I’ve been asked numerous questions over the years about auction law and customary practice.
Of those many questions, this one has been asked several times, and it’s usually phrased more-so as a statement.
It usually goes like this:
Mike, you can’t sell real estate [property] at absolute auction if it has a mortgage [lien] on it, right?
The answer is, “Of course you can … It happens every day.” The answer is easy as nearly every real property in the United States has a tax lien present, and yet sell many sell absolute — or “without reserve.”
But more importantly, what if this above $450,000 home has a $325,427.82 lien due to financing the purchase two years ago? This home can indeed sell absolute if the seller and/or third party guarantees that any delinquency between the final bid price and $325,427.82 is satisfied at closing.
For example, if the final bid price at absolute auction is $295,000.00, there is a deficiency of $30,427.82. If the seller and/or third party can bring this additional amount to the closing, all is well. Or, if the lender agrees in advance to reduce or eliminate a delinquency, then that’s another solution.
Absolute auctions draw larger crowds, more bidders and typically higher prices. As such, if the seller or third-party can guarantee to facilitate the transfer of free and clear title, selling absolute is not only prudent, but well advised.
However some auctioneers would choose to market the above property with a minimum bid (published or not published) of $325,427.82 (or maybe $326,000.00 to make it a round number.) Others might choose to have a non-published secret reserve — likely $325,427.82 or the like.
But both these marketing techniques — and related “type” of auction — deters bidders, lessens crowds, and sellers suffer accordingly. Given the reserve is 72% of the perceived market value, it is right where bidders begin to consider it prohibitive.
In the National Auctioneers Association’s Accredited Auctioneer of Real Estate class, I suggest minimum published bids, if necessary, shouldn’t exceed 67% of the property value. The same, essentially, for secret reserves.
We contend the “prospect of a deal” drives bidders to auction properties, and anything over 67% of the market value doesn’t really appear to most bidders as a deal. We wrote more about that topic here: https://mikebrandlyauctioneer.wordpress.com/2016/06/23/selling-the-discount-andor-the-value/
And, just as important as the minimum bid being low enough, a realistic view of the market value of the property is material to the process. If this isn’t a $450,000 property, and more-like a $300,000 property, then the 67% discount must be applied to the latter.
Auctioneers are encouraged to explore selling real property without reserve (absolute) and this certainly includes circumstances when the subject property has a lien. At minimum, offering clients this option shows good judgement.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.
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