Auctions: Adversary to Ally

June 1, 2007

Even before the real estate market began to slow, real estate auctions were gaining popularity across the country. Residential property auction sales saw a 39.2 percent increase from 2002 to 2005 — from $10.2 billion to more than $14.2 billion annually, according to a special report published in 2006 by the National Auctioneers Association. Now that residential sales have decelerated, this figure is likely to rise.

But what does this growth in the use of auctions mean for practitioners, who have traditionally viewed the auction as an adversary? And what are the legal ramifications for an agent when a client becomes involved in an auction?

A new look at auctionsAuctions have always provided benefits to both the buyer and the seller. The buyer has the opportunity to bid on a property and often purchase it at a discounted price. Buyers also have the comfort of seeing market value established at the auction.

From the seller’s perspective, an auction provides an expedited sales process, control over the terms and conditions of the sale, and highly intense promotion that isn’t generally associated with conventional retail sales methods. Because of its timeliness, an auction also creates immediate interest in a property from buyers who might otherwise sit back to see whether sellers will make further price reductions.

Recognizing those benefits and the need for greater flexibility in a slower market, some real estate salespeople have begun to explore auctions, both in person and online, as a marketing strategy open to them. Many are finding that auctions work well if you have a motivated seller and proper advertising exposure. At the same time, some auction companies are beginning to see real estate practitioners for what they are — a wealth of information and professional allies in selling a property at auction.

The Legal Lowdown

If you’re intrigued by the possibilities of an auction as a marketing option, it’s time to get up to speed on the legal differences and similarities between an auction and a traditional sale.

  • Licensure. Some states require an auctioneer to hold an auctioneer’s license to conduct any live auction. States may also require a real estate license. If so, rules such as including the broker’s name and license number in advertisements and making proper disclosures to buyers about the property apply to the auctioneer. Check with the department that issues real estate licenses in your state to see whether an auctioneer must have a real estate license to sell property.
  • Compensation. Almost all auctioneers will generally pay a licensed real estate agent a set fee if that agent brings the buyer to the auction property. Any fee offered is typically listed in the auction brochure, in the Internet listing, and in the auction terms and conditions of sale distributed before the auction begins. If a property is still listed in the MLS, the auction date and the fee offered to a buyer’s agent should be listed in the comments for the property. The auctioneer is legally required to pay any fee that’s advertised in promoting the auction.
    In many cases, there are restrictions that the buyer’s agent must meet to receive a fee. For example, the agent may have to attend the pre-auction open house with the bidder, notify the auction company in advance of the agency relationship with the bidder, and attend the actual auction. In addition, the fee to buyer’s agents may vary, depending on whether the buyer submitted an opening bid before the auction. Auction firms are often willing to pay a premium amount to a buyer’s agent for submitting a fair and reasonable starting bid in advance of the auction date, because such a bid sets a price floor. This speeds up the sales process on auction day and allows the seller to gauge the initial interest in the property. Be sure to read the auction terms and conditions regarding all fees.
  • Fiduciary responsibilities. Auctioneers who work directly with sellers are typically licensed as a real estate broker in the state where they conduct business. In such cases, the auctioneer has the same fiduciary responsibilities to the seller as does a traditional real estate broker. The auctioneer also has the same responsibility for disclosures regarding the property and its condition. Even if the property is sold “as is,” that doesn’t safeguard the auctioneer and the seller from liability for false statements or misrepresentations about the property.
  • Inspections and due diligence. Almost all auctions require that the buyer inspect the property before bidding at the auction. Most buyers are also required to sign a contract addendum stating they’ve seen and inspected the property, or they waive their right to do so. A few auctioneers allow a modest post-auction inspection period. In most cases, the bidder can purchase a due diligence package about the property before placing a bid. Those packages are usually available via e-mail or at a scheduled open house for the property. The package will typically include additional property photos, a survey, a plat map, location and topography maps, a floor plan, neighborhood and school information, tax information, an appraisal, a property inspection report, and a title report.

These days many forward-looking real estate sales associates are exploring online and offline auctions as ways to sell slow-moving listings. But as with any new business venture, be sure you understand your legal positions before you get involved.

Tony A. Isbell is president and CEO of RealtyBid International, which operates, a national online real estate auction site that works with practitioners. He’s a real estate auction sales veteran, having sold more than 10,000 properties for real estate brokerages and financial institutions. You can reach him at 256/549-1433 ext. 103 or