Auctioning new construction to the highest bidder: Pros and cons
An emerging trend among builders is auctioning new construction to the highest bidder. Between appliance shortages, volatile prices for building materials, and overwhelming demand, builders have had to adjust how they sell to better protect their profits. Today, we’ll cover some of the pros and cons of auctioning your properties to the highest bidder.
The pros of auctioning to the highest bidder
Auctioning to the highest bidder can have benefits for you and potentially, your buyers.
It can protect your bottom line
One of the biggest drivers of the auctioning trend is financial. Traditionally, you may have locked in a price for a new home via a contract, either before you started building or in the middle of construction.
For many builders, that method is no longer financially wise due to the extreme volatility of lumber prices.
As of this writing, the cost of lumber hovers at around $1,000 per 1,000 board feet. And that price signifies a relative crash in the price!
Since the beginning of 2021, the prices of lumber have consistently set new record highs. It reached a high point (thus far) in May, with the price for 1,000 board feet sitting at nearly $1,700.
These huge fluctuations make it extremely challenging for builders to offer a fixed price before completion. Doing so may cause builders to lose money.
By auctioning to the highest bidder, you can bake in some of the volatility in the materials pricing market. It can protect you against market-influenced spikes in your expenses, which have often occurred between signing the contract and completing construction.
Auctions can help you play catchup
Another driver of auctioning is that builders simply can’t keep up with buyer demand. Labor shortages and lumber prices play roles, but buyer demand influenced by a lack of existing homes is a big culprit.
Auctioning can help you tamp down on sales without stopping entirely while you play catchup. It also lets you hold on a sale until you’re more certain of the value of the home once it’s completed. This helps you avoid undervaluing the home and can protect against inevitable delays. Since delays can make a huge difference in your expenses, especially now, mitigating their effect is crucial.
Auctioning can help you get the best price without forcing buyers to wither on the waiting list vine
By requesting bids on homes, you can potentially help yourself and your buyers.
You may be able to use the huge demand for homes to get the best price possible. It’s no secret that buyers are often paying well above asking prices. Requesting bids can entice buyers to make their best offer up front, which could give you more options.
And though most bidders won’t win—and that may sting for them—auctioning can keep them off of waiting lists. Knowing that they need to keep looking sooner rather than later can be helpful for buyers, if not ideal.
The cons of auctioning to the highest bidder
Despite the benefits, there are potential downsides to auctioning to the highest bidder.
Desperate buyers may do desperate things. For example, a buyer may bid much, much higher than the home’s value—even accounting for expense volatility on your end—just to win the house. That can leave them with little or no emergency funds. Or you may run into a buyer who’s placing as many bids as possible and just hoping for the best.
While auctioning can protect your bottom line, you must still be diligent in researching bids. You don’t want to find yourself in a situation where you need to take someone to court or vice versa.
Volatility can force changes
Because costs are so unpredictable, a bid you accept now may not end up working out later. You may find that what looked like a good bid price is now a price that causes you to lose money. Likewise, the bid a buyer submitted may have been feasible when they made it, but over time, the cost of the house ended up going way over their budget.
One way to address these possibilities is to work with your counsel to consider opt-out clauses for both yourself and your buyers. That way, if costs get way out of control on either side, you can agree to walk away and try again. Just be sure to be upfront about opt-out clauses to provide a good customer experience and build trust.
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