For auction junkies, the greatest show on earth doesn’t take place under the big top but on the bidding floor.
Be it real estate, art, antiques or classic cars, a live auction provides multifaceted entertainment. There’s something for everyone: drama, suspense, potential for fame and fortune, mental and even-to some extent-physical competition. (Auctions may not be an aerobic workout, but they can generate a lot of sweat, bidders say).
“It’s a game to me,” said Tim O’Brien, a businessman in Orlando who regularly attends both property and classic-car auctions.
Like many auction enthusiasts, the expectation of improving his fortunes is a major drawing card for O’Brien, who runs several businesses ranging from airline consulting to private investigation.
“I’m not a gambler, but I am a bettor,” O’Brien said. “A bettor bets only what he feels comfortable with . . . at an auction you’re betting on the knowledge you have against other individuals.”
Although classic-car auctions tend to be more fun for O’Brien, at real estate auctions, he’s able to obtain more information in advance, such as open houses, tax information, and market comparisons.
Minneapolis investor Irwin Jacobs says some of his best deals have been made at auctions. Still, he cautions that “more people have gone bankrupt than made money.”
“There’s a certain excitement at auctions that causes people to lose control . . . to rationalize in their head-irrationality . . . it’s a high,” he said.
This frenzy is partially driven by speed. At a real estate auction, property sells literally within minutes, versus weeks or months as in traditional negotiated real estate transactions.
There’s also a finality that heightens drama surrounding the event. If the auction is conducted as an absolute sale-as opposed to an auction with reserve, in which the seller has a chance to accept or reject the highest bid (see related story, page ??)-it’s a done deal when the gavel strikes.
An auction is a highly-charged event. Losing control depends on what’s up on the block and how it tugs on bidders heartstrings.
For O’Brien, who both collects and re-sells cars, there is less chance that he’ll lose perspective at a real estate auction. On one classic-car deal, O’Brien overpaid-about $50,000-because he “bought from the heart instead of the mind.”
Marion Valle, senior vice president and general sales manager at Carroll Associates, a Chicago realty firm, has a different perspective: “I seldom get carried away when buying a piece of real esate (at auction),” he said. “That’s my business. But if I’m at an antique auction and see something I really love, I might pay more than I want.”
But that’s when his son, Mark, who runs an antiques store in Hyde Park, keeps emotions in check.
In many ways, auctions are also social events where bidders see old friends-and rivals.
Friend or foe, however, familiarity breeds insight, auction pros agree. “I feel more comfortable at an auction where I know the other bidders,” O’Brien said, explaining that understanding the other guy’s motives and bidding style can further your game plan.
Being adept at reading body language is important, too. Through facial expressions and mannerisms, many bidders unintentionally reveal whether they plan to stay in the battle or throw in the towel.
With this in mind, O’Brien likes to keep his back to the auctioneer and watch those bidding against him. He also tries to be discreet when making his own bids-generally communicating with an auctioneer’s assistant stationed in the crowd to assist bidders.
“People are very, very fickle on certain things,” said Valle, who has watched bidders drop out merely because they feel protocol has been violated.
Indeed, auctions are an ego-intensive industry. Jack Gartley, a manufacturer of mobile homes in Phoenix and auction enthusiast, recalls a televised auction where “one guy would bid on anything just to get on camera.”
Other bidders simply can’t stand to lose. And that can cause them to lose-by overpaying.
Jacobs recalls a time he stayed in a bidding war, not because he wanted the business being auctioned, but because he wanted his competitor to pay dearly for it. Jacobs dropped out after bidding $50 million, letting his adversary win at $53 million-more than double what Jacobs thought the company was worth. Jacobs recalls that his opponent was “pale-faced” when he went over to shake his hand.
Indeed, many people get caught up with the competitive spirit and then are surprised when they wind up with a winning bid. “I’m not sure what I’m going to do with it” is a frequent comment after the buyer comes up for air.
Yet whether or not one wants to be on the playing field, auctions are great spectator sport. “There’s no question about it, 80 to 90 percent are there for the entertainment . . . they’re not even registered to bid.” Valle said.
