AIPIS 75 - Learn About Real Estate Auction Agents with Larry Makowski

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It's my pleasure to welcome Larry Makowski to the show. He is founder and senior Auctioneer of Express Auctioneers. I'm looking forward to talking to him about auctions today. I don't think we've talked much about auctions on the show, so this should be a good new topic. Larry, welcome. How are you?

I'm very good. Thank you for having me.

Give our listeners a sense of geography. Tell us where you're located.

Well, we're based in Baltimore, Maryland, but our geographical area of selling is in Mid Atlantic region from New Jersey down to North Carolina and have sold all over the country. But primarily at this moment we are concentrating on the mid Atlantic region. New Jersey, Pennsylvania, Washington, D.C. maryland, Virginia, North Carolina.

Before we dive into it, you kind of made me curious when we were talking about geography there. What kind of license licenses, if any, do you need to do this? I mean you probably don't have real estate licenses in all these different states, right?

It depends on the state. Some of them have exemptions to selling real estate at auction. What that means that you don't have to be a broker or an agent to be able to do that in Maryland, in Virginia, in North Carolina, you do not need to be a designated real estate broker or agent to be able to do that. However, you only can do a transaction on the day of the auction. You cannot post sell it or pre sell it unless you are a broker. But we're generally licensed in all those areas so that we can pre sell one or post sell one if we don't aren't successful on auction day.

Right. Okay. Okay, good. So how does it all work? I mean look, the typical problem is someone wants to sell their property, they decide they're going to either sell it with an agent or or they're going to sell it for sale by owner. But there's really a third choice, right? And that's what you do?

That's what we do. Basically what we come into play which you see more and more now, where instead of us being the second Choice. They're the alternative choice for selling their real estate is their first choice. We have programs, what we call designations for where we train the realtor who wants to be involved with auctions to give a service to the client called real estate auction agent, and where they learn the basics of it. And they're able to discuss it with their potential client by giving a presentation plan of a plan, which is the traditional way of selling, or the B plan, the accelerated marketing method, which was actually auction. So for a period of time, we trained them so that they're able to make a decision that they're going to list it, get the listing, and if it doesn't sell after a certain period of time, instead of lowering the price, which takes away the amount of money that the seller will get, is talk to them about doing an auction sale and being able to sell it as is where is for cash, no contingencies and no cost for them. Because the fee that we charge and split with the realtor is a buyer's premium. And we split that 50, 50 for them when we're successful at selling it.

Okay, great. So do they have to have an agent? I'm talking about the owner now. I mean, can a seller just call you up directly and say, hey, come and auction my house off? I don't have a real estate agent.

That's correct. They certainly can do that. They don't need to have an agent at all. We originated the plan with the real estate agents about 15 years ago. So we are the originators of the designation. And the fact that the realtor can refer the property to us and end up getting a fee out of it. Sellers can come to us, and then they do come to us. And usually referred to from their attorneys or somebody else that's been successful with an auction sale. They've told them to come to us because they find that being able to sell it as is where is not having to fix the property up and put 10 or 15,000 in to be able to show it and list it with us, they can just put it up for sale and sell it the way they have it, list the way they're living in it right now.

Yeah. Hey, so I just got to ask you about the origin of this phrase, this as is where is. I mean, real estate is kind of permanent where it is. Why do they say that anyway? I mean, I can understand saying, you know, as is. That's great. That's how every seller wants to sell. They don't want to have to do anything. But why do you Say as is where is just out of curiosity.

Basically, it's the fact that when Realtors list a house, they have to name or have the seller go through a form designating all the things that might be wrong with the property or that they know what is wrong with the property. Where with the auction, we just have the buyer make that inspection and determine what they think is wrong with the property. And the seller does not have to stand up and say, oh, the roof is leaking or the backyard has cracked sidewalk or there's paint. This bathroom has some leaky pipes in it. As is where is says to the. It's a general legal term that's used a lot when you do foreclosures. You're buying it as you see it, and what you inspect and find is what you're going to get.

I totally understand that. I'm just questioning the where is part. I understand the as is part. So just kind of curious.

It's just a legal terminology that they use in the that's where it's been picked up from.

