Reserve prices at property auctions "on their way out"
2009-07-09

Reserve prices at property auctions "on their way out"

Will selling property on auction without a reserve price become a significant alternative for the South African market?

  Aucor's Paul Winterstein, head of the group's property division, believes that South African sellers should embrace this method, used successfully in the United States.

The concept was discussed by Ben Hudson, chairman of Atlanta-based Hudson & Marshall, one of America's leading real estate auction firms. Known in the USA as absolute property auctions - ie selling to the highest bidder, regardless of price - the approach has been known to increase selling prices by as much as 20%.  "Although the concept is a difficult one to convince sellers to follow, selling this way reinforces the fact that that a property will sell," Hudson said.

"An absolute sale is the strongest signal a seller can send to the marketplace. It attracts purchasers from the broadest geographic region because buyers can justify their time and efforts to inspect, bid, and buy, knowing there is no question the property will be sold," he explained.

 "These are times like never before.  We're in uncharted waters," Hudson said.  He mentioned that there are currently 700 000 foreclosed properties and 360 000 in default (in the US), and it's estimated that 2010 will see 3m foreclosures.  The US government and the banks are doing all they can to minimise these numbers.  However, across the US, banks repossessed 63 900 homes during April, the final step in the foreclosure process, with reports of over 1.3m homes being lost to foreclosure since August 2007.

Hudson said that in 2008 his company had 16 000 residential properties on its books for auction, 12 000 of which were sold and closed at 78% of current valuation figures.  However, while this may have been the case for certain regions, it  contrasted with some boom-and-bust areas such as California, Arizona, Nevada and Florida that have consistently have ranked in the top five for the highest foreclosure rates in the US over the past three years.  In these areas prices increased exponentially in the last few years, but sellers are now struggling to get 50c in the dollar.  Some areas where the market has bottomed out, such as Michigan, Detroit, which has sharply felt the effects of a declining auto industry, once the staple of Detroit employment, houses  which would sell for $100 000 in California, are selling for a tenth of that.

Hudson says that difficult times require a different approach.  Hudson & Marshall recently completed an auction for a Michigan bank, where 38 of 40 properties on offer were sold.  The bank was offering a standard 6% mortgage rate for a 30-year bond but in this instance, offered a sweetheart mortgage rate of 4%.  "The auction itself was extremely successful, and the added benefit for the bank was it no longer had to concern itself with taxes, upkeep, insurance or carrying costs."

Another approach by banks is financing on the spot once the pre-approved seller has put down a 10% deposit.  This has the benefit of ensuring that the auction in question only attracts qualified, willing buyers.

I believe selling without reserve has merit and should be seriously considered.  We have consistently  sold big-ticket loose items without reserve, and while sales without reserve are not order of the day when it comes to property, we believe that, based on our previous experience, it could be a viable, sustainable option for the South African property market.