To list or to auction?

JC Calhoun 

There has recently been a lot of attention given to the advisability of using the auction process to sell real estate and at least one law firm has been promoting it. I suspect we will be hearing a lot more about it in coming months, due to the weakness of the market in general and the difficulty in finding buyers. There are more and more owners out there who are motivated to sell for one reason or another, and as average marketing time increases for Cayman (and worldwide) properties, patience becomes thin even with tried and true methods. 

The typical scenarios we see are owners making their first mistake by listing their property too high whether it be based on their own estimation of the property value (which is normally the case), or an erroneous valuation provided by their real estate appraiser or agent. In falling markets like these it is crucial to lead the market with pricing. That means being more aggressive in pricing on the low side. If you don’t anticipate the lower value and lead the target, you will end up missing it and chasing it down which will inevitably result in a much lower price when you finally achieve a sale. 

Most owners will not be aggressive enough at the start and so they will have to reduce their price six months or a year later to what it should have been when they first listed. The only problem with this is that the market has also moved lower and they missed the real buyers when they first came on the market. Real buyers are those who are actively looking and those are the best candidates for a sale. You may have heard the phrase “the first offer is the best offer”; while that is not true 100 per cent of the time, it often is and describes the phenomena above. In falling markets, values and offers just get lower not higher. 

So with most properties which have been on the market unsuccessfully for a year or more, the fault lies not with the MLS but with the pricing not being consistent with the current state of the market. Last year the MLS was responsible for about $222 million of real estate sales. Nearly 75 per cent of all the real estate sales volume done in Cayman is done through the MLS. 

If a lender deems a property must be sold, either because the property is mortgaged and the note is not being paid or if the value of the property has sunk below acceptable levels to support the borrowing ratio, the bank will need to take action. They may try to sell by “private treaty”. In this case the bank can go to the court first with an appraisal and ask a price which the court feels satisfies their duty under the law, or they can go to them later with an offer even if it is lower than the asking price. But any offer must be “conditional” on court approval. The problem here is that in a falling market the appraisers, who depend solely on historical records, generally err on the high side. And due to the law, the court has to make every effort to try to sell the property at a price which will satisfy both the owner and the bank. If that were possible under current market conditions, that property would likely already have been sold. However, if at the end of the day, all the parties are willing and able to adjust pricing to suit market conditions, and the property is exposed in the MLS, then this method works well. 

The next traditional option is a “formal auction”. The beauty of a formal auction is that it does not need court approval. But, by the time this method comes into play the property is often stale and has been fully exposed to the market without a sale. Further, auctions attract purchasers who want a deal, not necessarily a specific property. This is a scenario which is likely to attract the lowest possible price. I have been to many auctions during my years in Cayman real estate and the one constant in all of them has been the motivation of the clientele. They are not there because they necessarily love the property (which is the primary requirement for getting a good offer) but rather because they smell blood in the water and hope to get a steal. 

In some formal auctions I have attended over the years, the bids were so low that the owner had to bid on his own property to avoid selling at a huge loss and in the process he incurred a large fee to the auctioneer for expenses. So not only did his property not sell at auction, it cost him dearly to find that out. 

The last option is an informal auction or “sealed bid process”. This is a hybrid of the two other methods. In these there is a reserve. And as this method does not qualify as a “formal auction” a court approval of the sales price is still required. This method is best suited for situations where there are already some interested parties as it requires them to make an offer within a certain time frame or risk losing the property to someone else.  

Although there may be appropriate circumstances for both open market sales and the auction process, frankly speaking, auctions should be a method of last resort in Cayman. If a seller will price his property as the market suggests, it will sell on the open market. And there is no better place to reach the vast majority of potential purchasers for Cayman property than through the CIREBA MLS. That’s a fact. 

generic real estate

To auction or to sell?