Yeah. Okay. So how much does this cost? I guess it doesn't cost a seller more, or does it cost the seller more money? Like, say, they have a real estate agent. Maybe they're paying them whatever percentage they've agreed to. Certainly that's negotiable. What does the auction do to that?

The seller pays zero commission. When we sell it at auction sale, it's a fee, what's called a buyer's premium that's added onto the top bid amount. So when we do the auction prior to knockdown, the bid may be $100,000, and our typical fee might be 10%. So it'd be a contract purchase price that reads $110,000 or $10,000 added to the top bid. Now, the seller benefits from this because he or she does not have to pay any transfer costs, doesn't have to pay any inspections, doesn't have to do anything to the property at all. And so it is a net net number to them. So the $100,000, there's no deduction when you go to a regular settlement, contract might read $110,000. Then you got to pay the commission that you're paying the realtor. You have to pay part of your documentary stamps, transfer taxes and things of that nature. And you may have to fix something up because of an inspection that was done at the buyer's request.

So you guys get paid through the buyer's premium, then?

That's correct.

Okay, and how much is the buyer's.

Premium, we generally use 10%.

So 10%. And does that cover the real estate agent too or does it just cover you guys?

It covers the real estate agent too. So if a realtor refers it to us, we split the fee with them. 50. 50.

Oh, okay. So, so in other words, if there's a listing agent that calls you up and says, hey, I've got this listing, I talked to the seller about it and we've both agreed that the best way to do this is via auction, then you'll end up, your company will end up with 5% and the listing agent will get 5%. Is that how it works?

That's true. Well, we'd like to stay just so we don't get in too much into the percentages.

Okay, so can a selling agent, can a buyer's agent bring a buyer to the auction? Are they going to get paid or is it really just you're looking for buyers directly only?

Well, we market it to buyers directly and we market directly to the real estate community. So if they happen to have a buyer, what you find today is a lot of people don't really understand how to buy at auction sale or they're a little afraid of it because they think the auctioneer talks too fast. So they will contact their agent to have them inquire about the particular auction that's going on for the piece of real estate that we might be doing at that time and we pay them a co op fee, being the buyer broker. 2% of the 10%.

Right. Okay. All right, sounds good. So are these absolute auctions or can they set a reserve price?

95% of what we sell is subject to confirmation. What that means is there's no real set reserve price is that we'll take the bidding to the highest point from the audience and present the offer to the seller and the seller can say yes or no to that price. So for instance, if the seller is expecting $100,000 and we know that's the target and we only get to 95, we reserve the auction, go into the seller and say, hey, we have $95,000 bid as your net number. Do you wish to take it or do you wish to reject it? If they say they'll take it, we go back out and take the final bids and see if we can get any more and we sell it for that $95,000 plus 10%. If they say they rejecting it, then we conclude the auction and then try to negotiate with the high bidder and see if that we can meet somewhere in the Middle to get the satisfactory price for the seller.

Right. So, so basically what the bidding does, it sounds like, is it opens up a negotiation, a final negotiation. Right. Is that correct?

That's correct. What it does is bring everybody that's interested in that property to the, to the site to make their offers that day. And the seller can make his decision that day as to whether it's good enough for him to take or not good enough for him to take.

Okay, so what happens with a multiple listing service or if anything in this, in this scenario, for example, I would assume what happens too often is there will be an agent out there. They've got the listing on the property, you know, the property's sitting, it's not selling. And they'll think, you know, let's call and let's try an auction. The property's already in the multiple listing service. What do you do with the MLS as it plays into the auction, if anything at all?

Well, in today's environment, almost all the listing services around the mid Atlantic and around the country have a section on their MLS for auctions. So if the particular agent doesn't want to put it under his name on that, we will do it under our name because most likely we're going to be a broker in that. But primarily we tried to put it on the MLS under the brokerage's name so that they'll benefit from all the inquiries that will come in who do not buy. So they'll obtain a list of prospective buyers of property. We're strictly in, we're not in the private treaty business at all. We only sell at auction. So when we put it on the mls, either under our name, the brokerage name, we put it under there. They have to put a list price up there. And we put a starting bid in the remarks section saying this is an auction sale to be held on X day. Broker co op invited starting bid is whatever it's going to put the starting bid at.

And what is the starting bid typically like? Say the property was listed at a million dollars and it's worth, you know. Well, we don't know what it's worth until it sells. But let's assume that the agents and the appraisers might say it's worth 900,000. So where is the auction price?

