A New Business Model for the Realtors

A White Paper

The Internet Auction - A New Business Model for the Realtors

By Charles L. Huggins
President, Rbuy Online Auction

      “Agents must believe a home seller should be more
   attracted to a company who proclaims to sell homes
   for more than one that boost of selling more homes.”
- Allan Dalton, president of Realtor.com - Article, "More is Less"

The Internet auction has changed how business is done online. It’ll do the same for real estate once companies give sellers the choice of the online auction. The companies that provide sellers this option will be more competitive and gain market share from those companies that remain wedded to the negotiated offer. The leaders that adopt the Online Auction will be using the Internet to its maximum advantage.

The online auction is shown to be a more effective and efficient sales method for selling real estate. In 1994, the economists all told the government that the auction was the only way to sell anything at its market value that buyers valued differently. This is one of the few things economists all agree on. All the studies also show that the online auction obtains a higher price, 10% to 15% more, for real estate than the negotiation method. One of the reasons is the additional competition an auction attracts.

The Internet Auction
Fourteen years ago, the power of the Internet auction was beyond most people’s imagination. In just a few short years, it has developed the ability to make markets more efficient and is quietly penetrating virtually every corner of our economy. It is the quintessential marketing program for selling real and personal property online. It makes the process of buying and selling goods and services to a larger market easier, less expensive, more effective, and more profitable. Most people are familiar with the Internet auction, but few understand its potential for changing how we conduct business.

The Internet turned the traditional auction on it head. It took it out of the control of the auctioneer and made it available to the public. It made it more easily accessible to the public, and convenient for buyers to bid from home or work. Unlike traditional auctions that last for a few minutes, Internet auctions can run for days or weeks allowing more buyers to participate. It is the auction’s bidding process where buyers openly compete with each other to buy an item that makes it more effective than other sales methods. The Internet auction gives business and the public a more efficient way to buy and sell real and personal property faster in real time on the Internet at its market value.

In only a few years, Internet auctions have grown dramatically. All government agencies and all major industries, except the real estate Industry, now use Internet auction. eBay, the largest of the consumer auctions and most visible, reports over 1.58 million registered users in 2005. According to a recent Forrester Research report, the online auction market will constitute 25 percent of retail sales by 2007. Businesses report billions of dollars in savings due to the efficiency of the auction’s pricing ability. This is strong evidence about effectiveness of the Internet auction, and that consumers and businesses alike find auctions more beneficial than the fixed-price and negotiation method.

The Research
The auction is said to be the most studied form of commerce by economists; and one of the few areas they all agree on. They all agree that the auction is the best pricing mechanism and most efficient and effective method for selling anything that buyer’s value differently.

Negotiation versus Auction - Several studies by researchers, one of those paid with a grant from NAR, compared the auction to the customary negotiation method of selling real estate. The markets selected for the studies were in Australia and New Zealand, where, unlike the U.S., real estate companies give sellers the choice of the auction or the negotiated sale. These studies found that in Melbourne, Australia, auctions averaged 8 percent more than negotiated sales, and in Sydney, auctions were up to 13 percent higher. A study in Christchurch, New Zealand found the auction prices ranged from 5.9% to 9.5 percent higher. In both countries, agents recommend the auction as the best method for obtaining the fair market value of a property. At the time of this study, companies in Melbourne report that 74 percent of their sales are auctions. The 26 percent that selected the negotiation method and gave as one of their reasons the 1 percent advertising fee charged upfront for auctioned properties. As in the U.S., it is customary for sellers to pay an advertising fee, and for buyers, a premium. Even with the auction’s higher costs, the studies showed that the net amount received by the sellers were still greater than the net from the negotiated sale.

Traditional Auctions
Studies show that in the U.S. traditional real estate auctions sell most property at a discount. The reason is they have trouble attracting serious buyers. That’s because buyers call an agent when they want to buy real estate. The agents have the buyers.

Internet Auction Gets Higher Real Estate Prices

The value of negotiating skill is small relative to the value of an auction’s
additional competition. - Auctions vs. Negotiations– Stanford Univ. Economist
Jeremy Bulow

There are a number of reasons that agents get higher prices when they use the auction. The following are a few:

(1) Agents have access to homebuyers through the MLS.

