What’s your home worth? Your farm? Your investment property? Let’s take an even easier example: What’s that $1.00 bill in your pocket worth?

You might answer to the $1.00 question, that it’s worth exactly $1.00. It’s worth that because that’s what you can get for it in terms of a candy bar, soft drink or today’s paper. It’s worth $1.00 at your bank because they’ll change it for you -- into 4 quarters, 10 dimes or whatever combination you desire.

So, a $1.00 bill is worth $1.00. Your dollar bill is worth $1.00. Basically, that’s because the market says it’s worth $1.00. The rule in the marketplace for all $1.00 bills is: you can get $1.00's worth of things for your $1.00 bill if you, the holder of the $1.00 bill gives it to someone who has, in your opinion, a $1.00's worth of things, and the owner of those things wants to sell them, and values them at $1.00.

Let’s look at real estate. You believe your home is worth $150,000 (150,000 $1.00 bills) You’ve had a plumber that did some work for you tell you that a neighbor’s house similar to yours sold recently for about that amount, and an appraiser three years ago said your home would be worth $150,000 by now.

But is it worth $150,000 because people say it is? Because you think it is? Remember our $1.00 bill. It wasn’t worth $1.00 in goods or services because we said it was. Rather, it is worth $1.00 because people are willing to act upon that premise and "trade" you things worth $1.00 for your $1.00 bill.

Here’s the rule for real estate: your real estate is only worth 150,000 $1.00 bills if someone out there has 150,000 $1.00 bills to give you for it, and you’re willing to sell for that, and they’re willing to buy for that. You’ve heard this type of phrase before: "willing buyer, willing seller, neither ..."

Now that we know what our home is worth, and why, let’s look at the traditional real estate marketplace. You decide you want to sell your home, and decide you want $150,000 for it. A sign goes up and people start noticing that your home is for sale for $150,000. Is it worth $150,000? Maybe. Remember, only if someone is willing to pay that for it.

In traditional real estate marketing, your home will sell, eventually, for a value likely $150,000 or less. You might negotiate terms and conditions, guarantees, possession and other issues. Nevertheless, the total "package" will be $150,000, or more likely some other lower number you and your buyer agree to.

At auction, your home will sell to the highest bidder. The auctioneer will gather all those interested together on one day at one time, and keep asking for more until the bidding stops. Once the bidding stops, your home is sold.

But what if the highest bid was only $132,500? You wanted $150,000 for your home, right? The plumber said it was worth that, remember? Well, where was your plumber that day? He wasn’t interested in buying your home, but rather interested in projecting his opinion about its value. If someone’s not buying, their opinion really doesn’t matter, does it?

And the traditional real estate advocates say "But that home was worth much more, and that buyer would have even paid more, but no other bidder forced the bidding any higher." Hmm, that never happens in traditional real estate, does it? It happens all the time. Offer - counter - counter - counter - counter - contract. Does that always mean the price was maximized? Surely not.

What an auction does is maximize the opportunity for the best price. It also maximizes the other issues, in that at most auctions, terms and conditions are not negotiable. It also sets a time and date for the sale, so other plans can be made easier. When is that traditional real estate listing going to sell?

In cases where you have to have $150,000 for your home, because of mortgages, etc, you may not be able to risk getting any less. So you list, and wait. You pay insurance, mortgage payments, taxes, maintenance and eventually, your home sells for what? What the market will bear -- maybe your price, but maybe not.

And what if your plumber was wrong and the marketplace said your $150,000 home was worth $160,000? Is that the likely sale price with a traditional listing? How would you ever know someone was willing to give more than the list price? You almost never do. Does that happen at auction? All the time -- auctioneers don’t yell to the crowd "Stop, you’re paying too much!" like your list price does.

What’s that $1.00 bill in your pocket worth? $1.00 right? What’s your home worth? All you can get for it. And how do you get all you can get? Consider an auction where the market is allowed to decide -- in your favor.

Published in FPG’s March 2002 Issue