Dr. Larner's Favorite Quotes:

AUCTION VALUE
Saul Larner, Ph.D., LL.M.

     One of the chief considerations in the decision process for an auction is the anticipated price for which the property  can be bought.  First, let us define auction value as defined by the author.

       “The maximum net dollar figure (1) for which the bid on a property can be raised to under competitive bidding conditions in a stochastic market open to all under the terms and conditions regarding fair and standard in an auction sale, but then reduced to the present value of the terms of the payment of the bid. (2) The seller, bidders and the Auctioneer and his crew, are each acting typically motivated, astutely, well informed and competently, and in their best interests.  (3) However, it is intended that the price has been affected, often grossly, by motivational bidding techniques and strategies considered.  (4)Also, the property is properly exposed to the market for a period of 45-60 days, with high impact advertising.  The property’s worth is measured in comparison with competing bidders as opposed to other competing properties.

     Implicit in this definition is the conveyance of title of the auction property within a 30-day period after the sale.  However, a date sooner than this is often required.

     Also, per the footnote references above:

  1. The value must be the net amount received by the seller because the amount of money spent on advertising and excess auction costs have a direct influence on the highest bidding price.  Also, the expenses in selling through public auction are usually greater.
  1. The value of the note and mortgage taken back by the seller must be considered after it is discounted to its net present value because the seller often takes back a mortgage at less than money market rates.  In addition, if he were to sell the paper on the open market, there would also be a risk factor discount involved.
  1. It is assumed that the Seller has been totally informed as to the highest and the best use of the property and understands all formulas in determining market value.  Further, the buyer is fully aware of any government restrictions curtailing the intended use of any factor of any kind whatsoever which will detract from the value of the market or intended use.
  1. The additional price which a property can bring at auction over conventional sales methods includes but is not limited to the following factors, which are not fictionalized when the properly used:
    1. DESIRE TO PURCHASE IS CREATED: 

An auction forces action among those who are thinking about buying at some future date, thus adding often several thousand percent more “would-be” buyers than there are buyers.

    1. IT FORCES A PROSPECTIVE BUYER TO MAKE HIS FINAL COUNTER OFFER AT THAT GIVEN MOMENT.

When a prospect is forced to make his decision quickly as to just how badly he wants a parcel of real estate, the value is often inflated.

    1. THE BUYER WILL USUALLY PAY MORE WHEN THE DEMAND IS VISIBLE.

The excitement of that buyer who really wants it is almost certain to bring a higher price.  This is the psychology of people.

    1. CONFLICT BETWEEN OWNER AND BUYER IS ELIMINATED

Buyer will not compete with seller over $500 on principle.  When the seller is removed from the scene, the buyer loves this and the competitive spirit dominates the bidding.

    1. The enthusiasm, graphics, environment, music, hypnotic trance, salesmanship, and professional strategies used by the Auctioneer have an important effect on the bidding process in raising prices.
    1. Other reasons include: 
      1. Excuses are more easily overcome.
      2. Hospitality and sociability create interest.
      3. Bidders appreciate using their own judgment.
      4. Public intelligence is the best guarantee that the price is raised little by little.
      5. Competition is stimulated and an atmosphere is created favorable to action.

Now, let us compare the definition to the market value definition as recognized by the Society of Real Estate Appraisers. The author has successfully passed the Society of Real Estate Appraisers 101 residential and 102 commercial appraisal exams and encourages all Auctioneers to do the same.

    

MARKET VALUE

Market Value is:

            The highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.

           Implicit in this definition is the consummation of a sale as of a specified date under conditions whereby:

  1. Buyer and seller are typically motivated.
  2. Both parties are well informed or well advised, and each is acting in what he considers his own best interest.
  3. A reasonable time is allowed for exposure in the open market.
  4. Payment is made in cash or its equivalent.
  5. Financing, if any, is on terms generally available in the community at the specified date and typical for the property type in its locale.
  6. The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs or credits incurred in the transaction.

             An alternative but outmoded definition of Market Value still widely used, especially by the courts, is:

     The highest price estimated in terms of money which a property will bring if exposed for sale in the open market allowing a reasonable time to find a purchaser who buys with knowledge of all the uses to which it is adapted, and for which it is capable of being used.

 

AUCTION VALUE vs. MARKET VALUE

     We are presenting auction value as being somewhat close to the definition of market value.  Similarities between the two values are:

Both values are seeking a most probable selling price.

In each definition, both buyers and sellers are typically motivated, informed and acting in their own best interests.

In each case, the property is exposed to the market for a reasonable time.

  1. If payments are not made in cash or unusual financing terms are used to adjust the selling price.
  2. Both buyers and sellers enter the market voluntarily.

