What Is a Buyers Premium in a Real Estate Auction?

What Is a Buyers Premium in a Real Estate Auction?
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An auction protocol stipulates that an asking price may or may not be set for an auctioned property. In either case, bidders determine the sale price, which is based in part on a perception that an opportunity exists to purchase a property for a wholesale or bargain price.

Consequently, during a real estate auction, the seller sets the terms of the offering, but the buyers' bids determine the price at which the auctioned property is sold. In addition to the winning bid, a buyer will pay a buyer's premium.

The Real Estate Auction Process

A real estate auction can be held to sell a single-family home, multi-family home, commercial property or real estate notes. During a real estate auction, a licensed real estate agent auctions the property that's sold to the bidder who places the highest bid.

An auctioneer puts the property up for bid and manages the bidding process, which includes announcing each bid that's placed. The buyers who place the bids register with the "auction house" prior to the auction and, at that time, prequalify by making an upfront deposit and providing assurance of the ability to pay for the property, should the person place the winning bid.

In turn, as the bidder, you must review information regarding the property to be auctioned and the property itself prior to the auction. You should also review the terms of the auction related to the property of interest.

Then, during the allowed bid time, you must place a winning bid, namely, one that's higher than any other bid and that meets the terms of the auction. Should you place the winning bid, you'll either pay the sale price of the property to the auction house or place a ​five to10 percent deposit, as well as sign an agreement to pay the balance within 30 to 45 days.

The auction house will provide you with a certificate of sale immediately. The certificate of title to the property should be forwarded to you about 10 days later.

The Seller's Auction Fees

The property's seller and buyer must pay auction-related fees. If you're the seller, you pay the auctioneer's commission and marketing fees to promote the auction. But, the relatively quick sale of your property can reduce the insurance, tax and maintenance costs of owning the property you might otherwise owe should you sell it through a real estate agent. Auction fees range from 1 to 3 percent of the property's sale price.

Also, as the seller, you'll pay the closing costs stipulated by law. These fees include those related to the transfer of the deed and your portion of the property taxes.

The Buyer's Premium Fee

You'll pay two auction fees for buyers at a real estate auction: the winning bid price of the property and a buyer's premium. The latter is typically a set percentage – ​3 to 20 percent​ – of the closing bid price. Consequently, you should factor this fee into the amount you budget for the property.

For instance, if a winning bid is $150,000 and the buyer's premium fee is 10 percent, the buyer will pay $150,000 plus $15,000, or $165,000 total, to purchase the property at auction. The buyer's premium makes a solid contribution to the revenue stream of the auction house, which covers the costs of the auction. Consequently, the premium shifts some costs of the property's sale from the seller to the buyer.

Amount of the Buyer's Premium

The exact amount of the buyer's premium is influenced by a number of factors. For instance, the property type influences the fee as does the location of the property and the preferences of the buyer and seller. Other influential factors include a discount granted for cash and check payments, and whether the auction is held online or in person.

The primary factor, however, is the agreement between the property's seller and the auction house. The Sherman Anti-Trust Act prevents the discussion of fees by auctioneers to ensure that they are unable to fix prices, a practice that would prevent buyers from benefiting from free markets.