Some sellers trying auctions to unload

their homes

Experts say a slow market is the wrong time for that

approach.

By James R. Hagerty, Michael Corkery
THE WALL STREET JOURNAL
Saturday, August 19, 2006

As a glutted real estate market makes homes harder to sell, some sellers are trying a different approach: putting their house or condo on the auction block.

Auctioneers, long confined to the margins of the U.S. home selling business, report a surge of demand since housing markets along the East and West coasts began stalling a year or so ago. They say auctions provide a quick exit for people who might otherwise wait months or years for a buyer to come along. But the costs of holding an auction are often steep, and the bidding can deliver crushing results: Homes may turn out to be valued at far less than their owners figured.

In some areas along the East and West coasts and in Florida, the number of homes listed for sale has more than doubled from a year ago and prices are eroding.

With so much to choose from, buyers are no longer in any hurry; many think prices will fall further if they wait a few months. The market has chilled so fast that sellers have little idea how much their homes are now valued at or how to attract buyers. That creates a perfect opening for auctioneers, who argue that they can create the buzz needed to snap bargain hunters into action.

"We do for real estate what a Fourth of July sale does for retailers," says Lynn Gardner, the owner of Homeland Auctions Inc. in Leesburg, Va., which auctioned 57 homes in this year's first half, up from 11 in the same period last year.

Bill Loper, an advertising salesman put his house in Destin, Fla., on the market with a real estate broker last year, asking about $510,000. With many other homes for sale nearby, "we were getting no lookers, no offers," Loper says. In March, with still no prospects, he put the home on the block in an auction handled by Anderson Auctions Inc. of Destin. It sold for $435,000. "I feel like we got the fair market value of the house on that day," he says.

Stephen Karbelk, executive vice president of Tranzon Fox, an auction firm in Burke, Va., says some of his business is coming from people who bought new homes and then found themselves unable to sell their old ones. In some cases, people are paying two mortgages and are desperate to sell.

Larger auction firms — including Sheldon Good of Chicago, Williams & Williams of Tulsa, Okla., J.P. King of Gadsden, Ala., and Pacific Auction Exchange of Bakersfield, Calif. — also report rapidly rising demand from individual sellers as well as home builders and investors stuck with excess inventory.

Auctions of residential real estate in the U.S. totaled $14.2 billion last year, up 8.4 percent from 2004, according to the National Auctioneers Association, a trade group. That is less than 1 percent of total home sales, but the proportion seems likely to rise this year for reasons beyond the slowdown in conventional home sales.

Web sites such as eBay.com have encouraged more Americans to view auctions as a way to sell all kinds of things, says Steven Good, chief executive of Sheldon Good.

Auctions allow sellers to control the timing of a sale and avoid the contingencies common in conventional sales, such as stipulations that a buyer can pull out if he is unable to sell his current home or obtain financing.

But auction services aren't cheap. Commissions and marketing fees often exceed 10 percent of the home's value, compared with the 5 percent or 6 percent typically charged by real estate agents.

Auctioneers say their fees are justified by their ability to get property sold quickly.

Sellers tend to show more interest in auctions when the housing market is weak.

But Chris Mayer, a professor of economics and real estate at Columbia University's Business School, says Americans have it backward. Auctions work best in strong markets when there are plenty of determined bidders to push the price up, he says.

During a downturn, he says, "buyers think one thing: big discount."

Although the owner often reserves the right not to sell if the bids are too low, a failed auction could leave a home "tainted," making it seem undesirable, he says. Instead of using auctions, he advises homeowners who need to sell quickly to price their homes "aggressively" low in relation to competing properties.

Auctioneers, of course, play down the risk of tepid bidding. "Buyers get caught up in the bidding and usually pay more than they should," says Jim Gall, president of Auction Co. of America in Miami.

Homes on the block

Questions to ask before you sell your home via an auction:

• Does the firm have a strong track record?

• Does the auctioneer have good training? Check for designations such as AARE (Accredited Auctioneer, Real Estate) or CAI (Certified Auctioneers Institute).

• Do you understand the financial details? Sellers generally pay upfront for all or part of the costs of newspaper ads, mailings and other marketing used to drum up interest. These costs can range from a few thousand dollars for ordinary homes to $50,000 or more for trophy properties.

• Do you understand the process? In most cases, auctioneers collect a buyers premium, generally 5 percent to 10 percent. But some auctioneers also charge the seller a commission.