 
The differences between auction value and market value stem from the auction process itself.  By this, we refer to several characteristics which are more dominant in the auction process than in other sales techniques.  These are:

  1. The necessity to make a decision as to buy or sell at that moment.  There is not time in which to deliberate.
  2. The auction process creates an atmosphere of competition among the bidders which could result in at least one or more bidders to offer more for the property than they would have under different circumstances.
  3. Buyers are not competing against sellers, but instead are competing against other buyers.  Therefore, the activities are not those of negotiation between a high and low price but instead it is a contest of how high one bidder is willing to go above another.

     Logically, it would appear that if all of the bidders present at an auction were all well informed as to the market price of a property, then the market price would tend to represent the ceiling of the selling price.  However, an auction many times acts on the emotional side of a buyer’s personality.  And when a person starts to add emotion into value judgments, then those judgments lose some objectivity and, in the buyer’s eyes, more value may be given to the property than is shown by market comparisons.

     On the other side of the coin, there is a possibility that the auction price may fall short of the market value.  For example, the time allotted to expose the property to the public may be in reality not long enough to attract that buyer who is willing to pay the highest price for the property.  Then, the seller who is emotionally prepared to sell the property may accept a lower price rather than wait any longer.  Also, if all of the buyers are able to remain objective and the auction group has failed to inject emotionalism into the bidding process, then the auction price may also fall short of the market value.

 

AUCTION VALUE AS GREATER THAN MARKET VALUE

     While it may be difficult to quantify auction value over market value because of a probable lack of comparables, appraisers might tend to agree that a dependable indication of auction value, at a given time, can be estimated by researching the past for evidence of how and to what extent people who recently bought or sold somewhat similar properties responded to the auction process.  Also, by studying conditions which have proved, also in other times and places, to influence opinions of value.  That is what increase or decrease in price has taken place in relation to other comparable sales.

     Of course, the appraiser must recognize that the forces and conditions of the auction are not always present to the same degree and do not always affect people to the same extent, because people respond differently to different stimuli at different times and in different localities.

THE AUCTION MARKET AS A HOT MARKET

     A “hot” market distorts prices from their long-term trends and brings “amateur” buyers and sellers into the market who are unaware of the true economic nature of land and development potential.  And, if they participate in great enough numbers, they can so overwhelm the market that the more reasonable and sensible investor is effectively excluded.  Moreover, if a speculative market remains out of hand long enough, even the cynical and pragmatic professional may be taken in by what appears to be the ground rules of the market, only to suffer along with everyone else when the inevitable collapse occurs. 

     Auction forces are strongest in rural and semi-rural land.  Urban land in well-developed areas has fairly specific use potential which is easily identified by a diligent investor.  Thus, the overly optimistic predictions and stories which are necessary in order to generate excited speculation, do not develop easily.  The other lands are much less encumbered either with obvious use limitations or with market prices which reflect such well-defined potential.  Therefore, it is easier to rationalize (however unjustifiably) eventual uses for such land which, if they ever come to pass, would mean very steep increases in market value from pre-speculative levels.

AUCTION VALUE

Va = P + F + C

Va = Auction Value

P   = Value in Use (current highest and best use of land)

F   = Present value of reasonable future use.  The additional amount which would be paid
by a reasonable investor in anticipation of future upgrading of the lands highest and
best use.

C  =  Catalyst of the auction process as a stimulus in raising bids.  A rationally
unwarrantable distortion of market value away from the sum of P + F.

When VA = Market Value, C = O and the auction process thus will not bring a higher value  It still may be of greater value than other selling techniques by enhancing a sale at a particular time, gathering prospective buyers and insuring that the highest price has been met.

 

TWO OTHER VIEWS ON AUCTION VALUE

      Distressed or Forced Auctions.. Special considerations need to be considered when a seller at an auction must sell his property quickly because of an urgent need for cash or is forced to sell to meet debt requirements.

     In these cases, the seller is not afforded the option of waiting for a fair offer and must sell the property for whatever price he can get.  One that is very often below market price.

     In order to determine how much the shortened sale period will affect the sale price, the appraiser must analyze the property, its markets, and the status and numbers of possible buyers.  If the property is in high demand, there is not an abundance of competitive properties and there are a large number of buyers then the sales price should not suffer from the forced nature of  the sale.  If, on the other hand, there is not a large demand for the property, if there are a large number of competing properties and if there are only a few buyers, then the short sale period will probably lower the most probably selling price.  By analyzing the degree to which these three variables are present in the appraisal problem at hand, he can make a judgment as to the effect on price.


PSYCHOLOGY FOR AN AUCTION BUYER

    Another aspect of the auction process which could possibly affect the final sales price is the thinking process of those who participate as bidders in an auction.  When the average person thinks of an auction, he is thinking of buying something at a price less than the market price.  This is also true of even sophisticated bidders at an auction; they are hoping to make a deal.  The sophisticated bidder is also aware of the actual market value and he will attempt to keep his bids under this amount.  Unless these bidders are influenced by some of the positive aspects of the auction process there is a good chance that the final sales price will be below market value.

 
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