Real estate auctions are where you can see some of the greatest histrionics, experts say. Dancing in the aisles, shrieking, crying . . . it all goes on at property auctions, they say. “For one can dream,” pointed out Jaime Alvarez, a real estate broker in Victor Ville, Calif.
Yet emotions are not part of the scenario for investors like Alvarez. “We just shake our head when someone goes way over. . . . We think gross profit, net profit,” he said. “He who cares the least wins. . . . It’s a bit of a paradox,” he added.
When it comes to bidding philosophy, it’s different strokes for different folks.
“Hard-core” collectors are often willing to pay any price for a piece they want, auction experts say, and home buyers are also more apt to overpay.
Investors must weigh acquisition costs against expenses and expected re-sale price. “The conversion process has to be in the back of your mind,” O’Brien said. “There has to be a profit at the end.”
Yet even the inexperienced bidder can do well, provided he does his homework, experts say.
Daniel Stone, a metallurgical engineer, bought his three-bedroom condo in Hazel Crest at auction for $103,000. “I think I got a good deal,” he said, noting appraisal price was $116,000. But he admits being nervous: “Not only was it my first auction but it was the first time I had bought property,” the 32-year-old engineer said.
Besides researching the property, Stone set fiscal and emotional limitations for himself. “I decided I wasn’t going to get mad if I got one unit (for this price) and the next bidder got one for less.” Having first choice of units was worth a higher price to him, he explained.
Because of his predetermined boundaries, Stone was on “automatic pilot” by the time he got to the auction. But as added insurance, he brought along a friend. “I told him to kick me if I went over (his ceiling bid),” he said.
The auction attraction is growing
Auction fever has been on the rise in the U.S. real estate market.
Properties selling at auction in 1993 totalled $42 billion, up from $10 billion in 1990, according to the Gwent Group, a real estate research and consulting firm in Bloomington, Ind.
Auction experts say it’s not just distressed property hitting the block. “Sellers are looking for more alluring creative, time-efficient marketing programs (than negotiated brokerage),” said Rick Levin, head of his own real estate auction company in Chicago.
Townhouses, condos, single-family homes, commercial property, and farm land can all be purchased at auction.
The most familiar type of auction is an absolute sale, in which property is won by the highest bidder, regardless of price.
There are a couple of variations: At a minimum bid sale, the auctioneer will accept bids only above a certain price, which has been previously disclosed. At an auction “with reserve,” the seller reserves the right to accept or reject the highest bid within a specified time.
Auctions can also vary by who’s selling and why. At auctions run by the federal Department of Housing and Urban Development (HUD), properties owned by that agency are sold because homeowners defaulted on FHA-insured loans. At Resolution Trust Corp. (RTC) auctions, property held by insolvent savings and loan companies is sold. At sheriff’s sales, property is auctioned off to pay delinquent taxes.
Or property owners may simply opt for auction rather than going the traditional route of negotiated brokerage.
Different types of auctions offer different benefits to prospective buyers.
Sheriff’s sales can be risky since buyers don’t get a chance to inspect the property. Yet there is more money that can be made on the deal, auction enthusiast say, estimating property can be purchased for 10 to 70 cents on the dollar.
At other auctions, product may sell at a higher price, however, there an opportunity to view property in advance and often get help with financing. In contrast, at a sheriff’s sale, payment is generally required within 24 hours.
Auctions often draw huge crowds. “But, it only takes two interested people to bring a top-notch price,” observed Ray Carnahan, an auction enthusiast in Fort Wayne, Ind.
Carnahan saved a bundle at one estate sale, because on the originally slated auction day, the estate’s attorney refused to go through with the sale. Only five bidders showed up and he wanted to reschedule in hopes of drawing a larger crowd. A month later, a second auction was attended by more than 100 people. Yet Carnahan, who wound up as top bidder, estimates he saved at least $50 an acre because two of the previous bidders, both serious contenders, didn’t show up.
