1 2. Identifying Sellers and Properties Understanding sellers, properties, and market conditions for which real estate auctions are best suited Applying the two-thirds rule

2 First Step in Auction Process Analyze: Seller PropertyMarket Conditions

3 Analyzing the Seller Seller motivated? Property overmarketed? Previous price "labeled" the property? Why has property not sold? Seller’s reputation? If not an auction, what do you suggest? Auction is a commitment and requires investment from the seller.

4 NOT Good Seller Candidates Over-motivated Legal issues, eg, lis pendens Unrealistic expectations of the property value Litigious Unwilling to level with you Multiple owners with differing goals

5 Good Seller Candidates Have high holding costs Need immediate cash Are retiring Partnership or marriage break-up Moving out of the state Want to liquidate an estate Are auction minded Listing about to expire

6 Never been listed Already purchased another house Know auction will bring true market price Financial problems Time sensitive—“just want it sold” Can’t/don’t want to maintain property Good Seller Candidates

7 Analyzing the Property Zoning Back taxes Tax assessment Equity and mortgage Property condition

8 Good Properties for Auction Owner has: At least 25% equity A lot of high carrying costs Property is: Unique Vacant Difficult to appraise

9 Analyzing Market Conditions Market conditions represent buyer interest. At time of listing, market condition must be considered.

10 Favorable Market Conditions Dull market—too much product, some buyer interest Seller’s market―high demand and a lot of competition Emerging market—kick off sales program of new developments

11 Consider Auction for All Properties Residential Industrial Agricultural Apartment buildings Shopping centers Nursing homes New housing developments

12 Consider Auction for All Properties Property in good condition and desirable location usually sells. Even property that needs rehab or construction can sell if there is positive demand for it.

13 Negative or No-Demand Properties Cannot be given away Examples are properties:  Where list price established the upper limit  Have been on the market for a long time

14 Two-Thirds Rule Used to analyze market, property, and seller If two out of three are favorable, auction should be offered to seller as a sales option

15 Questions to Ask Answering several questions helps determine if situation is auction candidate

16 1. Seller’s Motivation On a scale of 1 (low) to 10 (high), rate seller's motivation Auction creates a sense of urgency; important that seller feel comfortable with this situation

17 1. Seller’s Motivation Sellers more motivated when: Need quick cash Must sell property to finance another Under severe personal pressures Have high holding costs Have excess real estate

18 2. Seller’s Debt-to-Equity Ratio Estimate possible sales price, hard costs, auction expenses, mortgage, and other debts Establishes how flexible seller will be in adjusting sales price

19 3. Lender’s Position Type of mortgage and interest rate? Mortgage amount more than property value? Lender willing to release property for sale by auction? Lender allow assumption of mortgage?

20 4. Seller Financing Makes a purchase more attractive and affordable Consult with an attorney Also consider offering discounts to buyers who pay cash

21 5. Property Condition “As is, where is”—without warranties or contingencies Price should be only open issue on auction day

22 As Is, Where Is Property sold with all faults, as it is and where it is Buy what you see and do not see “As is, where is” does NOT mean caveat emptor. Full property disclosures are required by law.

23 6. Demand Factors If strong interest in a property type, better chance of achieving a good sales price. For example:  Last view lot in a prestigious subdivision  Prime highway location in busiest commercial area of town

24 Case Studies: Two-Thirds Rule 1.Read case study. 2.Analyze seller, property, and market. 3.Identify whether seller, property, and market are positive (+) or negative (- ) candidates for auction. 4.Apply two-thirds rule. 5.List advantages and disadvantages of selling by auction. 6.Answer question "Would you recommend auction for this case study?" and explain why.

25 Case Study 1: Estate Sale Jan is moving into a nursing home. Husband died 5 years ago, and she has not been able to maintain 125- year-old house and 8 acres of land. Children need to sell estate to pay for nursing home. Property is located 12 miles outside town. Real estate market is soft. Neighbors have expressed interest in property.

26 Case Study 1: Estate Sale (+) (-) Seller (+) (-) Property (+) (-) Market

27 Case Study 1: Estate Sale AdvantagesDisadvantages

28 Case Study 1: Estate Sale Would you recommend an auction for this situation? Why?  Yes No

29 Case Study 2: Business Loss Shanes own a home in NM and an antique business in CA. Only have 6 weeks to sell home Adobe-style house in historic part of town. Property appraised at $450K. Equity is 40%.

30 Case Study 2: Business Loss (+) (-) Seller (+) (-) Property (+) (-) Market

31 AdvantagesDisadvantages Case Study 2: Business Loss

32 Would you recommend an auction for this situation? Why?  Yes No Case Study 2: Business Loss

33 Case Study 3: Strip Mall Been on the market for over 5 months Owner cannot keep up with costs of managing property. Owner has 25% equity. Four out of six storefronts still under 5-year leases.

34 Case Study 3: Strip Mall (+) (-) Seller (+) (-) Property (+) (-) Market

35 AdvantagesDisadvantages Case Study 3: Strip Mall

36 Would you recommend an auction for this situation? Why?  Yes No Case Study 3: Strip Mall