Auctions Part I

Auctions used to be associated with the sale of distressed property, yet there is a growing sense among the Colorado real estate community that auctions are a means to sell property in any market circumstances. Among the potential advantages for sellers is that the dynamics of an auction put buyer against buyer, rather than buyer against seller. Auction sellers hope that the frenzied competition among buyers to win the auction will drive the sales price above the price fetched by more conventional marketing. Auctions are also seen as a way for sellers to avoid financing contingencies, property inspection contingencies and other common buyer conditions. For certain buyers, auctions seem to be an opportunity to “steal” the property. The world wide web may be increasing our comfort with auctions.

Part I of this article broadly addresses some auction issues. Part II of this article (which will appear next month) identifies some of the documentation needed for an auction and some of the disadvantages of auctions. Any broker interested in auctions should review the Real Estate Commission’s Position on Auctioning as neither part of this article repeats the information contained therein.

Auctions are generally characterized as: “absolute,” “subject to seller confirmation,” or as “hybrid” with a minimum bid. In an absolute auction, the seller is obligated to accept the highest bid produced by the auction, regardless of its amount. In theory, if the highest bid is one dollar in an absolute auction, the seller is obligated to sell the property for one dollar. In an auction which is subject to seller confirmation, the seller has the option of accepting the highest bid, or rejecting it and not selling the property. In a hybrid or minimum bid auction, the seller is obligated to accept the highest bid so long as the highest bid equals or exceeds the minimum bid. As far as this author is aware, these terms (absolute, subject to seller confirmation, and hybrid) are not defined under Colorado law. While the terms seem to have a uniform meaning within the auction community, brokers involved in auctions should take care to verify that buyers and sellers aren’t misunderstanding one another. For example, investors from other states might use the terms differently. The auction documents should be created or reviewed by an attorney to avoid misunderstandings.

The seller accepts the risk of low bids in an absolute auction. In exchange, the seller hopes that an absolute auction attracts more buyers than an auction which is subject to seller confirmation, or a hybrid auction with a high minimum bid.

The seller takes less risk with an auction which is subject to the seller’s confirmation, but also is less likely to drum up excitement about the auction and attract the investors looking for a steal who may compete and bid up the price of the auctioned property.

The risk for a seller with a hybrid auction is generally somewhere between the risk of an absolute auction and an auction subject to seller confirmation. With a hybrid auction, however, the minimum bid amount may discourage buyers from attending the auction or may discourage bidders from bidding above the minimum bid. The lower the minimum bid, the more the dynamics of a hybrid auction mimic the dynamics of an absolute auction.

In auctions, it is common for buyers to pay a “buyer’s premium” in addition to the highest bid. For example, in an auction where there was a buyer’s premium of 10%, a bid of $300,000 would cost to the buyer of $330,000.

If listing brokers compensate brokers who procure buyers, listing brokers need to give some thought to defining the meaning of procuring cause in the auction context. For example, the listing broker might publicize procuring cause rules which are similar to those defined by some builders. Listing brokers seek to avoid post sale procuring cause surprises.

Next month’s article explores the documentation brokers need for an auction.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.