How do Farmland Auctions Work?
Jason J. Smith, Auctioneer | Land Broker
Phone 515-537-6633 Email [email protected]
I’m glad to have you here. If you are researching farmland auctions and how they work you are either selling or buying a farm. I have been a farmland auctioneer long enough now to have sold farmland auctions in most Midwestern and Plains states as well as foreign countries. I enjoy the opportunity to market farms with crafted marketing campaigns. Our team has a solid focus on outcomes and client comfort. Over the years we’ve worked hard to refine our methods and developed our own proprietary software to help serve land sellers and buyers better. With over 1,000 tracts of land sold and counting I’m happy to present the following information to help you understand how farmland auctions work. If I can ever be of assistance please do not hesitate to reach out and visit with me. Be sure to keep an eye on my weekly Iowa Farmland News reports!
I often get asked the question “How do farmland auctions work” because the vast majority of people have never been to a farmland auction in their life. Those of us in the auction industry go to so many auctions it becomes second nature for us. I have conducted thousands of auctions myself. I thought it might be really helpful to people if I put some of that knowledge and experience into a page so everybody can understand how farmland auctions work. There are lots of different auction types and options for each auction type but let us start with the most standard options.
Farmland Auction Formats and Venues
This is the first decision in deciding on a farmland auction. How will you deliver the auction to the bidders? How will they participate? Participation in a farmland auction should be simple. Let us look at the two most popular auction format types. Live in-person auctions and online land auctions. In their most true sense, a Live Auction is an in-person event with a live auctioneer crying for bids with no online bidding. An online land auction is an auction where all bids are taken online. You can combine the two and create a hybrid auction type. This is where you have a live in-person auction but simultaneous online bidding. This is easily the most popular auction format today. It is important to understand that advertising for the different auction formats is identical. At DreamDirt, we do not treat auction formats differently in terms of how they are advertised. The only difference is in how we obtain the bids.
Live In Person Farmland Auctions
Live farmland auctions are held in person. They can be conducted multiple different ways, but the in-person element defines a live auction. In fact, even more than the in-person element of live auctions, the auctioneer’s cry is the most notable part of a live in-person farmland auction. In a live auction participating bidders would initially register with the clerk upon arriving at the auction and receive a number. Not all auctioneers register bidders, some just allow any bidder to bid. This is done because bidders in farmland auctions are often averse to showing intention to bid prior to actually bidding. Once the auctioneer calls for bids the bidders would signal the auctioneer in one of many different ways from winking to raising their hand.
Online Land Auctions
Online land auctions in their most true sense are often referred to as an “Online Only Auction” which essentially means all bids are placed online using software designed to take bids in an auction format. In an online auction, all bidders are required to register as well as go through a screening and verification process. At DreamDirt we use a multi-layer approach to screening online bidders. In an online land auction, bidders will not hear a live auctioneer calling for bids. Instead, they will see a bidding box on their screen which is live for anybody watching it. The bidding box contains the amount already bid, the amount of the next bid, and a countdown clock. DreamDirt bidders place bids by using a 2 click process which ensures no bids can be “accidentally” placed.
Live Auction Venue Types
If you chose to have a live in-person auction you will need a venue. There are two general venue types. The Ballroom type venue is any indoor location. In Iowa and across the Midwest these auctions are typically held in local town halls, libraries, fire stations, conference rooms, banks, etc. The on-farm auction venue is the more “old-fashioned” choice. This is more common in some areas than others. Northwest Iowa and Southeast Iowa see more of this venue type. Typically, you would bring an auction sound truck or a special box on the bed of a truck that has a sound system for the auctioneer to call bids which we have.
Ballroom Type Auction Venue
On Farm Auction
Farmland Auction Types
Once you have gotten to this point it is time to make some legal decisions. Prior to this point, the decisions have been fairly nonconsequential. The decision to conduct your farmland auction as a reserved or absolute auction will choose a specific path and define legal obligations that you will be required to adhere to. The obligations and legal characteristics of each auction type are very specific and will affect how your auction is conducted and what you are able to do and not do.
