The first property auction sponsored by Hawaii Life is less than a week away. In between showing my auction listing and answering questions about it and other auctions properties for prospective buyers, I seem to find myself spending a lot of time explaining how the auction works.
An auction is not the most familiar purchase method for real estate buyers; an auction is also a relatively new concept for most real estate agents. Here is my attempt to make “how to bid at the Hawaii Property Auction” simple to understand.
Practice the Auction Process With Places Like eBay
A good place to start might be with eBay—you could even practice as a warm-up to bidding on a property! Look at this auction of Old Hawaiian Tiki Coasters that is set to expire at roughly the same time our auction of Hawaiian real estate takes place:
Note that eBay has evolved from a pure auction-style marketplace to have several styles of buying and selling. You have some sellers listing only at “buy it now” fixed prices and you have some sellers listing at absolute auction…which means that any bid price will take the item when the auction closes.
Then, you have our Tiki Coasters, which are offered as an auction item…with a starting bid price of $9.99 and a reserve price of $11.99, roughly 20% higher than the opening bid price. This seller will also allow you to make a preemptive bid at his reserve price, which he has disclosed.
This seller also says “FREE shipping and handling.” Of course, shipping and handling isn’t FREE…pretty sure the seller has to buy packaging and pay USPS or UPS to deliver the item, but in this case, the seller’s costs are pretty high compared with the cost of the item, so he’s chosen to price it into the listed price of the item rather than tell the buyer they have to pay 50% S&H on top of an $8 item.
29 ocean view acres plus new Hawai’ian style cottage. Opening Bid: $775,000 (MLS# 241049)
Understanding The Auction Format
Let’s take those concepts back to our Hawaii property auction to explain why the auction format confuses us as real estate agents and buyers. In a regular MLS listing, it’s like the Tiki Coaster Seller offering FREE shipping and handling. We all know the seller has to pay a commission to their agent, probably 6%, conveyance tax, and a few other closing costs. It is not of direct concern to us as buyers because that was true of all the comparable sales we’ll review as we decide what the property is worth. It’s “FREE shipping and handling” in other words.
The “shipping and handling” is transparent in the upcoming real estate auction, however. As the winning buyer, you add 8% to your winning bid price to determine your total purchase price for the property. When you are figuring out the top price you’re willing to bid, remember the comparables relate to the total purchase price including the 8% auction premium.
Oceanfront home on 1.7 acres. Opening bid: $850,000 (MLS# 245061)
Opening Bid Price Versus Reserve Price
Now let’s take on the second confusing concept: opening bid price versus reserve price. Normally, when you see a property priced at $8 (mentally add 5 zeros) in the MLS, you figure in today’s market you can offer 10-15-20% less. I believe that confusion is why we’re getting in bids less than the MLS listed price/opening bid price in advance of the auction, but if you look at eBay, there is literally no way to enter a bid amount that is less than the $9.99 opening bid (or current bid if the item already has other bids on it).
With prospective buyers who understand this, the question I get asked most often is, “Do you think there’s any chance that Kohala Waterfront lot will sell for close to the $100,000 opening price?” When I laugh and say no, the next question will be, “How do I figure out what the reserve price is going to be?” Let’s just say it might be the same or less than the net the seller would have accepted if we’d kept the regular listing in the MLS.
Kohala Waterfront gated community has 3 lots in the auction. Opening bid: from $100,000 (MLS# 248580)
It is rare that a seller really knows what their bottom line is until the offer is on the table…and that might end up being true with this auction as well. In other words, for a seller, a well-attended auction is a great way to get information: what the market thinks your property is worth. For a well-prepared buyer, it is a chance to get lucky.
If you’re still confused, but are interested in one of the auction properties, remember that your buyer premium is the same whether or not you use an agent to assist and represent you in the auction. And…you can register at the door. For more details, or to download registration forms, click on the link: Hawaii Life Auction Process.
See you on Saturday, November 26th!
Beth Thoma Robinson, R(B)