Feb 23, 2010 - Recently, real estate auctioning in Canada is starting to gain momentum as more real estate auctioneers begin to sprout up across the nation. This is causing buyers and sellers alike to consider the strategy. For many, the approach is unchartered territory and if you don't know all the facts then you could wind up in over your head.

In the United States, auctioning is a $58.6 billion industry, according to the National Auctioneers Association. By comparison, Canadian auctioning is still considered small potatoes. A quick Google search reveals that there are dozens of auctions and auctioneers in Canada, and a handful of them deal with real estate specifically.

There is no national association that regulates the Canadian industry, as there is in the U.S. Instead, real estate auctioning companies are typically regulated by the real estate commission in each province. The rules vary province-to-province. In Saskatchewan, for example, you don't have to be a licensed real estate broker to auction property. In Alberta, however, in order to trade real estate you have to have a licensed broker involved in the deal.

Experts advise investors to make sure any auctioneer you choose to purchase or sell real estate through is a licensed brokerage, or is able to get a licensed broker involved in the deal.

Process
Real estate auctions are being held nation-wide and can include properties of all types, from mobile homes up to multi-million dollar properties and land development.

There are two basic ways that auctions work. The first is where a real estate broker approaches the auctioneer with a listing and the second is where an individual seller contacts the auctioneer. Generally, the first option occurs because the property has been listed for some time, and with the second option it's because the seller wants to sell the property quickly.

When working with a co-operating real estate broker, Matt Johnson, real estate manager at
Hodgins Auctioneers Inc. in Melfort, Sask. says he prefers to approach the deal as partners.

"If it is a current listing, we prefer to work with the brokers and get paid a portion of the selling commission, rather than taking the listing away from them," he says. "It is important that we talk both with the Realtor involved, as well the client who is selling their property."

Since the property is already listed, whatever agreements or commission the brokerage and seller have worked out beforehand still stand. The auctioneer retains a portion of that commission (varies depending on property), as well as a buyer's premium (also varies).

Sometimes with this method, there can be a referral fee involved, where the auctioning company pays the brokerage a one to two per cent fee of the final bid price. In this instance, the brokerage approaches the auctioneer with the intention of handing the deal over to the auctioneer. A meeting is scheduled with all three parties and at the meeting the auctioneer explains the process to the seller. If they agree, from that point onwards the brokerage is longer involved and attains a referral fee.

If it's an individual seller that approaches the auctioneer, then the process is a bit more straightforward. The seller would be responsible for covering any advertising costs and commissions are usually split between the buyer and seller.
 
"For example, in our recent online real estate auction, we charged a three per cent buyer's premium and negotiated the seller's commissions on an individual basis," says Johnson.

With some deals, however, the buyer could end up incurring the commission costs. Michael Marienwald, president and broker of record at Anchor Real Estate Investments Corp. in London, Ont. says, the buyer's commission is about six percent of the final bid price. So, if the property costs $200,000, the final sale price would be $212,000. It always depends on the deal at hand. 

Sellers
At auctions, the seller sets the terms for the sale of their property and there are many flexible options, such as how long to hold the auction for, what type of advertising should be used, and what is the bottom price is. There is no maximum selling price for the property and because auctions typically create a sense of urgency amongst buyers, it may be an option worth looking into.  

"Depending on the interest level and excitement, properties can sell anywhere from below the expected selling price to well above market value," says Johnson. "Every single auction is different. All it takes is two people to want the property very badly, and then the sky's the limit."

"The benefit for the seller is often they get their property sold within 30 to 45 days with cash offers," adds Marienwald. "The pitfall is that they may not like the amount it sells for."

One tip to assure you don't undersell, according to Johnson, is to set the price with a reserve. For example, if the seller wants to sell the property for $300,000, then the auction continues going until that price is met. The best way to generate buzz is to start the bidding lower than the reserve and this usually creates a bidding war amongst buyers. The seller gets to choose how much lower than the reserve bidding starts at. Some sellers are comfortable with starting it as low as 50 per cent of the reserve price.

Also, the seller gets the final say once the bid closes and they're offered a price. Marienwald has come across instances where sellers have walked away because they felt the price they got at auction was too low.

"Sometimes what we get seems less but many people that we have worked for have tried the conventional method of listing and selling for as much as 12 years before they came to us and we were able to sell the property for them in about a month," he says. "Because these people had been paying the carrying costs for that long, their net was far lower than if they'd simply put it up for auction."

Overall, it's really up to you, as the seller, he says, to consider all your options, look at the property at hand and determine which method could work best.

Buyers
With all the variables that occur at auctions, are they really worth it? It depends case-to-case and on whether you've got the stamina to withhold the bidding process without getting carried away. But, if you feel you can handle it there are a few tips that will help you find a bargain. 

First, be sure to know your market, says Marienwald. This will help you determine what a reasonable price is for the property you're interested in. Keep emotion out of it and be flexible when bidding, but at the same time know what your budget is.

Also, financing should always be pre-approved because many sellers don't have time for conditional offers since their goal is to sell the property as soon as possible, according to Marienwald. It's wise to get on a buyer's list so you get an e-mail notification whenever a new property goes up for auction. Simply approach any auctioneer and enquire about getting on their list.

Lastly, Johnson offers this advice for any investors that choose to purchase property through an auction. "Be sure to attend the auction because you won't find deals otherwise. Find out why the property is being sold and become familiar with the terms and conditions of the auction."

From the December 2009 issue of CRE