What are sealed bids, how thus it works and what is the advantage in using a sealed bid system?
The Bidding Gallery as neutral facilitators creates the ideal platform for sealed bids as a sales option other than public property auctions. The Bidding Gallery conducted our first sealed bid sale five years ago and realized an over twenty percent higher price than excepted. We believe that our sales bid system work because ultimately will the agent introducing the highest bidder be receiving the most commission agreed upon.
We quote extracts from an article published by Property Professional - 09 June 2009.
In an attempt to gain the best possible price for sellers and to give all potential buyers a fair chance at purchasing a property, estate agents in the UK are increasingly resorting to sealed-bid auctions - a practice that has become commonplace in many countries the world over.
What is a sealed bid and is it an effective method of selling property for South Africans?
Steve Caradoc-Davies, a director of Harcourts SA, says where there are two or more purchasers who want the same property at the same time, the sealed-bid approach can be advantageous. All interested purchasers are asked to make their best offer in writing and they usually expire at the same time. The purchasers are encouraged to make their best offer as they won’t get a second opportunity to purchase should another offer be more attractive.
"The estate agent is also able to remain neutral in the matter without favouring one particular purchaser. The seller benefits as he knows the purchasers are making their best offer. He is also not under any obligation to accept any of the offers should they not be acceptable." Caradoc-Davies says that the sale by tender method is similar. “We’ve been using the For Sale by Tender method for nearly a year now and it's an effective way of attracting buyer interest to a property without objection to the price as the property is marketed without a price."
Adrian Goslett, assistant regional director - RE/MAX of Southern Africa, says sealed-bid auctions present myriad benefits to all stakeholders in the real estate value chain. "It presents a new marketing and sales service offering, which real estate companies could offer to their clients. The advantages presented to both buyers and sellers would directly benefit estate agents and property professionals - the key advantage being a faster sales turn-around time."
For sellers, Goslett says, a sealed-bid auction could be viewed as a more aggressive and advanced marketing programme that increases the potential interest in and awareness of a property. Buyers have to decide and, creating competition among buyers, lends itself to faster sales. "Buyers know that they could make smart investments through sealed-bid auctions, as properties purchased are at a fair market value, and sellers are committed to selling. This auction type also eliminates the long negotiation process."
Herschel Jawitz, chief executive of Jawitz Properties says: "In the current market where the challenge is to get buyers to commit to meaningful offers, sealed bids that must be submitted within a specific period create greater price tension as each buyer does not know what competing bids are out there in price and number of bids. In the period that we have been running a sealed-bid programme, we have seen a significant increase in the number of offers received."
He says that depending on how the process is run, the sealedbid programme combines the best of the normal selling method and auctions. Jawitz notes that his company is running sealed bids as "for sale by private tender".
Heinrich Koorts, Seeff licensee who heads up the Auction Division, says that one of the benefits of a sealed-bid auction is that a low bid price, which could affect post-auction sales, can be avoided. "The seller can also choose a bidder even if the offer wasn't the highest, without public confrontation," he says. Koorts, however, mentions that sealed-bid auctions are rare and do not remotely generate the excitement or competitive bidding that makes public auctions so effective.
Andy Todd, MD Seeff Southern Suburbs, says it is worth considering alternate means of sale, such as sealed bids, for the following reasons:
In order to be sold, a property needs to be competitive and this often implies that the marketing method needs to be competitive.
- Properties are being sold for significantly lower than the original asking prices. For example, this year Constantia prices were an average of 14% less than the asking price - Bishopscourt sale prices averaged 27% less than asking price (according to RPPR).
- Properties are taking extremely long to sell - most of the 900 odd listings we have in the Southern Suburbs, for example, have been on the market for longer than six months. There is a direct correlation between length of time on the market and the list to sale price differential.
- Current real estate marketing methods rely on a strategy of 'hope'.
- The competitive nature of real estate makes it unwise for an agent to encourage a client to drop the price. The agent pricecounselling a seller is sometimes vilified but later acknowledged to be correct when presented with an offer by an opposition agency at the newly suggested price.
"What we so often forget," says Todd, "is that the property value is what a willing and able buyer pays a willing and able seller. Auctions can be seen as an expression of free market forces at work - provided that the buyer is allowed to buy without too many hindrances. Sealed-bid tenders are another way of encouraging this - buyers and sellers need a massive education campaign to show them how this approach works."
Todd says his only concern is that at this stage, there are too many properties on the market and an undersupply of buyers. "If the sealed-bid tender is to encourage competition between buyers, where will these competing buyers come from? There are also too many agents in this market competing not professionally, but on price - price of the property to flatter the seller to get a sole mandate and low commission rates to get the business."
Imagine the frustration and disappointment, he says, of the seller in Bishopscourt who listed his property last year in January at R20m on the advice of an agent and who sold it more than a year later at R13,5m. “That’s 32,5% lower than his original price. Had he sold last year at R13,5m, the present value of his money would have been closer to R15 million."
Goslett says sealed-bid auctions can be seen as a great selling alternative during these trying economic times, benefiting those sellers who need to obtain liquidity in a hurry or who wish to free up capital and move on to other investments. "The recent downturns in real estate markets across the world have resulted in an unprecedented rise in the number of sealed-bid auctions, making it a more acceptable method of ensuring property sales," he concludes.
Adrian Goslett, assistant regional director - RE/MAX of Southern Africa, offers the following insights and guidelines about sealed bid auctions for real estate professionals:
- Consider sealed-bid auctions as an effective way to meet a specific sales deadline. If real estate has to be sold by a certain date - before a foreclosure or before a fiscal year-end for example - an auction would be a good sales method.
- Use a sealed-bid auction when the seller’s goal is to determine the highest price a buyer is willing to pay.
- Disclose in the advertising and marketing material a high minimum or appraised value or bid. Buyers would not knowingly pay more than an assessment expert thinks the property is worth.
- Do not limit the number of bidders. If you are limiting bidders because "that's the way it's always been done", rethink. There will be more adrenalin flowing with a bigger crowd.
Andy Todd, MD Seeff Southern Suburbs, notes the advantages and disadvantages of sealed bids:
A sealed-bid tender has the following advantages:
- The buyer is not put off by a price
- The seller has a date by which he should get an offer
- The buyer may be able to submit a tender on his terms
- Unlike a public auction, the terms and nature of the offers are not public knowledge
- A sealed-bid tender has the following disadvantages:
- The average buyer and seller is not familiar with this approach
- The average agent is not familiar with this approach
- It is more difficult to accept an offer prior to the tender submission date
- There is no visible competition for the property, unlike a public auction
The Bidding Gallery general rules for sealed bids are as follows:
- Same contract to be used by all parties
- Specific time frame established for sales bids to end
- All agents invited to all our sealed bids
- Agents introducing successful buyer will never earn less than 50% of the negotiated commission
- Sealed Bids envelopes to be opened at open venue and minute
- No further negotiation after sealed bid auction unless reserve price not met
- Reserve price also disclosed if net met at auction
- All agents welcome to make use of this sales system