CHAPTER 20: REAL ESTATE AUCTIONS

CHAPTER 20: REAL ESTATE AUCTIONS

INTRODUCTION

Auctioning is an alternate method of selling real property that has long been popular in the Mid-West region of the United States. Although real estate auctions have been held in Oregon for over the past 40 years, their popularity has become evident in only the past few years. This popularity is due in part to the attention the news media have given to various large auctions of lender-repossessed property. In many instances, commercial lenders had accumulated large portfolios of repossessed property and had tried to market them through conventional methods. When they failed to sell on the open market, the lenders turned to the broker/auctioneer.

In the auction process, the working relationship between owner/seller and broker/auctioneer is different from the traditional real estate listing and sale transaction. The question of agency between seller and broker are the same, but the mechanics of obtaining the highest and best price for the seller differs.

Results of an auction are totally dependent upon the auctioneer's expertise in selecting the property to be auctioned, methods of advertising, and, above all else, the ability to orally solicit bids in a manner that will produce a successful sale. In an auction, purchasers openly bid against each other in an attempt to buy property. Often bidding is enthusiastic, with bidders hoping to purchase below market price.

A real estate auction may be only one parcel of real property or over one hundred. The auction may be one or several days' duration, depending on the amount of property to be sold and the geographic location of the properties.

Common to all real estate auctions is the fact that to agree to conduct a real estate auction one must hold an Oregon real estate broker's license. Anyone involved in the auction and dealing with potential buyers or with the winning bidders following the auction must first be licensed as Oregon real estate licensees. (See additional discussion at "Licensee Considerations," below).

Selling by the auction method is not for every property or every broker. Like any other specialized activity in real estate, the licensee that is considering auctioneering should not attempt to do so without first becoming very familiar with the entire auction process and traditions. This familiarity can be achieved by attending schools, by attending auctions, and by working with an experienced real estate broker/auctioneer.

Because Oregon has no auctioneer licensing, the Real Estate Agency has an increased concern over the conduct of real estate auctions. An auctioneer/broker or auctioneer licensed in another state cannot offer or agree to conduct

a real estate auction in Oregon without first obtaining a valid Oregon real estate license. Failure to comply with the licensing requirements can result in criminal action against the unlicensed auctioneer.

At most real estate auctions in Oregon, the majority of persons have never attended an auction before. Since procedures and language are different from a traditional real estate transaction, care must be exercised to make certain bidders understand the auction procedures.

DEFINITIONS

The terminology used in this chapter is based upon practice in Oregon, and may mean something different in another state. Following is a partial list of the most common terms associated with auctioneering:

ABSOLUTE: The term referring to the auctioning of a property with no sale reservations. Absolutely sold to the highest bidder. AUCTIONEER: The person who orally offers the property and solicits bids. This person can be an Oregon real estate sole practitioner or principal broker, or a broker working on behalf of a principal broker. BACK-UP BIDDER: The second to highest bidder. The back-up bidder is under no obligation to purchase, although he may be given an opportunity to acquire the property if the original sale fails. BID CARDS: A numbered card given to the registered bidder. Most auctioneers require a person wanting to bid to register, giving name, address, telephone number and in some cases, additional information. The registrant is assigned a number and given a card with this number on it. This card is held up by the successful bidder, so the auction clerk will know who purchased the item and record the sale amount against the account of that bid number. BID INCREMENTS: The amount by which bids are increased. The auctioneer will normally reserve the right to set the minimum amount the bid can be raised by a bidder. In order to avoid confusion and not waste time, the auctioneer wants the right not to accept an annoyance bid. For instance, he will reject a bid of one dollar when it has been established that bid increments are $100. BID PACKAGE: A packet of information about the property being auctioned. Prior to the auction day many hours of work and research will be devoted to the property being offered for sale. The broker will normally obtain a preliminary

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title report, plat maps, zoning information, pictures, and make a personal inspection of the property being offered. This information is incorporated into a "package" that is given to the bidder at registration, together with a "bid card". In some cases a person may obtain the registration and bid package prior to auction day.

BIDDER'S CHOICE: An opportunity given to the highest bidder in certain situations. During the course of the auction, the auctioneer may decide to offer several items for sale at the same time. For example, five subdivision lots of similar value may be offered at one time. The high bidder has the choice of which lot or as many lots of the five as he desires, each purchased at the bid price. In effect, the successful bidder gets the choice of the lots offered. BLIND BID: A blind bid, sometimes referred to as a "clock bid" or "rafter bid", is the practice of an auctioneer accepting a non-existent bid from a non-existent bidder. Blind bids are used to trick legitimate bidders into believing there is a competitive bidder and to thereby induce the legitimate bidder into bidding higher. Such a practice is fraudulent. BROCHURES: Descriptive material which is usually sent to attract persons that would likely purchase the type of property being auctioned, and sent to persons requesting information on a forthcoming sale. This is in addition to other types of media advertising. The brochure usually contains the auction location and date, pictures of the property offered, and the terms of the auction. Many brokers also include property disclosures and disclaimers in the brochure. These will be orally repeated at the auction. For instance, the warning that the bidder will be purchasing based on the bidder's individual personal inspection and investigation of the property, or that the lot offered is in the flood plain. COOPERATIVE SALES: Two brokers working together on the sale of a property. There are several events that may cause a broker to co-op a real property auction. The broker and seller may decide the best method of sale is an auction but the listing broker does not have the ability to call an auction. The broker would then enter into a co-op agreement with a broker that has that ability. A broker finds he will need more licensed persons than he has for an auction. The broker will co-op with another broker for the additional licensed assistance. A broker may desire to have several "back up" auctioneers to assist in calling the auction. In each case, the cooperative agreement will be between brokers and should be reduced to writing. As in any professional real estate activity, the broker(s) remain responsible for the acts of their licensees in a cooperative auction. TO CRY AN AUCTION: To orally solicit bids from the bidders, also known as