Reserved Farmland Auctions
In the plainest English, a Reserved Auction is an auction where the seller is not obligated to accept the highest bid. It is an auction that allows the seller to bid against the bidders to achieve the reserve amount. This is ONLY possible in a reserved auction. It is important to note that case law has held that the seller’s right to bid is conditioned on the seller notifying bidders they reserve this liberty. The Uniform Commercial Code on Auctions (4) guides this practice.
During a reserved auction, sellers may withdraw a lot at any time without any penalty and are under no obligation to sell the lot. Reserved auctions are the typical farmland auction. Selling farmland without reserve is extremely rare.
All Auctions are reserved auctions unless specifically advertised as an absolute auction.
Absolute Farmland Auctions
An Absolute Auction or auction without reserve is a different animal compared to its counterpart the “with reserve auction”. This auction type requires the seller to accept the high bid at the end of the auction and prohibits any type of seller bidding. The seller is obligated to accept the highest bid at the auction and perform the transaction. It is interesting to note that during an Absolute Auction there is no opportunity to withdraw lots, however, the auction can be canceled prior to the auctioneer ever calling for bids. The very moment an auctioneer calls for a bid, the obligation to sell is triggered.
An auction must be advertised as an absolute or without reserve auction for it to be an absolute auction. This can create some confusion among bidders. Most bidders believe all auctions are absolute and the seller is obligated to sell when it is not the case. We always work hard to manage this expectation and avoid misunderstanding.
Uniform Commercial Code Relating to Auctions
Auctions are regulated differently in all states. The US commercial code includes 2-328 but its adoption is not uniform in all states. The State of Iowa has not adopted Article 2 of the UCC but has court decisions based on its guidance. Most of our border states have adopted UCC but not all articles. Again, court precedence still tends to rely on the Uniform Commercial Code. Iowa is as compared to our neighbors the least regulated when it comes to auctions. Missouri and Minnesota have Auctioneer license laws. Nebraska and South Dakota as well as Minnesota do require real estate brokers licenses to sell real estate. There is no such thing as an auctioneer’s license in Iowa and no requirement to have a real estate license either. There are no laws that pertain to auctioneers and auctioneers in Iowa are allowed to sell real estate without a real estate license! Don’t worry we have our broker’s license and all of our auctioneers are licensed, real estate brokers or agents. Not only are we licensed in Iowa, but Minnesota, Nebraska, South Dakota and Missouri as well. As a potential farmland seller, it’s important that you consider the potential pitfalls of who you choose to sell farmland for you and what they DON’T have to tell you. I’ve listed the Uniform Commercial Code pertaining to auction sales below. (1) clearly states “goods” which has been held to mean personal property and not real property. That has not stopped many courts from using UCC 2-328 as guidance in deciding real estate cases where an auction was involved.
US Commercial Code 2-328 Sale by Auction
(1) In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.
(2) A sale by auction is complete when the auctioneer announces by the fall of the hammer or in another customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may at his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
(3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with a reserve, the auctioneer may withdraw the goods at any time until he announces the completion of the sale. In an auction without a reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case, a bidder may retract his bid until the auctioneer’s announcement of the completion of the sale, but a bidder’s retraction does not revive any previous bid.
(4) If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.
Auction Listing Agreement
When you engage us at DreamDirt to help you sell farmland you will get a “Listing Agreement” This is a contract between you and DreamDirt. This listing agreement gives us the Exclusive Right to Sell your farmland and it guides our relationship. It lays out the rules we have all agreed to and your wishes. The agreement will include your reserve price, our fees, your responsibilities, the earnest amount, the closing date, the auction date, and everything that pertains to your auction. This document is used by multiple people in our company to create advertising and schedule planning and guides the crafting of the Purchase Agreement you will sign with the buyer. All of the Terms and Conditions of your auction will originate from the Listing Agreement.
