How Do Real Estate Auctions Work?

When you get ready to buy or sell your home or other real estate, you may think a traditional sale is your only option, but real estate auctions are increasingly popular in today’s market. Rather than listing your property with an agent and waiting for an interested buyer, sellers can sell their property quickly if they use an auction. Buyers can also benefit from real estate auctions by finding a better price than they might have otherwise found.

Real estate auctions look much like other types of auctions. Buyers register before bidding and can preview the property before the auction starts. Generally, real estate auctions are held in the same “oral outcry” style as other types of auctions, meaning the buyer can simply shout out his bid or raise his hand, though some auctioneers use other auctioning styles. The auctioneer may require bidders to provide proof they have funds available to buy the property before they are allowed to register to bid. After a buyer wins the auction, he has a certain period of time to get his financing together before he must close on the property. Auction companies typically advertise these and other terms before the auction takes place.

Real estate professionals may use auction terms unfamiliar to many buyers and sellers, but these terms may be very important to the success of your auction experience since they describe how the auction will work. In an absolute auction, the property is sold to the highest bidder no matter what price that highest bid is. This guarantees the property will sell, so there may be more excitement and participation from buyers. Typically, this type of auction creates the most response from the marketplace, so it is a popular style among sellers, banks and government agencies.

At a minimum bid auction, the auctioneer only accepts bids that are at or above the published minimum price for that piece of real estate. This reduces the risk for the seller since the sales price is guaranteed to be above a certain set minimum. For example, if a seller thinks his property is worth $120,000 and he sets the minimum at $100,000, he is guaranteed to receive at least $100,000 as long as someone bids over that amount. However, if no one bids over $100,000, the property remains unsold. Thus, by choosing a minimum bid auction, sellers may limit the number of buyers who are interested in the auction.

At a reserve auction, or auction subject to confirmation, the highest bid is actually considered an offer so the seller gets to choose whether to accept or reject the “winning” bid. The seller does not publish a minimum bid, though he may have a minimum in mind. The seller has a specified time, usually no more than 72 hours after the close of the auction, in which to decide whether he wants to accept that price for his property. While this gives sellers more control over the purchase price, prospective buyers may not invest much time into researching the property since they have no way to know whether they will actually get to purchase it even if they bid the highest price. Sellers can increase buyers’ interest in the property by providing more information about the property before the auction.