(2) The open bidding process attracts buyers and stimulates bidding.

(3) Buyers like seeing all the bids. They say it helps them make better buying decisions.

(4) An online auction can run for days or weeks which allow more buyers to bid.

(5) An online auction has no listing price to limit what a buyer will pay, allowing the buyer who values the property the most to buy it.

(6) Online auctions have a beginning and ending. This encourages buyers to make faster decisions and results in faster sales.

(7) An online auction taps into buyers’ competitive spirit. Some buyers think of it as a game. They don’t just buy a home, they win it.

A Paperless Transaction Speeds up the Sales
The inefficiencies of the real estate industry are well known. With its mortgage and closing components, it is literally buried in paper which makes real estate transactions time consuming, expensive, and error-prone. The Internet auction is the ideal format for totally automating the real-estate transaction to make it paperless. The automated transaction will speed up the sale and closing, and increase the liquidity of real estate.

Liquidity - Time is Money
As the auction’s popularity increases in a local market, it becomes the local marketplace for buying and selling real estate online. Its open forum, with its beginning and ending format makes it a transparent, organized selling method with a credible sales price and a predictable outcome. It lets sellers watch the bidding and when they sell they will have the confidence that they got their best price. The transparency of the auction makes the selling price credible. No other sales method is transparent.

Buyers make faster buying decisions with the benefit of the price other buyers make on the property. This speeds up the sale of real estate. Anything that makes selling real estate faster, more efficient, and predictable makes it easier to convert equity to cash. This lack of liquidity cost real estate owners billions of dollars. With greater liquidity, the turnover in real estate will increase, which will create a greater demand for real estate services.

Changes in Real Estate Practice
The online auction will change the way real estate is sold and benefit everyone by simplifying the sales process.

The following are some of the changes to the real estate sales process:

Higher Price: The open bidding process, unlike the negotiated offer, lets all qualified buyers compete in an open forum where everyone can see the bids, thus permitting the buyer that values the property the most buy it.
No Contingencies - Auctions cannot have contingencies because it is a final sale. They must be handled before the buyer bids. The seller may agree to a buyers request if he thinks the buyer will bid more aggressively giving him a higher price. That's why in an auction, a seller is more likely to agree to a buyer's request.
No Negotiations - There is nothing to negotiate--no haggling over price and subject to's.
No Listing Price – Auctions have no listing price to limit the amount a buyer will pay. It lets the price increase as high as buyers are willing to bid letting the buyer with the best reason for owning the home buy it.
No Risk to Seller - The auction has a secret “Reserve Price” the lowest price the seller will accept. This puts a bottom on the price the seller’s will have to accept.
More Buyers – Real Estate Auctions offer the potential for a bargain and attracts more buyers for sales of other properties.
Auctions Make a Market – All of the above helps the auction make a market for slow selling properties.
Inactive Buyers - An interesting aspect of real estate auctions is the number of sales made to inactive buyers. They are buyers who were not actively looking to buy and attended out of curiosity. They are neighbors, bargain hunters, potential investors, who treat real estate auctions like a sporting event. This is why auctions can sell property in a slow market.
Less Litigious – The auction empowers the buyer and seller. It simplifies the real estate sale with fewer areas of contention. The open bidding process gives buyers and sellers more control over the sales price which removes reasons for litigation.

A New Sales Model
With the auction, there is less selling. It doesn’t take much coaxing to get a buyer to bid on a property when they can see the highest bid and only need to bid the next increment above it. Agents will think of themselves more like advisors, consultants and marketers. The listing agents will run their auctions more like a marketer or market maker. They will be responsible for promoting their auctions and attracting all the interested buyers to inspect the property and bid. More importantly, the public will begin to see agents more like professionals who serve the interest of their clients. The online auction has removed the conflict of interest where agents needed to close the sale conflicted with their buyer's interest to get his lowest price and the seller's interest in getting his highest price. This new business model allows the real estate business to evolve from a sales business into a service business with important advantages that benefits the public and the industry.

