House poor doesn’t begin to describe Ajoy and Celine Kapila’s real estate quandary in late 2001.
Earlier that year, the Chicago couple bought a parcel in Hinsdale with the intention of building a house on it. To finance that, they put their Lincoln Park house on the market for $1.2 million. To ease the way for a quick sale of the house (they thought), they bought a Loop condo and moved into it.
The Kapilas got crushed by their game of real estate transaction dominoes.
As the recession rapidly worsened in late 2001, they needed to free up some cash for the operation of their software development firm.
The properties had to go; the sooner the better.
They put all three on the auction block. “We weren’t desperate,” says Celine Kapila. “We just wanted out. [Through an auction] there was a date when it would end.”
A happy ending it was. The Kapilas got nearly $1 million for their Lincoln Park house, a very fair price, in their estimation. The building lot also sold at a decent price. Bids for the condo weren’t high enough, so they decided to continue living in it.
Auctioning is an alternative real estate universe that involves way more than the thrill of the bidding war.
Auctioneers, while licensed by the state, have very different roles and obligations than do real estate brokers.
Sellers and their auctioneers have lots of leeway in organizing the auction and setting the selling terms.
Potential buyers must do all their homework on the property before they start bidding, because once the gavel comes down, that house is sold. That means that serious bidders often have to shoulder the cost of house inspections and other qualifying services before the auction. Usually, bidders can’t even participate in the auction unless they are prequalified for financing or have the cash in hand.
“[Buyers are] supposed to do your homework before you put your hand in the air. Nobody can come back and sue you [sellers] if the basement floods or the roof leaks. When it’s done, it’s really done,” says Tom Jurs, a real estate broker based in Huntley who also auctions property.
Auctioneers must comply with Illinois disclosure laws and tell potential buyers about flaws in the property that they know about. Of course, all fraud and consumer protection laws cover auctions, too. But, unlike brokered real estate sales, which sometimes fall through when a buyer or seller gets cold feet, there’s no opportunity in the auction process to change your mind once the gavel falls.
Most people associate auctions with both ends of the real estate sale spectrum: foreclosures and mansions. That’s slowly changing, as auctions are gradually becoming more commonplace for the sale of more typical properties. In some markets, like Memphis, auctions account for as much as 20 percent of residential sales, according to the National Auctioneers Association. The National Association of Realtors estimates that 6.5 percent of 2001 residential real estate sales were by auction, a figure that includes foreclosures, very high-end houses and farm-type property as well as relatively run-of-the-mill properties.
Auctions aren’t prevalent in Illinois. It’s likely that 2 percent to 3 percent of non-foreclosure residential sales in Illinois are by auction, says Alan R. Kravets, president of Sheldon Good & Co. Auctions LLC, based in Chicago.
With today’s record-low mortgage interest rates, relatively reasonable real estate prices in Illinois, and consistently high demand, there aren’t many compelling reasons to skirt the traditional process and take on the lesser-known auction route, says Ward McDonald, a Champaign lawyer and adjunct professor of finance and law at the University of Illinois, where he teaches classes in real estate law.
Still, it’s tempting to some. Buyers think they will get a steal and sellers think they might reel in a richer-than-expected price. Some, like the Kapilas, are frustrated by the broker-listing process, which can drag on and can leave sellers annoyed with the drawn-out schedule of showings and open houses.
Awareness of auctions in general has never been higher, thanks to the 67 million registered users of Internet auction site eBay. It’s just a logical next step, some house buyers and sellers think, to step up into the higher-stakes arena of real estate auctions.
“People think that because of eBay [experience], they know this world,” says Kim Hagen, president of the Auction Marketing Institute, a national trade group based in Overland Park, Kan. “Five years ago, we’d ask at the beginning of an auction how many people had ever attended an auction before and maybe 5 percent of the hands would go up. Now, when we ask that, every hand goes up. Then we ask, `How many have attended a live auction?’ and they all go down again.”
On eBay, auctions count down to the second when the auction ends. Online bidders might lackadaisically post bids in the days before the auction ends, but the last-minute action for hot items is frantic as would-be buyers try to edge each other out with their electronically submitted bids. The auction is over when the time is up.
Some real estate brokers are experimenting with versions of the eBay model because it has set the norm for online auctions. Frank Baloun, a Loop-based real estate broker, has set up online auctions for the penthouse-level condos at the 910 S. Michigan Ave. condo development. His custom-designed process blends some aspects of traditional auctions — interested buyers have to put money in escrow to establish their credibility — with an electronic bidding process.
The proliferation of online auctions only stirs up the silt in a selling process that already appears murky to the inexperienced.
Professional auctioneers explain that there are only two kinds of in-person auctions: absolute and reserve.
At an absolute auction, the property will be sold. The price it fetches depends on the skill of the auctioneer at managing the auction process, as well as his or her success in drawing the right crowd through marketing and advertising.
In a reserve auction, the seller and auctioneer decide ahead of time on a minimum sale price but they don’t let the bidders know what it is. Usually, that price is determined by an independent market appraisal. As the auction carries on, the bidders may or may not be told when the reserve has been met. If the highest bid doesn’t meet the reserve, the seller can choose not to accept it.