Crafting Your Auction Terms and Conditions
There is no possible way to overstate the importance of Auction Terms and Conditions (T&C). It is EVERYTHING! T&C really is the auction itself. It sets the rules, guides the relationship, and sets in stone every particular element of your auction. It can be changed before the auction starts but after the auction ends the only way to change it is through mutual agreement. During the auction… you are asking for trouble. It is always best to create the best T&C from the start by walking through the transaction and property in your head and ensuring you have covered every base. It is incredibly easy to overlook a future detail or event and it helps to have lots of experience crafting action T&C so those things are easier to predict. In some cases, the T&C head off bad behavior. In other ways, they draw a line that can’t be crossed. In many ways they are meant to be a deterrent to bad behavior by acknowledging certain things ahead of time, stating them, and spelling out the outcome. This ensures that every person that bids have a known set of rules. It means every bidder is treated exactly the same and bids under the same exact conditions so the value received (not perceived) is identical.
Term and Conditions for a Farmland Auction must address:
- Closing date and buyer penalties for missed deadlines
- Earnest Amount and how it’s treated on default
- Who pays the property taxes/assessments and when
- Manner of Conveyance
- Income division and how its distributed
- In a Reserved Auction they must reserve seller’s liberty to bid if desired
- Government Farm Programs
- Manner of bidding available
- Any requirements for Court Approval
- AS-IS acceptance of easements, covenants, and restrictions
- Must extinguish any potential contingency, especially financing
- Survey and property boundary disclosures
- Who the auctioneer is representing
- Procedures for each aspect of the auction. Taking bids, accepting bids
- How mistakes will be handled
Auction Advertising Stage
When you have made the big decisions above and arrived at a listing agreement it’s time to start the advertising stage. At this point, you are less involved as we will be carrying out your wishes and representing your best interests which were laid out in the listing agreement. In the Auction Advertising stage, we will be busy collecting, researching, photographing, taking videos and creating advertisements, and distributing them. This process occurs very quickly. In most cases, we are able to fully launch an auction with completed advertising in 4 days. Our in-house staff has created hundreds of auction campaigns. We have employees that cover different aspects of the auction development.
Our Standard Timeline for our Farmland Marketing Strategy
- Collect real estate data and Farm Service Agency data
- Photograph/drone the property
- Place signs on the property and surrounding area
- Edit video from the drone to create an online advertising video
- Build the online listing on DreamDirt.com for online bidding
- List property in Realtor MLS and syndicated sites like Zillow, Realtor.com, Lands of America, Farm & Land, etc.
- Create and distribute newspaper ads
- Design and send postcards
- Design and distribute sale fliers
- Create, and schedule social media posts
- Include the property in our weekly email newsletter
- Send notices to our “VIB” (Very Important Bidders) A list of known land investors
- Build paid ads online in search engines and social media
- Write, record, and distribute radio ads
- Place ads on Craigslist and other trader websites
- Set up automated notices in our BidCapture software.
- Conduct a phone campaign to potential bidders
Land Buyer Response Stage
‘One of the most important parts of an auction is the auctioneer’s response to buyer inquiries. In auctions, we are representing the seller only. We do not represent the buyer. This is called Single Seller Agency. As potential buyers respond to advertising our response is to help them understand the property that is being offered and how the auction is conducted. Buyers desiring representation or discussion that creates an agency relationship must engage representation outside of our agency. While we will offer them fairness in our interaction but are not there to advise the buyer clients.
Most farmland buyers in the auction environment tend to engage very little prior to the auction. This may be because they are not interested in tipping others off that they might be interested or have plans to bid. This is evidenced by many phone calls I have received from potential buyers that often as “has so and so called yet” essentially prying for information. Obviously, those things are private matters and while we don’t represent the buyers we would never disclose who has or has not called, registered, or placed a bid because it is not fair dealing, and it’s not in the seller-clients interest.
With today’s technology so advanced most buyers are able to obtain any information they need through our website which very thoroughly represents each property. We provide aerial maps, soil maps, copies of the proposed purchase agreement, tile maps, FSA 156 forms, field boundary maps, easements if known, terms and conditions, bidding methods, leases, or any associated paperwork. On top of that, we are providing drone videos and aerial photography. Buyers can get access to any piece of information right on our website without calling. In most cases, the buyer is going to use this resource of information and spend the majority of their energy working with the bank to prepare.
