August 27th, 2007
REAL ESTATE AUCTIONS-LEGAL CONCERNS FOR AN INCREASINGLY PREFERRED METHOD OF SELLING REAL PROPERTY
Editors’ Synopsis: Part I of this Article provides an introduction and history of how the real estate auction has been used to sell non-distressed properties as an alternative to negotiated sales. Part II analyzes, from a legal perspective, auction practices that allegedly undercut the reputation of the industry, including complaints of both buyers and sellers. Part III reviews existing legal and ethical rules that affect the real estate auction process, and considers why existing rules are not adequate and are in need of reform.
According to estimates of the National Association of Realtors (NAR), thirty percent of all real estate will be sold through auctions by 2010.1 There has been a tremendous increase in the use of auctions between 1980, when $10 billion was sold in the United States, and 1999, when $49.5 billion was sold.2 Good and Weinstein thoroughly discuss the auction advantage.3 Auctions might be the most efficient method of sale, especially for properties that are not easily valued.4 Yet, there is little understanding of the auction process. Additionally, some players involved in the auction industry have sullied the public’s view of selling real estate by auction, which has led to allegations of ethical and legal shortcomings.5 More important, proposals for reform are forthcoming to insure that this method of selling real property is a win-win situation for both sellers and buyers.6
I. INTRODUCTION AND HISTORY OF THE AUCTION INDUSTRY AND AN ALTERNATIVE TO NEGOTIATED SALES OF NON-DISTRESSED REAL PROPERTY
A. History of Using the Auction to Sell Real Property
In the United States,7 real estate auctions were used almost exclusively to sell distressed properties involved in mortgage foreclosures, property tax foreclosures, and bankruptcy lawsuits until the mid-1970s.8 Because of the perception that auction prices were much below the fair market value, brokers and other advisers to owners of real estate discouraged the use of auctions except in dire circumstances.9 Professors Grant Nelson and Dale Whitman, scholars reviewing the proposed Uniform Non-Judicial Foreclosure Act, have recently given thoughtful attention to the inadequacies of auctions held pursuant to court order in foreclosures.10 The law often uses auctions to extinguish a debtor’s rights as opposed to maximizing the value of the property being sold. These legal complexities often create a negative perception that real estate auctions are a way to sell distressed properties and they no doubt discourage prospective buyers, a fact that in itself affects the selling price. Thus, for purposes of this Article, the authors are concerned only with real estate auctions as an alternative to negotiated nondistress sales.
Throughout the 1980s and 1990s, real estate auction companies worked diligently to demonstrate that the real estate auction was a legitimate means of selling real estate, regardless of the category (such as residential, commercial, or “trophy home”). Thanks to intense marketing efforts, hundreds of thousands of successful sales, and positive word-of-mouth, those first auction companies are now seen as pioneers.” The first auction companies are knowledgeable organizations that revitalized an age-old sales approach to sell their clients’ properties expeditiously and for fair value.
With the indisputable triumph of the real estate auction format, a few national real estate companies have become industry titans.12 Numerous upstart companies have entered the industry in an effort to gain some of the real estate auction selling business. Charges of increasing legal and ethical violations on the margins or in the gray areas of existing rules have come with the increased competition among the auction companies to get sellers of real estate to hire them. What the rules are, and what they should be, is unclear in many instances, because courts respond to issues about sales of personal property, not real estate, when interpreting auction rules.13
Because widespread use of auctions to sell nondistressed real estate is so new, the legal and ethical rules have not caught up with the issues facing the industry.14 An exhaustive analysis of past claims and disputes, or those currently pending, is challenging. Research in this field is difficult because so many of the cases have been settled, often with confidentiality agreements, before they reach appellate courts or have been resolved through arbitration.15 The absence of reported appellate cases makes it difficult to find specific examples of the gray areas and to suggest how to avoid these problems. To investigate cases at earlier stages of litigation would require in-person reviews of pending and resolved cases on a state by state basis-an impracticable task.
Furthermore, there is not a consistent, clear body of case law or legislation in this area.16 Different courts often make different rulings on the same issues. Little scholarly attention has been given to the problems here. Yet, there is a serious concern that the questionable conduct of some industry players threatens the entire industry and may stifle the recent progress to make auctions an acceptable, if not yet preferred, process for selling real estate.