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2. Identifying Sellers and Properties

• Understanding sellers, properties, and market conditions for which real estate auctions are best suited

• Applying the two-thirds rule

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First Step in Auction Process

Analyze:

Seller

Property Market Conditions

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Analyzing the Seller

• Seller motivated?

• Property overmarketed?

• Previous price "labeled" the property?

• Why has property not sold?

• Seller’s reputation?

• If not an auction, what do you suggest?

Auction is a commitment and requires investment from the seller.

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NOT Good Seller Candidates

• Over-motivated

• Legal issues, eg, lis pendens

• Unrealistic expectations of the property value

• Litigious

• Unwilling to level with you

• Multiple owners with differing goals

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Good Seller Candidates

• Have high holding costs

• Need immediate cash

• Are retiring

• Partnership or marriage break-up

• Moving out of the state

• Want to liquidate an estate

• Are auction minded

• Listing about to expire

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• Never been listed

• Already purchased another house

• Know auction will bring true market price

• Financial problems

• Time sensitive—“just want it sold”

• Can’t/don’t want to maintain property

Good Seller Candidates

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Analyzing the Property

• Zoning

• Back taxes

• Tax assessment

• Equity and mortgage

• Property condition

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Good Properties for Auction

Owner has:

• At least 25% equity

• A lot of high carrying costs

Property is:

• Unique

• Vacant

• Difficult to appraise

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Analyzing Market Conditions

• Market conditions represent buyer interest.

• At time of listing, market condition must be considered.

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Favorable Market Conditions

• Dull market—too much product, some buyer interest

• Seller’s market―high demand and a lot of competition

• Emerging market—kick off sales program of new developments

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Consider Auction for All Properties

• Residential

• Industrial

• Agricultural

• Apartment buildings

• Shopping centers

• Nursing homes

• New housing developments

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Consider Auction for All Properties

• Property in good condition and desirable location usually sells.

• Even property that needs rehab or construction can sell if there is positive demand for it.

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Negative or No-Demand Properties

• Cannot be given away

• Examples are properties:

Where list price established the upper limit

Have been on the market for a long time

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Two-Thirds Rule

• Used to analyze market, property, and seller

• If two out of three are favorable, auction should be offered to seller as a sales option

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Questions to Ask

• Answering several questions helps determine if situation is auction candidate

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1. Seller’s Motivation

• On a scale of 1 (low) to 10 (high), rate seller's motivation

Auction creates a sense of urgency; important that seller feel comfortable

with this situation

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1. Seller’s Motivation

Sellers more motivated when:

• Need quick cash

• Must sell property to finance another

• Under severe personal pressures

• Have high holding costs

• Have excess real estate

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2. Seller’s Debt-to-Equity Ratio

• Estimate possible sales price, hard costs, auction expenses, mortgage, and other debts

• Establishes how flexible seller will be in adjusting sales price

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3. Lender’s Position

• Type of mortgage and interest rate?

• Mortgage amount more than property value?

• Lender willing to release property for sale by auction?

• Lender allow assumption of mortgage?

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4. Seller Financing

• Makes a purchase more attractive and affordable

• Consult with an attorney

• Also consider offering discounts to buyers who pay cash

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5. Property Condition

• “As is, where is”—without warranties or contingencies

• Price should be only open issue on auction day

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As Is, Where Is

• Property sold with all faults, as it is and where it is

• Buy what you see and do not see

“As is, where is” does NOT mean caveat emptor. Full property

disclosures are required by law.

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6. Demand Factors

• If strong interest in a property type, better chance of achieving a good sales price. For example:

Last view lot in a prestigious subdivision

Prime highway location in busiest commercial area of town

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Case Studies: Two-Thirds Rule

1. Read case study.

2. Analyze seller, property, and market.

3. Identify whether seller, property, and market are positive (+) or negative (-) candidates for auction.

4. Apply two-thirds rule.

5. List advantages and disadvantages of selling by auction.

6. Answer question "Would you recommend auction for this case study?" and explain why.

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Case Study 1: Estate Sale

• Jan is moving into a nursing home.• Husband died 5 years ago, and she

has not been able to maintain 125-year-old house and 8 acres of land.

• Children need to sell estate to pay for nursing home.

• Property is located 12 miles outside town.

• Real estate market is soft.• Neighbors have expressed interest in

property.

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Case Study 1: Estate Sale

(+) (-)Seller

(+) (-)Property

(+) (-)Market   

                 

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Case Study 1: Estate Sale

Advantages Disadvantages

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Case Study 1: Estate Sale

• Would you recommend an auction for this situation?

• Why?

Yes No

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Case Study 2: Business Loss

• Shanes own a home in NM and an antique business in CA.

• Only have 6 weeks to sell home• Adobe-style house in historic part of

town.• Property appraised at $450K. Equity

is 40%.

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Case Study 2: Business Loss

(+) (-)Seller

(+) (-)Property

(+) (-)Market   

                 

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Advantages Disadvantages

Case Study 2: Business Loss

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• Would you recommend an auction for this situation?

• Why?

Yes No

Case Study 2: Business Loss

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Case Study 3: Strip Mall

• Been on the market for over 5 months

• Owner cannot keep up with costs of managing property.

• Owner has 25% equity.• Four out of six storefronts still under

5-year leases.

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Case Study 3: Strip Mall

(+) (-)Seller

(+) (-)Property

(+) (-)Market   

                 

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Advantages Disadvantages

Case Study 3: Strip Mall

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• Would you recommend an auction for this situation?

• Why?

Yes No

Case Study 3: Strip Mall