Auction Bidder Registration
We have talked about the different auction formats above including Live Land Auctions and Online Land Auctions. The auction registration process will vary by bidder. Both can register with us on our bidding platform and many have already created an account with us. Once a bidder has an account with us, they are registered for all future auctions as long as they have maintained good standing.
Registrations made online use a multi-layer security system to verify the bidder’s identity. This ensures that anonymous people are not able to log in and make fraudulent bids on auctions. A part of this registration process is a phone call from the Auctioneer. Our vetting process for bidders has never failed and has a 100% success rate.
Registration for online auctions is necessary. It becomes less necessary for live-in-person auctions. In fact, most auctioneers do not register bidders at a live auction. The vast majority of people would be known to each other. I have often written about the social friction in live, in-person auctions and this is one of those pain points. Bidders in live auctions for farmland don’t like to register in front of the crowd because it may telegraph information to their “opponents” in the same room. They prefer to keep their intentions close. If they are required to register, others in the room can glean the intention to bid from that. If they can hold that information until the last moment, others are less able to respond to them. As auctioneers, we have to consider how registration affects our clients’ interests and it’s likely most advantageous to not have forced registration at live, in-person auctions.
Farmland Auction Day Protocols
It’s the big day, auction day and there are big differences between what will happen between a live auction and an online auction. Both methods are very different in how they accomplish a result but all elements are exactly the same. One very important distinction between a live farmland auction and an online farmland auction is that the live version has a starting time. An online auction has an ending time. That is because with a live auction everybody gathers at a location to start the auction. With an online auction, bidding has been happening for 30 days and bidders are bidding against a clock. When the clock hits 00:00:00 the bidding ends.
Live In Person Auction
You might attend your own auction, you might not. Whether you are in person or not doesn’t make any difference. The day for our auction team is very scripted, we know exactly what we will do before it happens. Our live, in-person auctions typically start at 10 AM. Our team will arrive at the venue around 9 AM. We will have with us everything needed to conduct your auction. This will include refreshments, printed handouts, a sound system, visual aids, computers, etc. We will first set up the auction arena and arrange tables and chairs the way we would like them. Arranging the crowd in a way we can make eye contact with them and easily see everybody is important. Pushing people toward the front of the room and into chairs is our preference. All of the sound systems and information booths will be set up. Once the bidders begin to arrive, we will greet them with refreshments, and printed material and introduce ourselves. By 10 AM the Auctioneer will take the podium and begin to address the crowd. After introductions, the Auctioneer will read the Terms and Conditions to the crowd.
Next, the Auctioneer will begin to call for bids. It will be around 10:15 AM and if we are only selling a single tract the first round of bidding will last around 5-8 minutes. At this point, there is an assumption we have achieved 75-90% of the farm’s value in bidding. We will take a break and give bidders an opportunity to make phone calls and think for a few minutes. Breaks are typically under 10 minutes. During this break, we will speak with the seller of the farm and if the auction is WITH RESERVE ask them to confirm the sale of the farm. If the auction is ABSOLUTE the seller has already given confirmation and the farm will sell.
The confirmation step is very important and something you should understand before auction day or it will be confusing and seem rushed. When you confirm the sale of the property to the highest bidder it does not mean the auction is over, it only means that you agree to sell to the highest bidder after the next round of bidding. Many auctioneers mistakenly tell the crowd after receiving confirmation “this sale is now absolute”. We discussed reserved and absolute above. There is no legal way to change a farmland auction from reserved to absolute. The sale started as a reserved auction and will always be a reserved auction.
If you give your confirmation to sell the farm there will still be one more round of bidding. If you do not give your confirmation there are at least 2 more rounds of bidding. We will conduct rounds of bidding until you have given confirmation or it no longer makes sense. Over 95% of our farmland auctions are confirmed by our sellers after the first round of bidding. I see this as a pretty standard number across all farmland auctions I attend. Confirming after the first round has been in my experience the best practice for a seller to achieve the best momentum in the 2nd round of bidding. Buyer fatigue starts to become evident if there is a 3rd round of bidding and the mood of the room tends to sour if you go to the 4th round of bidding. Buyers always want fair treatment and this is one thing they will interpret as unfair treatment.
