AUCTION LISTINGS: An Overview of the Real Estate Auction Process ________________________________________________________________
REALTORS® have noticed, especially in the current market, that more listings have employed an auction process for selling the property. Auction listings are not a stand-alone category of listing type, such as exclusive right of representation or exclusive agency, but rather a technique for selling. This technique is most commonly thought of in the live auction format with a fast-talking auctioneer, but the process is also employed online by various websites. This paper will provide a primer on the subject.
2. The Auction Contract
Auction companies that conduct business in the State of California are required by law to be bonded by the state. Any auction company selling real estate in California must also have a DRE licensed broker overseeing every auction. Auctioneers serve as agents of the sellers, and in this capacity, they draw up and sign the memorandum of the sale and the real estate sales contract on behalf of the sellers. Duties imposed on the auctioneer include diligence, obedience, disclosure, accounting, and loyalty as a fiduciary to the seller. The duty of diligence requires the auctioneer to do all it can to obtain the highest price for the property by extensive advertising that builds excitement into the bidding process. The duty of disclosure requires the auctioneer to inform the seller of all material facts that might affect the seller. A listing agent/broker is an agent of the seller who markets the seller's property and represents the seller during the sale and at the closing. In a sale by auction, the listing agent/broker manages many traditional real estate functions and shares the commission based on the amount of involvement and the relationship defined by the parties involved. This relationship is beneficial for auctioneer and agent when services by a local auction or real estate company are needed or when an agent identifies a potential auction situation for a seller and the agent is not an auctioneer. Upon agreeing to hold an auction, the seller, listing agent, and auctioneer execute an auction contract that sets up the relationship. The auction contract is distinguishable from a listing contract executed between a seller and real estate broker, although like the listing contract, the auction contract does establish an agency relationship between the seller and the auctioneer.
2. Types of Auctions
• Minimum Bid - In a minimum bid auction, the minimum bid is published in advance and a sale will not occur unless the minimum bid is reached or exceeded.
• Reserve - A reserve auction requires no minimum bid, but the seller reserves the right to accept or reject the highest bidder according to the terms, conditions, and timing of the auction. This reserve amount is not a minimum and most often is not disclosed to the bidders. The seller and auctioneer agree on the reserve amount, which is a confidential number. If that undisclosed reserve price is bid, the seller owes a commission to the auctioneer but is not obligated to enter into a sales contract with any bidder. Thus, the seller can reject the highest bid for virtually no reason. The seller’s ability to reject appears to protect the seller from low bidding, but it may reduce the number of prospective bidders who will be willing to perform the necessary due diligence if the time and cost could be destroyed by the seller’s unwillingness to accept any offer. Yet, auctions are presumed to be reserve unless they are advertised specifically to be of a different type. Prospective buyers in reserve auctions wil l want to know in advance that even if theirs is the high bid, seller can choose not to accept it. Thus, REALTORS® should always make sure to disclose to their clients if an auction is a reserve auction.
• Leap of Faith - A “leap of faith auction” is a variation on the reserve auction with no undisclosed reserve. A leap of faith auction arises when the seller and the auctioneer cannot predict a likely range of prices sufficient to set the reserve. The auctioneer may agree to hold the auction but often will charge a fee to cover expenses of the auction that can be charged against the commission if the property sells at the auction.
• Absolute or No Minimum Bid - Where the auction contract sets up an absolute or no minimum bid auction, real property is sold to the highest bidder regardless of price. This guarantees that a sale will occur. In an auction held “without reserve,” the opening of bids by the auctioneer constitutes a firm offer, as opposed to an invitation to make an offer as in a reserve auction. Sellers are not permitted to bid in an absolute or minimum bid auction to insure that the mutual assent that is necessary for a contractual relationship will remain. If sellers were permitted to bid, they could effectively reject the highest bid. Auctioneers find that absolute auctions typically attract the most bidders because of the lure of the bargain, and for that reason, absolute auctions bring the highest price.
3. Auction Companies In California, the most commonly encountered companies conducting real estate auctions are listed below:
• Real Estate Disposition Corp. dba Auction.com is an LLC based in Irvine, CA founded in 1990 that conducts auctions throughout the United States and even abroad. They conduct both live and online auctions of every conceivable type, including REO, foreclosure, short sales, luxury, and more. This company appears to conduct more auctions in California than any other.
• Williams, Williams & McKissick, LLC dba Williams & Williams is an Oklahoma-based company that auctions real estate nationwide. Auctions are held live on site, but the company allows for offsite interactive bidding through its Auction Network online portal.
• Hudson & Marshall is a Georgia-based corporation which auctions all types of real estate including condominiums, co-ops, town homes, single-family homes, land, ranches, commercial & investment properties, and high-end trophy properties. All auctions are conducted live on site or in a ballroom setting.