Things get muddy when sellers, buyers and auctioneers each put different meanings on the same terms. An opening bid, for instance, is just the first number that the auctioneer suggests as a starting point. It’s not the reserve price, though some people sometimes confuse the two.
Red flags should go up if an auctioneer or seller start modifying the definition of “reserve” or “absolute,” warns Terry Dunning, an Elgin auctioneer who is a member of the Illinois Auction Commission, the state board that oversees the state’s 1,683 active licensed auctioneers.
Auctioneers believe that absolute auctions draw in the biggest crowds, but, he concedes, some auctioneers make last-minute announcements putting conditions on the terms of a supposedly absolute sale. In Illinois, he says, auctions are assumed to have reserves unless they are stipulated as absolute auctions.
But, it’s crucial for both buyers and sellers to make sure they know exactly how the auctioneer defines the auction terminology.
Like real estate brokers, auctioneers shoulder the cost of marketing the property. Newspaper and Internet advertising and the cost of mailing brochures about the house to the auctioneer’s own list and other mailing lists likely to attract buyers can cost from 1 percent to 10 percent of the estimated selling price. Dunning says that in Illinois, the cost is usually 1 percent to 2 percent.
Real estate brokers’ commissions, though, are usually a straightforward 5 percent to 6 percent of the selling price, though that is negotiable, and include marketing costs.
For auctions, “There is no standard operating procedure in terms of fees,” says Chantal Howell Carey, who, with husband Bill Carey, authored “Going Going Gone, Auctioning Your House for Top Dollar” (John Wiley & Sons, 2000) Often, sellers pay an auction fee of about 5 percent of the selling price. Meanwhile, buyers often have to kick in a 10 percent “buyer’s fee” on top of the actual cost of the property, the Careys say.
Once again, the fees that both buyers and sellers pay are set by each auctioneer, and each auctioneer has his or her own opinions about who pays what, says Dunning. Sometimes the buyer’s 10 percent fee, or premium, is all that the auctioneer requires, and sometimes the fees are fashioned as a seller’s commission of 8 percent and a nominal buyer’s premium. It all depends on how the auctioneer likes to run things.
Though real estate brokers are allowed under Illinois law to auction property, not all of them have experience conducting auctions. Conversely, not all auctioneers hold real estate licenses, which come in handy when houses fail to sell at auction and must be listed with a broker.
The key thing to remember, says Steve L. Good, CEO of Sheldon Good Auctions LLC, is that “when you sign on for an auction, you sign on for an event at a particular date and time. But when you get a real estate agent, it’s a contract for them to try to sell the property.”
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An auction checklist for buyers and sellers
For buyers
– Check the contract to determine the buyer’s fee, also called a buyer’s premium. As with all auction expenses, this fee varies widely. In Illinois, it typically ranges from 3 percent to 10 percent, says Terry Dunning, an Elgin auctioneer who is a member of the Illinois Auction Commission, the state board that oversees the state’s licensed auctioneers.
The buyer’s fee is added on to the final purchase price. If the winning bid for a house is $100,000 and there is a 10 percent buyer’s fee, the buyer must pay $110,000.
– Clarify auction terms with the auctioneer and examine the contract to be sure that all terms are spelled out. Don’t assume that you and the auctioneer both mean the same thing for commonly used terms such as “reserve.”
– Review the contract and its terms with an attorney experienced in auctions.
– Inspect the property personally and, preferably, with a professional home inspector.
– Get all legally required disclosures about the property from the auctioneer. Fraud and consumer protection laws still apply, and the seller is required by Illinois law to disclose known flaws of the property to potential buyers. If there is no fraud and if flaws are properly disclosed, the auction sale is final and cannot be reversed.
– Research the market, including prices of recently sold, comparable homes, through the county record of deeds.
– Get a professional appraisal, if necessary, to estimate the value of the property.
– Get prequalified for a mortgage or other financing so that the sale can be completed within three weeks of the auction. Auctioneers rarely accept bids contingent on the buyer selling his or her current house.
– Bring to the auction a cashier’s check in the amount specified by the auctioneer. If your bid wins, this check is the first part of the earnest money. Illinois auctioneers often require $5,000 to $25,000, depending on the value of the property. You’ll write an additional check to bring the earnest money to about 10 percent of the purchase price. All the earnest money must be turned over to the auctioneer within two or three days of the auction’s completion.
For sellers
– Check the qualifications and track record of the auctioneer with the Illinois Office of Banks and Real Estate; http://www.obre.state.il.us/; phone 217-782 3000 or 312-793-3000. Through this office, you can verify that the auctioneer is licensed with the state and you can see what, if any, disciplinary actions or complaints have been filed recently.
– Check the auctioneer’s certifications with the Auction Marketing Institute, www.auctionmarketing.org.
– Determine whether the auctioneer or a related brokerage will sell the house if it fails to sell at auction.
– Clarify auction terms with the auctioneer and examine the contract to be sure that all terms are spelled out. Don’t assume that you and the auctioneer both mean the same thing for commonly used terms.
– Review the contract and its terms with an attorney experienced in auctions.
– Negotiate marketing and seller’s fees with the auctioneer.
– Cooperate with the auctioneer, who is responsible for holding scheduled open houses, and open the property for inspection by potential buyers.