chanting or calling the auction. DEPOSITS: Minimum amounts required as deposits if a bidder is

successful. Many auctioneers require bidders to show a Cashier's Check for one or two thousand dollars prior to receiving a bid number and/or obtaining a bid package. This allows the auctioneer to know the bidders are serious. The Cashier's Check is not earnest money until endorsed over to the broker or escrow company at the signing of the earnest money agreement.

DISCLAIMER: A waiver of responsibility by the broker or owner. Most auctioneers will give both written and oral notice to the bidder that attempts to disclaim liability by the auctioneer and owner for certain things. For instance, "you are buying as-is, where-is", or "the auctioneer is not responsible for any defects in the property," -- or "you are bidding based on your personal inspection of the property, not representations of the auctioneer." Disclaimers may not limit the liability of the licensee who fails to disclose those problems with a property that a diligent investigation by the licensee would discover. HOUSE NUMBERS: Bid numbers reserved for the auctioneer or staff. Although an auctioneer may bid against other bidders if full disclosure is made prior to the bidding process, this practice is questionable at best and should not be used. It jeopardizes the auction process by eliminating the neutrality of the auctioneers. OPEN HOUSE: The practice of making the real property open to the public for inspection prior to an auction. RESERVE BID: A third-party-submitted bid on the subject property prior to auction. Usually, only the fact that such a bid exists will be disclosed to the bidders, not the amount. Many auctioneers will not call an auction if the seller allows a reserve bid to be made prior to the oral auction. If the highest oral bid does not exceed the reserve bid amount, the person that submitted the reserve bid is the purchaser. RINGMAN: A person assisting the auctioneer in spotting the persons bidding. Also known as "spotters", these people identify the bid amounts and which person made what bid. SALE WITH RESERVATION: A sale with reservation, or a sale with reserve, means that the seller has set a minimum price and instructed the auctioneer that bidders must exceed that amount before there is a sale. The reservation, but not the amount, must be disclosed prior to the sale in the advertising, and at the sale, by the broker. If a bid is not obtained that is higher than the reserve amount, there is no sale. SHILL OR SHILL BIDDER: Persons who bid the price up, but who are not bona fide purchasers. Shills are usually employees or friends of the seller or auctioneer. Using a shill bidder is deceitful

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and misrepresentation under the license law and must not be allowed.

LISTING AGREEMENTS

When a broker receives a proposal to auction, it must be reduced to a written, signed agreement. The agreement should spell out the expected terms, conditions and expected financing, if any, of the sale. Of great importance to the broker, seller and bidder are the terms of sale. That is, owner financing (and on what terms), reserve bid, sale with reserve, absolute sale, or minimum starting bid. These terms are set by the seller prior to the auction, are normally printed in the brochure or notice of auction, and are included in the bid package.

Many brokers will obtain an employment contract to auction that will include a fee paid by the seller, in advance, for advertising. The broker must treat all fees and commissions in accordance with ORS 696.241(6) and 696.290.

AUCTION DETAILS

Location

On sales of more than one property, thought must be given to having a moving auction or a central site auction. Both have advantages and disadvantages. The "moving auction" will move the bidders from site to site. This is usually used in subdivision lot sales. The advantage is that the auctioneer is selling the property on site; the disadvantage is that it is slower and bidders in a large sale tend to tire and leave during the sale. Also, if the weather is adverse, it may affect the success of the auction.

A central site auction is usually held indoors or under a tent, for weather protection, better crowd control, better security and a less tiring situation for the bidders. The disadvantage is that the sale is not conducted on the site of the property sold at auction. If a central location is used for multiple property sales, the broker will usually have visual slide pictures of the property to show the bidders. This will assist the bidders in knowing the property they are bidding on is the one they want to buy.

Security

In the past several years, much of the property sold at auction has been for cash. In many instances, bidders have brought large amounts of money to the auctions. Where large crowds and large amounts of cash are involved, consideration should be given to providing security at the auction. Often, local law enforcement agencies are willing to provide assistance at no cost to the broker.

Financing

Because an auction takes place at a definite time, with little or no time to qualify a purchaser during the bidding, prior consideration must be given to financing offered or other terms or conditions of the sale.

Many properties are financed by the seller. The agreement to sell and the advertising should contain the required earnest money, downpayment, interest rate and balloon payment, if any. The method of financing, that is, contract or trust deed, should also be noted.