• Florida 100 Realty Inc. dba Auction Services International is a Florida corporation that was organized specifically to meet the special needs of financial institutions in the successful disposition of REO property. All auctions are conducted live.
• Bid4Assets is a Maryland-based real estate auction corporation founded in 1999. It primarily engages in the sale of various forfeited, surplus, tax-defaulted, and foreclosed properties online. All auctions conducted by the company are done online; i.e. there are no live, in-person auctions.
4. Auction Concerns
While the auction process can well-serve some buyers and sellers, it can also generate problems. Be on the lookout for the scenarios set forth below:
• Shill Bidders, Fraudulent Bidders, and By-Bidders: Perhaps the most common potential problem with auctions is the use of fraudulent bidders, also known as shill or by-bidders. Typically, the seller employs a by-bidder, who has no intention to purchase, to raise the price by fictitious bids, thereby increasing competition among the bidders.
• Confusion and Deceptive Advertising: In some cases, the complex nature of selling multitract properties at auction confuses unsophisticated parties. In others, bidders miss modifications to the auction terms announced by the auctioneers at the auction, which confuses them. At the extreme, some auction advertisements simply misrepresent what is being offered for sale or the terms of the auction sale.
• Denial of High Bidder at Absolute Auction: It sometimes disappoints a bidder to learn that its highest bid at the auction does not entitle it to purchase the real estate at that price. In a reserve auction, the seller may cancel the highest bid for no reason at all; however, a REALTOR® should make sure to inform the buyer of this possibility ahead of time. In the case of a high bidder who is denied at an absolute auction, however, a buyer may pursue legal action and a court may use a contracts analysis to resolve the dispute.
• Inconsistent Bidder Registration Practices: An auctioneer’s advertised terms for qualifying to bid may be inconsistently enforced. In one case, the purchaser brought an action against the auctioneer for fraudulent misrepresentation as to who was allowed to bid at the auction. The auctioneer’s advertised terms required bidders to provide certified funds of $2,500 per parcel, or $50,000 for the entire property, in order to bid at the auction. The auctioneer assured the prospective bidder that all bidders who participated in the auction were qualified. However, the auctioneer’s assurances were dubious at best, because subsequent investigation showed that at least some of the bidders did not qualify, which artificially inflated the price of the property.
5. Auction Listings on the MLS
When an auction listing is placed on an MLS, the following C.A.R. Model MLS rule applies:
7.24 Auction Listings. Auction listings entered into the MLS system shall have listing contracts as required under these rules and be clearly labeled as auction listings. Auction listings shall further specify the following:
(a) The seller’s minimum acceptable bid price; (b) Whether the auction is being conducted with or without the seller’s right of reservation; (c) The date, time and place of the auction; (d) All required procedures for Participants/Subscribers to register their representation of a potential bidder; (e) The compensation to be paid to the Participant representing the successful bidder; (f) The time or manner in which potential bidders may inspect the listed property; (g) Whether or not the seller will accept a purchase offer prior to the scheduled auction and if so, the compensation to be paid to the cooperating Participant in the event of such a pre-auction sale as well as any other necessary pre-auction details; and (h) Any other material rules or procedures for the auction.
Because this rule requires a disclosure of the seller’s minimum acceptable bid price, only minimum bid auctions - or alternatively reserve auctions that disclose the reserve price - may be listed on MLSs which follow the C.A.R. Model MLS Rule. Incidentally, some MLSs may have adopted more lenient rules for auction listings regarding submission of a list price, in which case, listings with an undisclosed reserve price may be permitted.
MLS Rules will otherwise require from auction listings what is required in all listings submitted to the MLS. These basic requirements for MLS submission are that a valid written listing agreement exists; a list price is entered (starting bid price or bid range that the seller will accept is okay, but using an opening bid price below what the seller will accept is misleading); unconditional compensation is offered; and some degree of agency is in place for the duration of time the listing will be on the MLS.
Some have noted that auction listings can conflict with the MLS Rule (see Model MLS Rule 7.12) requiring unconditional unilateral offers of compensation. For example, this issue would be triggered in the following circumstance: A listing submitted to the Service will be available for sale in a traditional (i.e. non-auction) format for a certain period at one rate of commission with an indication that the listing will be converting to auction if not sold within that period and then offered at a different (usually reduced) rate of commission. Under the MLS Rules (see Model MLS Rule 7.16), a listing broker is free to make changes to the amount of commission offered at any time prior to the presentation of an offer. However, placing varying rates of commission on the Service based on the occurrence of a certain condition (the auction) would be an impermissible condition placed on commission in violation of MLS Rules. Should a listing agent be operating under a listing agreement setting forth the two different scenarios, he will need to either (1) select a commission rate he intends to be bound by regardless of conditions or (2) submit the listing with the initial rate and then make sure to change it to the subsequent rate at the operative time period.