the question “what is the property worth in exchange for other goods and/or services?” In addition, you must be cautious in counseling a prospect. It is your goal to obtain a selling price as close to market value as possible. If a buyer would not contribute value to or recognize certain improvements in their bidding efforts, you will be wasting your time in trying to market those improvements.
In addition to market value, you will need to understand a property’s highest and best use. The highest and best use of a property is defined as “the reasonable and probable use that will support the highest present value.” The highest and best use can change over time. You will need to be objective in assessing highest and best use. Preconceived notions on the sellers’ part should be questioned. A building that was once at its highest and best use may be past its prime or may have experienced growth levels requiring expansion in its current operations. Be objective when considering highest and best use and you will advise the seller properly and avoid potential disappointments on auction day.
Other Pricing Factors
Sales comparisons compare the sales of similar properties with the subject property to reach an indication of value. Because most comparable properties will have a different size or other attributes, a common denominator must be found between all properties (acreage, price per square foot, etc.). Once the common denominator is accounted for, other differences between the sales must be noted. These differences can include: time on market, age of improvements, location, physical characteristics and terms of sale.
In most appraisals, land value is estimated first and separately from any improvements. Land value is typically determined with comparison sales of similar properties within the area.
The cost to construct an exact replica of a building is the reproduction cost, many sellers get caught up in the notion that the market will pay for the cost of exactly duplicating their improvements but the reality is buyers are thinking more in terms of the utility of the property in its entirety. The replacement cost is then used to reflect their thinking referring instead to the replacement of utility rather than producing a replica.
Sellers like to ignore depreciation which can be defined as a loss in value due to any cause including physical deterioration, functional obsolescence, and external obsolescence. Whether each depreciation factor is “curable” or “incurable” should also play a role in pricing. As well as whether a seller is willing to “cure” any “curable” factors prior to the sale.
The income approach is based on the anticipation of future income, whether through future annual earnings of net profits or appreciation in value at the time of resale.
Mastering the Art of Reserve Pricing
There is no golden rule for setting a reserve price but there is a go-to method to get a conversation started.
70% reserve rule – is a starting point for the discussion to find the pain threshold for the seller.
Example: if you believe a reasonable market value range for a property is $100,000 to $120,000 then conservatively you may determine a reasonable reserve price could be $70,000. ($100K x 70% = $70K).
What you’re looking for when you say this is what their emotional response is. You can negotiate up from there to find out what their pain point is and ultimately determine whether they’re financially capable of an auction.
Other Factors that will drive up or down the reserve:
- Marketing history
- Current Market demand
- Depreciation
- Income
Auction Commissions
For any auction, there are two parties involved the contract for sale; the Seller and the Buyer. As an auctioneer, you have a fiduciary duty to the Seller, but who pays your commission? Ask a room full of auctioneers and, surprisingly, their answers may vary.
Check out THIS Negotiating Auction Commissions webinar.
Seller Paid Commission Examples:
Commission
Auctioneers charge the seller a commission, which is typically a percentage of the gross sales. For example, an auctioneer charging the seller 15% on the gross proceeds of $25,000 would earn $3,750.
By the hour
Auctioneers charge their seller a fixed rate by the hour. If an auctioneer is selling cars for a car auction, and charging $150 per hour, he would earn $750 for 5 hours of auctioneering.
Flat rate
Auctioneers charge their seller a single, fixed rate for their auctioneering services. For instance, an auctioneer charging a $1,000 flat rate would earn that fee regardless of the auction gross proceeds.
Salary
Auctioneers may be employed by a seller who might be conducting auctions on some regular basis. For instance, if a police department had an auction every Saturday of surplus or confiscated items, the department might employ an auctioneer full time, and pay him a salary.
Commission with minimum
Auctioneers charge the seller a commission, which is typically a percentage of the gross sales, or a minimum fee, whichever is greater. For example, an auctioneer charging the seller 15% or $1,000 would earn $1,500 for a $10,000 auction, but earn $1,000 for a $5,000 auction.
Fee + expenses
Auctioneers charge either by the hour, a percentage, flat rate, or otherwise, plus These expenses could be for additional staff, advertising and marketing, hotel, meals, travel, setup, cleanup, etc. These expenses could be paid up-front, and/or following the auction.
