FEATURE ARTICLE, APRIL 2006
AUCTIONS: BIDDING ON RELIABILITY
Real estate property values and prices are not at odds at auction.
Unlike many real estate sales strategies, auction marketing thrives in a diverse and changing marketplace. The auction method of marketing has historically proven to be the most reliable measure of asset worth and actual sale value.
The value of any commodity fluctuates with the supply and demand for that given commodity. This holds true for real estate as well. The last few years have seen the lowest interest rates available to the American public in our history, and they have caused a ripple effect in many markets across the nation. The resulting glut of real estate investors has caused, in many cases, an unrealistic rise in asset valuation. Though sustainable for a short term, neither these rates nor the extraordinarily higher expectations of worth can be maintained in the long run.
These trends are being seen across the board. Housing starts are down, builders are now offering special incentives to buyers for their excess inventory and commercial property values are beginning to normalize.
The actual value of an asset is what the buying public is willing to pay today, not necessarily the valuation attributed based on historical comparables. Once the professed worth of an asset grows beyond its apparent value, the subsequent sale and closing price for that asset will decline. These actions can be seen in the market today. The problem lies with the real estate portfolio whose assets were obtained at the crest of the proverbial bubble. Unfortunately for some, the law of supply and demand will normalize the market and many investors may be left with inflated asset values that cannot be obtained because the buying public is no longer willing to see the market through rose-colored glasses.
This is why the auction method of marketing has proven time and time again that artificially setting the value of a property does not in and of itself make the property sell for that value. Realistically speaking, even the hottest new niche or item can only sustain inflated positive growth for a limited time. The newness wears off, the new car smell fades and you are left with an investment that may not fulfill the anticipated value in the short term.
Auctions are not affected by the sands of time. An asset sold at auction will always bring what the buying public considers to be its value. Not a penny more, not a penny less. It doesn’t matter if the market is inflated or flat; the buyer’s perception is always met at auction.
Therein lies the rub. If the asset holder or owner has invested in the assets at a higher hypothetical worth than the public’s speculative value, a loss may occur. It doesn’t matter whether the asset is sold at auction or not. An auction invites all interested parties into the mix at the same time. This allows the perceived values of potential buyers to work competitively to determine the actual value of the seller’s asset.
Many people expect to see a roomful of “bottom-feeders” at an auction. Yet, the majority of buyers are well capitalized, educated individuals who recognize and appreciate the chance to buy without going through the seemingly endless cat-and-mouse game of the offer and counter-offer process.
At auction, buyers have the confidence that they are paying fair-market value. Auction buyers enjoy bidding competitively based on the same terms and conditions. No games — everything is out on the table. Buyers come into the process knowing that the owner is ready to sell and is not just shopping the property. On the other hand, sellers are able to control the structure of the sale process from marketing through closing. Corporate clients will appreciate the opportunity to set both the timing and the terms.
As the real estate industry continues to normalize itself and come in line with new higher interest rates and slower investor trends, the auction marketing method will persist in forecasting the true value of real estate. Just as the stock market displays the day-to-day auction price of stocks, real estate auctions set the fair-market value of a property on any given day.
The situation that exists today is exactly the same as it was when the Roman Empire was sold at auction thousands of years ago. The only difference is that the market is fluctuating faster than traditional systems can cope with. History shows that only the auction method of marketing reflects the real value of a given property regardless of the economic climate. This makes the auction a perfect barometer for success in changing times.
Lisa Higgenbotham is vice president of the commercial real estate division of Higgenbotham Auctioneers International Ltd. Inc. in Lakeland, Florida.
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