It's generally 50% of what the last list price was.

Oh, so you're taking that property down to $500,000.

Correct.

On the day of the auction. Now do you do that? When do you do that? When do you change that price?

Immediately when we start the marketing of the property under the auction, which is.

About three weeks before the actual auction, you're saying?

Yeah, that's a minimum of three weeks.

So don't, don't you get a bunch of unqualified buyers showing up or don't you get, you know, people complaining, hey, I thought, you know, this house was 500,000 and really it's not going to sell anywhere near that amount?

No, they don't. We don't have too much problem with that. Very little as a matter of fact. Because what happens is it, it will direct them to call us or the agent, and the agent will direct them to our website. The website will give them all the terms and conditions of buying the property at auction sale. And what happens is they'll see that they have to put up a cashier's check to be able to bid at the auction sale. And that's going to be about 10% of what the starting bid will be. So if we're doing a $500,000 property, in order to be able to come qualify the bid on that property, you must have $50,000.

Oh, okay, so how do you collect those cashiers checks that would, it's that you're really gonna only have serious people showing up at your auction if they gotta have a check. Is this auction physical? I mean they come to the property and you have a physical live auction, right?

That's correct. Yeah. 90% of what we do is on site sales. Unless it has a condo, a condominium. It may have a restriction as to doing on auction on site. We will get a ballroom close by where we were selling or a restaurant room and have people invited there and do the auction from there. If the HOA restrict auctions from being held on the property.

Right. Okay, but, but say you have it live, say it's a single family home and you don't have some illegal government, which is what I call HOAs. But say it's a regular single family home. So the people come and they show up. Have they already mailed in a cashier's check for them to get in the door or do they bring that with them in their hand? Or how do you do that?

Well, there's two ways they can do it. One is most of the people go to the website or they call the office and they request what we call a bid packet. And then the bid packet is, it will be either emailed to them or mailed to them, depending on what their situation is. And that will tell them the terms and condition of the sale. And that generally will eliminate a lot of people who do not have a cashier, the ability to put down a Cashier's check of 5 to 25 or 50,000, whatever it happens to be that for that particular property. So that's an automatic qualifier. As you know, today most people buy, try to buy with little or no money down or they have to get 100% loan or 95% loan or 70% loan. So it eliminates the general people who do not have the ability to get financing. Because remember this is an all cash deal, it's not subject to financing. So they put bring their check to the auction. They know beforehand whether they can do it or not do it. And if they're going to get financing they have to go themselves. Or if they're going to do themselves or they can do it through their agent, get pre qualified to be able to get a loan. They bring the money. Our people who are registrants at the sale will verify that they do have the funds. And then when they have registered that they qualify, they get a bid card and they're able to go look at the property on the day of the sale. Now everybody can pre inspect the property by an appointment. All they need to do is just call their office, make an appointment and they can bring their agent and bring their inspector, they can bring whoever they want to the site to see if that property is going to be worthwhile for them to be there, to come there and buy so they don't have to wait till auction day to see it. But I have to tell you, in my experience, you know, almost 40 years, 90% of the buyers come the day of the sale and buy without pre inspecting the property.

So why do you think that is? I mean, what does that mean? Tell us.

Well, if you think about it, most people go look at property, four or five or six of them in a day and then come back and say, let me see this one. And then they buy it. They don't do a lot of inspection or looking at the property prior to putting a contract in because they have the safeguard I'll buy it subject to an inspection. If it makes my inspection, I'll take it. If it doesn't, I'll walk away from it. With the auction, they don't have that opportunity.

They can't walk away.

In other words, they can't walk away. They put down that cashier's check amount and if they walk away from the property or don't settle, then they lose it.

Who do you think gets the best deal at an auction, do you think it's a buyer or a seller?

Well, I think the seller, I think both parties get a good deal. The seller gets rid of the property in a time that's.

Very good for them. And the buyer gets the opportunity to buy a property probably for a little less or at a price he's willing to pay, knowing what he has to know about the property and the condition it's in. So I think it's a win win situation for both of them. And it's a win win situation for the agents because they get, they don't have to worry about closing because it's going to be an Automatic close in 30 days. They don't have to take them to get financing. They don't have to sit through termite inspections. They'll have to wait for an inspection report to come back. There's no way that it's going to be delayed. It's a situation where it's going to go 1, 2, 3 and in a 30 day period because they have 30 days to close.