If the sale is to be other than seller financing, the broker should have some type of potential financing arranged in advance, with the lender at the auction to assist the high bidder in making the necessary loan application.

In many of the lender-owned property sales, the lender will supply material to be included in the bid package or brochure that explains loan qualification, amounts of down payment and interest rates charged.

Brokers may also want to take advantage of the services offered by many escrow companies to set up a temporary office on site of the auction. This will greatly expedite the closing and relieve the broker of the problems of trying to obtain the necessary documents, signatures and information while the sale is still being conducted.

Transaction Requirements

As with any real estate transaction, an auction of real property must be conducted in accordance with existing statutes and rules. There must be full, fair and complete disclosure as there would be in any other real estate transaction. The successful bidder will be required to tender earnest money, agreements will be drafted and receipts given. The records must be treated the same way as real estate records in any other sale, including their retention in Oregon for six years.

In addition to Real Estate Agency Statutes, the Oregon Unlawful Trade Practices Statutes apply to most real estate auctions. Should a complaint be filed that is under the jurisdiction of the Attorney General's office (for example, misrepresentation or fraud), both agencies will probably investigate. A civil action may be filed under the Unlawful Trade Practices Statutes that may allow for damages, punitive damages and attorney fees.

In order to insure adherence to Oregon real estate statutes, the Real Estate Agency normally will have staff attend a real estate auction.

Supervision

There are various persons working at auctions who must be licensed. These include the broker who contracts (listing or employment agreement) to conduct the auction and the person who cries the auction. Bid assistants (sometimes called spotters or ringmen) who do more than merely spot bids for the auctioneer will also be required to have a real estate license. Often times a ringman will not only spot bids, but will encourage a bidder to bid more, by

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"talking the sale up" to the bidder. For instance, if a bidder hesitates, the ringman may urge a bidder to increase his bid by reminding the bidder of the investment potential of the property, or other such statements so as to induce the bidder to bid again. This activity in real estate must be done by knowledgeable licensed persons so as not to misrepresent the auctioned property or terms of sale. Further, good ringmen will often be asked questions about financing, payments, property condition or other matters while the auction is in progress. Therefore the ringman, in order to assist and respond, must be licensed and be prepared to give correct, understandable answers.

Clerks at the auction, like bookkeepers in a broker's office, are not required to be licensed unless they somehow become involved in professional real estate activity. The broker is responsible for supervision of the auction and the activity of those involved. The broker must determine if the actions of those working for the broker amount to professional real estate activity that requires licensing.

Many broker/auctioneers will experience a sale where they will require more staff than they have. For instance, the sale of 30 or 40 homes will not only require more on-site staff on auction day but will also require more persons available to answer questions and hold "open house" prior to the auction for prospective bidders to inspect the property. Further, the person calling a large auction will often have "back up" auctioneers on hand in case something happens to the auctioneer.

In such sale, the broker will often "co-op" the auction with another broker/auctioneer and staff, using a prior written agreement that lists the fees to be paid for the duty or work accomplished. In cases where "co-oping" licensees are involved, care must be taken that these people are not represented as being licensees of the selling broker. An associated broker can function only in the name of the principal broker to whom he is licensed. An associated broker cannot represent a principal broker other than the principal broker to whom he is licensed.

prospects for the purchase of the property and otherwise assisting in the auction is professional real estate activity for which licensing is first required. Persons or companies from out-of-state are not exempt. Furthermore, a nonresident licensee would only be allowed to physically be present in this state to conduct an auction under a reciprocal agreement. If there is no such agreement, the non-resident licensee is unlicensed for enforcement purposes and, as such, if they share any fee or commission with an Oregon broker, the Oregon broker is subject to significant sanction for aiding in your unlicensed activity in this state.

Websites are putting real estate on the website and asking for bids from various Internet users. By going on the Internet, they are targeting Oregon consumers as potential buyers of the real estate to be auctioned. That contact is the offering of real estate for sale in Oregon and/or the solicitation of offers for the sale of real estate. Where an auctioneer of real estate puts a property up for auction on the web and invites Oregonians to bid on the property, that auctioneer is engaging in activity requiring licensing. Severe civil and criminal penalties are available to sanction unlicensed real estate auction sales on the Internet.

AGENCY ASSISTANCE

We have found that prior to conducting an auction, most licensees contact the Real Estate Agency for assistance and suggestions regarding disclosure, advertising, and other problems that may arise. The Real Estate Agency will assist within limits of their ability to do so, in order to help insure compliance with licensing law.

Disputes

Prior to the actual bidding, the auctioneer will normally try to explain the terms of the sale, the property information and how the auction will be conducted. Bidders will be given an opportunity to ask questions.

Even after the auctioneer is assured bidders understand and the auction commences, a question may arise from a bidder. Most concerns can be handled by the auctioneer with a simple explanation. In the event a bidder becomes argumentative, the broker should assure that someone is appointed to handle any disputes or misunderstandings that arise, in a manner that does not disrupt the ongoing auction.

LICENSEE CONSIDERATIONS

The activity of showing the property, procuring

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