Real estate auctions: Next big thing or next pets.com?
Several years ago, the National Association of Realtors® magazine ran an article extolling the benefits of selling homes at auction. The article listed the ways auction selling differs from the usual method:
As I read the article it struck me that this "new way of selling" is in fact the way most homes have been sold here since the late 1990s, particularly in high-demand markets like Palo Alto and Menlo Park. It's more proof that a) like politics, all real estate is local, and b) cutting edge Silicon Valley has cutting edge real estate practices.
So it was with a certain amusement that I read the San Jose Mercury's November 18, 2006 article, "For Speedy Sale, Owners Try Auctions". Hasn't the good old Merc figured out yet how homes are sold around here?
You can read the article and not be so sure—there's no "gosh, aren't the parallels interesting?"—but it's still an intriguing and well-balanced look at the brave new world of home auctions. And I use "brave new world" not as the usual tired literary allusion but in full appreciation of Aldous Huxley's essentially conservative message: "be careful what earthly paradise you wish for".
Home buyers, want the real estate auction brought into the privacy of your cubicle or spare bedroom? Burning to bid on homes anywhere in the country? Yearn for that screaming deal you can't find here? Your wish is the Internet's command.
Now, without leaving your computer, you too can buy real estate in places where $200k will get you a real home. Now you too can take advantage of "sellers...auctioning their properties for as much as 25 percent less than market value" according to one auctioneer. All without having to travel to exotic locales like Ohio, Indiana, Michigan, the Southeast or Texas.
Operators are standing by, but you must act now!
But put your ecstasy on hold for one little second. Because if you did visit any of those locales, you'd be able to check out those pesky little factors that determine the value of the home you're bidding on: condition, location, neighborhood, schools, shopping, the local economy. Think it might make a difference if the roof leaks like a sieve, the house is downwind from a pig farm, half the homes in the neighborhood have bars on their windows, the local school has the lowest test scores in the state, the nearest shopping is a desultory strip mall forty-five minutes away, and the only employer in town just shuttered its factory for good?
And while you're hanging at the local real estate agent's office, you might come to find out that "25 percent less than market value" isn't the screaming deal you'd hoped for, but in fact just the current market value in a distressed market where home prices are sinking like a rock. You know, insider stuff like that. You might even wonder how an auctioneer in Alabama would know what "25 percent less than market value" is, hundreds of miles away, in the Shady Oaks subdivision of the Lazy Acres tract in Lawndale, Indiana.
Or how you'd know.
What kind of credulous fool—sorry, "investor"—would buy homes this way? Recently I met a woman who's purchased five condos, a type of housing often preceded by the word "overbuilt", in a mid-western state notorious for its boom-or-bust economy, entirely because their price is dirt cheap compared to here (not a shock) and their rental income is enough to cover her carrying costs. That's not investing, that's eyes-closed wide-open-throttle speculation of the kind that burned thousands of wishful thinkers in a certain other can't-miss market of the late 1990s.
What got her into a market two thousand miles from home and light years beyond her level of expertise? Her brother. Now, thanks to online auctions, she won't need her brother to lead her down the garden path.
The founder of one property auction site says online auctions are better for everyone because they offer "transparency". According to the article, "sellers can clearly see online what buyers are offering, and buyers can see what their competitors are willing to pay". I didn't know that sellers are ever in the dark about what buyers are offering—all they have to do is look at the spaces in the contract where the buyer fills in the dollar amounts. And while it is true that the current system is anything but transparent to buyers and their agents, that's to the seller's advantage, and guess who gets to pick how houses are sold?
So much for online auctions. How about live auctions?
According to the Merc's article, an Orange County real estate broker recently opened a brokerage "with a mission of selling real estate through live auction". This broker feels that "an advantage to the live auction is that it removes from the process the real estate agents' perceptions about what properties are worth, and lets buyers and sellers hash that out on the spot". It's the old "agents just get in the way" bromide, and it overlooks the fact that buyers and sellers currently "hash out" value through something called "negotiation", aided and abetted by experts in negotiation called "real estate agents".
Another alleged benefit of this broker's live auctions is that they "bring all the potential buyers to the house to see the house, and let them on the (auction) day compete to see who's going to buy the house". But don't the Multiple Listing Service, listing Web sites, agent marketing, open houses and fixed offer dates already "bring all potential buyers to the house" in this area? And if those tools work here, couldn't they work elsewhere without having to re-invent the wheel?
You'd think a real estate broker would know better than to fix the one part of the real estate system that isn't broken. Smelling a novice if not a rat, I ran a license check on him on the Department of Real Estate Web site and, sure enough, this broker has been licensed since just June 2004, or about long enough to get his live auction brokerage up and running. Is this yet another attempt to revolutionize the real estate industry by yet another person who knows diddly about the industry?
Finally, what everyone is missing so far in this exclusively price-driven discussion is that price is just one of many terms in the purchase agreement. The auction format can accommodate these other key terms only by standardizing them, cookie-cutter style. Every buyer has to offer the same terms, with price the only variable, at a time when buyers say they want more choices.
For example, one online auctioneer requires a thirty-day close. But an all-cash buyer can close in a day or two, while a buyer using the State of California's first-time buyer program might realistically need forty-five days or more. Thus the seller can't take advantage of the all-cash buyer's quick close, while the auctioneer's policy shuts out the state-assisted first-time buyer. Yet both may be equally qualified.
Or an auctioneer can decide that no bid price can include a credit to the buyer for closing costs, since that credit would overstate the bid by the amount of the credit. But in some areas, buyers routinely depend on a seller credit because without it they can't pay their closing costs. So does the auctioneer try to level the playing field by making everyone ask for a credit, even buyers with hundreds of thousands of dollars in liquid assets?
That's just the tip of the iceberg. Because under an auction system, those buyers of mine who got their home not because their offer was highest, but because the sellers recognized them from a photo I included in the offer package, wouldn't be living where they are today. And those other buyers of mine who got their home, not because their offer was the highest, but because the offer package I presented was the most complete, also wouldn't be living where they are now. And every seller who chose an offer, not because it was the highest, but because the agent who presented it came as across as the most credible, would be denied the right to go with his or her gut.
There's no doubt that the way homes are bought and sold is deeply flawed. But the innovators from outside the industry never realize that those flaws exist because they favor consumers. That's why, at least so far, even the irresistible force of the Internet hasn't changed the basic real estate industry model.