Yeah, interesting. Okay. How many auctions have you done? I mean, how big is this side of the business? I'm just curious.

I've probably done 20,000 properties since 1974.

Wow.

Wow, wow. So you guys are mostly on the east coast, but you've done them every all over the country, right?

All over the country, including Puerto Rico.

When you were talking before, we talked about the multiple listing service and you say sometimes you'll put the property in under your company's name as the listing broker and sometimes it'll just be the existing broker, but you'll have that auction status listed in the mls. So I mean, you have to be a member of a whole bunch of different mlss, right? Well, yes, that's pretty complicated. I mean. So you just maintain a whole bunch of memberships, huh?

Yeah, I don't have to pay membership. It becomes expensive. But it's necessary to be able to get the correct exposure. And if we're dealing with real estate brokerages, they already have it. So it's, we put it under their name, as I had said before. And so it's, it works that way. And we, you know, we've been able to do a number. If we're selling for private owners, you know, we do probably two or three of those in a day, depending on what the situation is and the geography of it. And for investors, we do multiple sales in a day for them because they will have four or five, six properties or two or three investors. Will get together and want to be able to get their costs down to be able to sell the properties because main thing is the seller has to pay the marketing cost that's involved in selling the property.

With investor properties, can you sell them when they're tenant occupied?

Yes, we can just have to have a copy of the lease to see what the. So we can pass the information along to the buyer so they know what they're buying. You know, they're getting a 1 renewable lease, a month to month lease and what the terms and conditions are that we sell number investor properties that way.

Yeah, very interesting. So is your life, I mean do you, you have other auctioneers that work for you, I assume, right?

Yes, we do.

Okay. You know, they're constantly traveling around, they're on airplanes, they're going to all these auctions, right?

Yeah, not so much on airplanes but you know, pretty much driving to it, you know, to the site. So it's, it's not all that difficult. Most of it's in the marketing and getting people there and it. You have to have a special.

We're working with realtors. We have them do the legwork as far as showing properties. Somebody wants to see it before the sale. So that's all taken care of through that through the co op. If we're doing it a single property that we're the seller came directly us then we will handle that from beginning to end.

What's the best day and time to hold an auction?

You know, I have not found any data. Better than any other. The main thing we have to stay away from is holidays, which will affect vacation time, which will affect, you know, particular buyers. Because if remember they're only going to get a couple weeks out of the year to be able to go on vacation. So you know, you want to stay away for particular area if it's going to be impacted by people going on vacation.

Right, right. Yeah.

Or if it's a holiday, it's not, not a great time to be able to do it because especially around Christmas time, you know, like from December 15th to January 15th, that's probably the poorest time to be able to sell a property, no matter where it is.

Yeah, makes sense. Makes sense. How big is this industry? I mean how many properties are auctioned versus sold traditionally?

Well, I only have an older statistic on from the national association of Realtors that they had predicted that within the 20, by 2020 there'll probably be 1/3 of all real estate sold at auction by 2020.

1/3 they're saying so that's only five years away. And do you know how much is sold that now? Any, any estimates?

I'd only be guessing, but on a pretty staggering amount right now.

Good, good stuff. Give out your website if you would.

Ones for investors is sell your flips dot com. That would be the one that will direct them to every, all the other ones.

So sell your Flips.com for investors. Right. And so a lot of investors that are constantly flipping properties, they, they use your service to sell them, huh?

Yeah. If they don't sell them right away, they certainly do because the holding cost with eats into their profit for a lot of them. They want to move it pretty quick.

What's next for you?

Well, we're, we're expanding out to go over the whole country right now we're crying up our work in the mid Atlantic area. And so we're looking to get our training program out to all the brokerages that have not been able to embrace the auction method and don't understand it. So they stay away from it. So what they have to learn is that when we do an auction for them that they're going to get a 5050 split of the fee which basically doubles what they traditionally get right now when they go to settlement. And a lot of them are shocked that they end up getting more than if they sold it themselves.

Very interesting. Good stuff. Well, Larry, thank you so much for joining us today.

I appreciate it. Thanks for having me.

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