Buyer’s Premiums:
A buyer’s premium is a surcharge a buyer pays to a seller that is added to the hammer price at auctions. Buyer’s premiums allow an auctioneer to earn more money for their services, charge sellers less (or no) commission, pay for additional marketing, and/or compensate buyer’s brokers (more on this later). The most common reason auctioneers choose to use a buyer’s premium is to charge no commission to their sellers, allowing the sellers instead to invest in upfront marketing, appraisals, title commitment insurance, and other due diligence fees. Doing so, takes the financial burden of these items off of the auctioneer’s back and places them into the hands of the seller, further tying them to the commitment to and success of the auction process itself. Now something you must keep in mind is that you as an auctioneer have a fiduciary duty to the seller of the property, not the buyer. The auction sales contract is between the buyer and seller only. Therefore the buyer’s premium is paid from the buyer to the seller. Now, where does your payment come in? Your compensation from an auction comes in the form of selling commission or cost reimbursement paid by the seller at closing as provided within the auction listing contract. Therefore, in order to collect the buyer’s premium, you must include it within the auction listing contract. It is also important to note that a buyer’s premium must be disclosed prior to bidding for it to be enforced upon a buyer, and of course, the seller and auctioneer must agree to any fee arrangement prior to the auction.
Sample Buyer’s Premium Clause:
"A TEN PERCENT (10.00%) Buyer’s Premium will be added to the high bid price to arrive at the Total Contract Price for the PROPERTY, to be paid by the purchaser. The Buyer’s Premium proceeds are used as follows:
One hundred percent (100%) of the Buyer’s Premium amount will be paid to AUCTIONEER as Commission.
AUCTIONEER’S commission shall be due and payable by the SELLER from the first proceeds of the sale on the date and at the time when the PROPERTY is conveyed to a purchaser and those commissions shall be deducted from the contract price. AUCTIONEER’S Commission shall be delivered to _____, City, State Zip. SELLER will instruct the ESCROW AGENT to pay commissions to AUCTIONEER according to this AGREEMENT. No funds shall be disbursed to any party without commissions being paid to AUCTIONEER. (See Escrow Instructions attached hereto and incorporated herein.) This paragraph shall survive the closing."
Buyers Broker Participation Fees
Offering a buyer’s broker participation fee at auction is in the best interest of your seller and is healthy for the industry as a whole. While it is unreasonable to expect an auctioneer to give up a large percentage of their income after doing the majority of the work, offering a buyer’s broker participation fee will enhance your sellers’ exposure of their property to more buyers and agents as well as help you receive higher starting bids on auction day. To offer a buyer’s broker participation, have a written opportunity in the auction listing agreement which allows the seller (client) to offer buyer’s broker participation for an additional percentage, provided they only pay the additional fee if the buyer is properly registered, is represented by a licensed broker/agent at the auction, and their buyer successfully close the transaction.
Sample Buyer’s Broker Clause:
"In the event the successful buyer is represented by a licensed Buyer’s Broker, AUCTIONEER will pay the Broker Twenty Percent (20%) of the Buyer’s Premium as a referral fee, but only if the Broker meets the Buyer Broker Requirements as determined by AUCTIONEER."
No Sale Fees
A no sale fee is paid by the seller if the property does not sell for any reason other than a buyer default. Not all auctioneers use this fee but it takes the nearly identical effort to not-sell something as it does to sell something. All of the marketing, preparation, day-of-auction activities are likely the same and if you have properly qualified the seller and the property and the seller still elects to forgo the auction, this could leave you and your company in an unfavorable view of the potential auction bidding audience.
Sample No-Sale Clause:
If SELLER fails to close the sale of the PROPERTY for any reason other than default by the purchaser, SELLER hereby agrees to promptly pay AUCTIONEER the full commission that AUCTIONEER would have earned upon closing of that sale.
Buyer Default Fees
Auctioneers sometimes have problems with buyers that refuses to close the deal. While we will get into how to address a breach of contract later in the Contracting Auctions page, one thing you can do to deter a buyer from defaulting is to add in buyer default fees to your auction agreements.
Sample Buyer Default Clause:
In the event that the purchaser of the PROPERTY, either in whole or in part shall default or otherwise fail to complete their purchase, AUCTIONEER shall be entitled to retain fifty percent (50%) of any deposits/down payments received as a credit against the commissions which would have been due on account of that sale, not to exceed the above stated commission. The remaining fifty percent (50%) of the deposit is to be paid to the SELLER.
Estimating Job Costs
As with any business decision, it’s always a good idea to have a full understanding of what an auction will cost you before committing yourself to the sale. If it is going to cost your company more money that you will make, it may be in your best interest to pass on the deal. United Country has developed a worksheet to help you navigate estimating job costs (available to download in the Auction Listing Strategies page) along with a full webinar tutorial on how to use the Job Cost Estimator Worksheet HERE.