I had an interesting e-mail in my box a few days ago. The idea was to sell my home by using an auction. Auctions are used to sell properties, but I have not seen them used for residential real estate on a normal basis, so I decide to investigate this option for this series.
Auction sites on the internet have become quite common, and auctions for foreclosed properties happen frequently, so combining the two ideas is not far fetched. Live auctions are wonderfully exciting. Some pieces in my art collection came form auctions, where it was a thrill to be the high bidder. E-bay has not held the same fascination for me. I find it easy to be caught up when bidding in a live environment for the object of my desires, where E-bay left me confused. This feeling about an internet auction is simply because of my lack of interest in pursuing it, but I do understand why people can gather at their site. The concept can be an intriguing method for the real estate market, but I think at this time the concept may not have been developed enough.
I just finished reading Tim Harford’s book The Undercover Economist, so I will play the role of an armchair economist, even with my obvious lack of expertise. Mr. Harford actually deals with auctions in his work, and I believe that I could use some of his analysis in my own way to examine such a real estate auction. First, we have to consider how will the property be valued. As a seller, I would want to achieve a certain price for my house, so I have to consider some type of appraisal. Should I go with the county tax assessor’s value or some other figure? At what price will the auction start the bidding? For a buyer to to bid, he needs to feel like he has a chance for a good deal, but if the bidding starts at a number to low, the seller may not realize his desired price, or even come close to it. An internet or live auction would have to take both seller and buyer into consideration. Sellers who feel cheated will not offer their properties anymore, and buyer who feel cheated will not purchase a property on the site. But would not a buyer only purchase one house, so there feelings may not come into play? The same could be said of the seller. This is true, but word of mouth is important for business, and negative publicity could hurt such an auction house. Considering what your house is worth and where to start a bid will be key for all parties involved. For the seller another factor needs consideration, who and how many bidders are there. A regular group of bidders, say some real estate investors, could conspire to keep the price down, by simply allowing one of their own to win, without going to high up in their bids. Even if the bidders are not working together, a small gathering of bidders will bring a lower return on your home. For a buyer, there can be the danger that another bidder has a relationship with the seller. Auction sites will have to find ways to monitor this behavior to create a fair auction, if they want their business to succeed. The house will have to be sold as is would be a final concern. I cannot bring the house to the bidder to examine, and no pictures or documentation could provide the discovery needed by a buyer. In fact, the e-mail was quite proud of the fact that there would be no seller’s disclosure form or discovery. Should I simply complain that this idea would put me out of business for my argument? That fact really does not matter to the seller or the buyer, but a buyer should be wary of finding themselves with a house that will need extensive repairs, which could not be shown in photographs or videos. A transaction, wether by auction or contract, needs to be perceived of as fair by the seller and the buyer. The buyer may be told that the sale is for an as is property, but would that prevent them from attempting to gain recompensation. Somehow, a successful auction house would have to adequately address this issue, instead of praising the as is model. Otherwise, the government will step in with its own rules to protect the buyer and seller, which now exist in a normal real estate transaction.
At this time, I feel that such a business is geared towards fraud if it does not deal with the ability for a buyer to have a discovery period. The fact that a market has not been developed bodes badly for the seller, because it means that there are not many buyers in this arena. Maybe a site for real estate investors at first, which can be open to others, would build-up the market for sellers and buyers. I think that the scheme could work, but creating a fair auction would have to be a concern for the firm that takes on such a plan.