Rbuy - The Internet Auction for Realtors.
Because agents have access to the buyers through the MLS, they are the logical user for the online auction. To provide an Internet auction service, agents need an auction designed specifically for them. Rbuy Online Auction for Realtors, http://www.rbuy.com is designed for real estate agents to auction their listings online. It is the only Internet auction designed for agents. It is inexpensive and easy to use. No staff is required. Companies and their agents can immediately make the online auction available to sellers. It is a state of the art design with many features that makes it easy for any agent to sell all types of properties, including Residential, New Homes, Foreclosures, and Commercial and Investment properties. The auction opens up many new markets for real estate agents that were consider unavailable before. It makes companies very powerful competitors for the over $200 billion dollar auction market.

The Mediator - The Automated Sale
The Mediator is the first and only Internet negotiation program. It is used when the reserve price is not met. The listing agent gets the highest bidder and the seller to agree to try and reach a price that satisfies both parties. The agent initiates The Mediator. The Mediator does the rest. Once an agreement is reached, it announces “The Parties Have a Deal,” and the amount of the sales price. That becomes the highest bid and the auction ends with the property sold. The importance of The Mediator is that the negotiations don’t require any face to face meetings of the parties. It’s all done online.

Agents Auction their Own Listings
The uniqueness of Rbuy Online Auction is that it does not change the traditional relationship agents have with other agents and with their buyers and sellers. It keeps the agent central to the sales process and with total control of their listings. Rbuy provided all the tools agents need to easily auction their listings. They qualify and approve all buyers who bid on their listings. They continue to provide most of their customary services such as matching buyers with homes and handling the marketing and inspections of their listings. Rbuy has no relationship with the buyers and sellers. It is an auction service for real estate companies and their agents. The buyers and sellers are the clients of the agents.

Conclusion
The research is unanimous and evidence is clear that the online auction is a more effective method for selling real estate. It benefits sellers by maximizing their price and the transparency allows them to accept the sale with confidence that they received their best price. No other sale method provides the transparency for a credible sale price. Buyers benefit from seeing the value place by other buyers on a property. They control the price they bid. The online typically runs in two week intervals and gives buyers time to do their research and decide what price to pay. Offering seller the online auction should not be a hard decision for companies and their agents to make in service economy where companies compete on the basis of services that benefit their customers.

When a business competes, it has two choices: cut cost or add value. Cutting cost can be a sure path to failure. And what is the added value? Almost without exception, it is service. Although a business sells a product, it must see itself as a service company if it is to be competitive in this service economy. When all the companies off the same service, reducing the price becomes the easiest concession close for agents. Offering a new more effective marketing service makes an agent more competitive and profitable.

Rbuy’s new business model for Realtors is a “service" business model. It will permit agents to practice real estate more like professionals. The efficiencies will make the business more profitable and less time consuming for everyone.

The only question is who will be the leaders in this movement to make selling real estate more efficient and consumer oriented, and who will be the followers. Any experienced business person will tell you that it’s more profitable to be the leader of a movement than a follower. For the leaders, this is a unique opportunity to be first in their market and increase their market share.

Or, it’s easier to ride horse in the direction its going. – Zen proverb

For information, Call Charles L. Huggins, 301-718-0969, or email chug@rbuy.com.

¹ - Study – In Australia real estate companies provide sellers with a choice, the auction or the negotiated offer. A study of real estate markets in Melbourne, Australia shows that auction prices were over 8% higher than the negotiation sale. - A comparison of prices brought by English auctions and private negotiations, by Kenneth M. Lusht (1989, 1996), American Real Estate and Urban Economics Association

-A study of real estate markets in Sydney, Australia, shows auctions prices averaged 3%–13% higher than negotiated sales. Research findings by Lusht (1990, 1996) and Newell, MacFarlane, Lusht and Bulloch (1993)

-A study of real estate markets in Christchurch, NZ, shows that auctioned properties averaged 5.9% to 9.5% more than negotiated sales. - Research by Mark G. Dotzour, Everard Moorhead, Daniel T. Winkler. - The Impact of Auctions on Residential Sales Prices in New Zealand, Journal of Real Estate Research.

REALTOR® -- A registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.

The Author
Charles L. Huggins, Sr., is President, Founder of Rbuy, Inc., www.rbuy.com, chg@rbuy.com