Why Shouldn't I list privately first?
Occasionally, I get a phone call that starts with the statement, “I know with an auction I have to take less money…”
Truthfully, it shocks me when I hear this statement made out as a fact. The real fact is, it’s absolutely NOT true. In 2017 alone, approximately 55% of farmland in Iowa was sold at auction and only 17% by listing. There is a reason for this! Selling farmland at auction creates the ideal outcome in terms and conditions, and price.
I always recommend that sellers should start with an auction. Sellers seem to have this overwhelming idea that they should start with a listing first and move toward an auction second. In my opinion, this is self-destructive. I believe this idea comes from the seller falsely believing they have more control with a listing, and that a slower pace feels less threatening. In reality, the seller has more control and more protection in the auction environment.
Auctions are the best way to sell properties where demand is average or higher because all buyers have reasonably equal leverage. High-quality farms may appear to “do better” at auction, but in reality, an asset will bring its true market value. This simply means that lower quality properties will bring less money.
Everybody is an expert negotiator
As a land broker and auctioneer that has participated in over $500 million worth of land transactions, I have seen the over-inflated sense of self confidence people have in their negotiation skills. It takes a very deep knowledge of farmland and agriculture economics to really understand how to negotiate the sale of land to achieve the best price. Achieving a top-of-the-market offer takes current and historical market knowledge, in-depth training and experience with real estate principles, an advanced understanding of auction methods, experience negotiating transactions with multiple value aspects, and a tremendous number of resources to attract buyers. “Knowing numbers” and “sticking to your guns” is not negotiating, like some people tend to believe. I have seen the outcomes of this dangerous mindset. Often this mindset causes sellers to put their listing on the market, price it too soon to the wrong people, and end up selling the farm at a discount to what it’s worth.
Why do auctions bring more money?
Imagine that you put your farm up for sale and you want $8,000 per acre for it. So you, like most people, decide to price it a little bit higher at $9,000 because you think you will have to negotiate down. This sort of thinking tends to be the “norm” among those using privately negotiated sales.
When your first buyer shows up, they tend to have the same mentality. If they are willing to pay $8,000 per acre they will start by offering $7,000. Once negotiations with buyer #1 fail, the second buyer shows up, and the process ultimately repeats itself over and over. 99.5% of the time with a listing, the seller ends up frustrated and their property ends up de-valued. The complicated negotiations also irritates the buyer pool and creates a permanent black mark against their property.
The biggest advantage of an auction is that sellers don’t have to keep starting over with each and every buyer. Instead, the auction process gathers all the buyers in the same place and lets them compete for the asset. If your auction starts at $7,000 nobody can bid $7,000 again - the next offer MUST be higher, and the next offer higher yet. Auctions defeat the “starting over” issue that often leads to the demise of private farm real estate sales. With auctions, sellers can achieve the highest price because the ascending bidding creates an environment where the seller can take advantage of the true market demand. Buyers also lose all leverage because the seller sets all terms and conditions.
9 Advantages of Selling Farmland at Auction
Auctions Create Competitive Bidding
At an auction, negotiations are ascending. In other words, they keep moving up from the last bid placed. In private negotiations, negotiations start over with every new interested buyer. This key difference between the two methods is what makes auctions a
superior choice of marketing in MOST cases, and eliminates the negative effects of overpricing your farm. Having multiple buyers competitively bidding against each other always gives the seller the upper-hand.
The seller tells the buyer how the asset is being sold and creates all terms and conditions that the property is sold under. This effectively eliminates the buyer’s ability to create loopholes in the contract. This also creates a solid foundation for a transaction where the seller is in control, and not the buyer.
AS-IS Selling Conditions
Selling real estate at auction means buyers purchase the asset AS IS, WHERE IS. This relieves the seller of any buyer-demanded improvements or changes in the property. This includes any aspect of the property from building conditions, septic systems, fences or any other element a buyer would have the power to negotiate in a private transaction.
All negotiations occur inside the auction which greatly reduces negotiation time for sellers. They will not spend a year on the market reducing their price to a point that buyers find enticing. The seller sets all terms and conditions and the price is negotiated in a short timeframe during an auction.
Non-Refundable Earnest Money
At an auction, a buyer’s earnest deposit is the security that protects the transaction. If the buyer fails to perform, there is no question - the earnest deposit goes to the seller. In private transactions, earnest money is rarely non-refundable if the buyer fails to perform. This unfortunately would leave the seller to start the private transaction process all over again.
Preparing the property every couple of days for a showing can become cumbersome. With the auction method, we provide one or two inspections dates where interested buyers come view the property. For properties with residential structures, sellers especially appreciate this time-saving advantage.
When a seller shows interested buyers their commitment to sell, they will be rewarded with kinder buyer treatment. Auctions help buyers see a seller’s commitment to selling. The seller will pick the sale date and the closing date, they will decide how much earnest deposit is required and how the transaction is closed, and all buyers must follow these rules and guidelines. This also allows the seller to meet deadlines for trusts, estates, taxes, or their own future investments. This time-certain sales method and commitment to buyers is another advantage to the seller.
This factor is extremely important to buyers. The auction method is the most open and transparent way to sell farm real estate for all involved.
The intent behind this blog post was to help prospective sellers understand they DO NOT have to settle for less money with an auction. An auction’s advantage will create competition that will maximize, not reduce, the outcome. The auction method also reduces holding costs and exposure to the potential pitfalls of real estate sales. Sellers can also protect themselves from financial disasters by using reserves and confirmation processes to ensure they truly obtain the most money for their property.
A seller that will trust both the auction process and a professional auctioneer will have a better overall experience, achieve a greater offer, and have a higher net profit in the end. I say this after selling 500+ tracts of land and observing the sale of thousands of properties in my career.
At DreamDirt, we want to be a resource you can depend on. Whether you’re ready to start the selling process, or even remotely curious, we will gladly provide resources to get you started in the right direction toward a successful sale! The proper evaluation of your assets by an appraiser is the first step, and often the foundation of your decision making when selling farm land real estate. Please feel that you can reach out to us to get a better understanding of what your property is worth.
Whether you’re ready to start the selling process, or even remotely curious, we will gladly provide you with a FREE Market Analysis! If you are in a position to sell land in the Midwest, we want to help you achieve the top of the market on your sale.