When the sale of the farmland is confirmed and the bidding is complete the auctioneer will announce the farm is sold and identify the high bidder in most cases. If the sale was never confirmed the auctioneer would close the auction and follow your instructions.
Online Only Land Auction
If you chose to conduct your auction online, welcome to the future! It probably took a little faith and convincing but you chose a new way of conducting farmland auctions. The method is much different than the in-person auction but very much the same in so many ways.
First of all, nobody is traveling anywhere. Sellers, Auctioneers, Buyers, everybody is going to go about their day as normal until the auction STARTS TO END at 2 PM. I emphasized “starts to end” for a reason. I’ll discuss that below.
So many people believe an online auction is completely hands-off, anonymous, and automated. Nothing is farther from the truth. In fact, we have almost constant communication with bidders and our process has been refined over the past decade to be a highly effective method. In 2017, DreamDirt built its own proprietary software for land auctions that other auctioneers do not have. Our software is still today the only land auction software in the marketplace. Our software known as BidCapture is highly specialized for land auctions. It mimics the in-person experience and builds on it with a clearer process for bidders. A part of the software is a communications system of chat, emails, and text messages that allow us to communicate with online bidders at a moment’s notice. We also place phone calls to the bidders to discuss their position, notify them of outbids, and generally encourage their participation. Our software system also has a function to mimic the “confirmation” once the seller has confirmed the sale. This on-screen message is prominent and a milestone in the auction process.
The most intense portion of an online-only land auction will be the final hour leading up to the 2 PM deadline. That said, the 2 PM deadline is conditioned on no bidding occurring in the final 2 minutes of the auction. This is because we use what we call a “soft close process”. While the clock was originally set to end at 2 PM on auction day, additional bids in the final 2 minutes will extend the clock to 2 minutes. Each successive bid will set the clock back to 2 minutes again. Some people are confused and think I am saying we add 2 minutes, but what I am saying is we set the clock back to the 2-minute mark. If there was 1 minute 35 seconds left and a person bid it sets the clock to 2 minutes. If there were 2 seconds left and a person bid, it still sets the clock to 2 minutes. This process will continue until the final 2 minutes are allowed to wind down without any bidding activity. Bidding extensions are standard in online land auctions. Our longest extension was a total of 96 minutes. So, when I say the auction “starts to end” I am really talking about the designated time before extensions begin. When the auction will actually end is never known.
During the final hour of an online auction as the seller, you will have options to be in contact with us or to have given us instructions we will follow. For families that desire to be in contact with us, we will accomplish that using a Zoom Meeting room or a phone conference line. Most of our clients choose to give us instructions and let us carry them out. You are allowed to be as involved or uninvolved as you wish.
Our clients that choose this route are usually surprised at how intense the final hour is and just how easy the communication is, how quickly we are able to transfer information, and how responsive the bidders are. We often see “bidding wars” break out during the final hour and end up with clients cheering for a bidding number only based on aggressiveness. They actually end up having fun in the process and every one of them has highly recommended the online land auction to our future clients.
Auction Purchase Agreements and Closing
The auction process has played out. From start to finish you’ve been through the decision-making process for many things. Advertising was done, the auction occurred and you have your result. Now it is time to put your agreement with your buyer into writing. We talked about the auction Terms and Conditions above. Those “rules” guided your auction and now must be memorialized in the purchase agreement. This legally binding contract will be the guiding document for your relationship with the buyer. Remember earlier you had another contract called the Listing Agreement which guided your relationship with us. Some clients confuse the two. This is between the buyer and seller and will include all of your auction terms plus the amount bid. This document will be used by everybody involved in the closing and it will become a historical document that can be looked back on for years should questions arise. The purchase agreement in typical farmland auctions is accompanied by a non-refundable earnest deposit by the buyer. These are the “teeth” that hold the buyer in the transaction. From the end of the auction through closing buyer and seller must both meet all obligations in the purchase agreement in order for the closing to occur.