How Do Real Estate Auctions Work

Contrary to popular belief, real estate auctions are actually quite simple to carry out, and prove advantageous to the seller as well as the buyer. Until a few years ago, the only way to sell a home was through a foreclosure sale, and this was a very lengthy process and it also involved paying a large amount of commission (around 10% of the value of the home) to the real estate agent who carried out the sale. Auctions soon came into public notice, and have been growing at a steady rate ever since.

A home seller will find an auction useful because the process is very quick. Moreover, the popular misconception that an auctioned off home will sell for a very low price has slowly been eradicated as well. The seller can set a minimum price that he expects for the home and then invite bids, and in most cases he will be presented with a price that is far greater than what he expected in the first place. Additionally, the sales commission that needs to be paid to agents is also absent in this case, and the seller really does not have to do much more than simply be present at the auction, and at open houses for potential buyers to see the home.

Home buyers also find auctions beneficial for the same reason. The quickness with which a transaction can be completed is a major advantage, but this is often overshadowed by the fact that closing costs are very low for buying homes in this manner. Closing costs include the costs that need to be paid to the agent, and this is something that is absent in real estate auctions. The closing costs are also shared equally between the buyer and the seller, and this further reduces the amount of money that the buyer would have to contribute towards the closing cost of the transaction.

Working of a Real Estate Auction

It is important to remember that just because a home has been put up for auction, it does not mean that extremely high bids will fly in from every direction. These are unrealistic expectations, and the seller should simply expect a bid and a price around the minimum price that has been specified by him. This price is also referred to as the Comparable Market Value (CMV) sometimes.

Primarily there are 3 different types of auctions, and each of them have their own subtleties and details that an individual must look into. These are the Auction Without Reserve (or Absolute Auction), where there is no minimum bid amount set by the buyer; the Minimum Bid Auction; and the Reserve Auction (or Confirmed Bid Auction), where the minimum bid is not made public and bids are then invited from interested buyers. Since auction sales come under the category known as As-is sales, the seller will find that there is no risk with the nature of the buyers that arrive, there are no future contingencies to be met and the home will definitely be sold on the date of the auction itself. The buyer will also get a rapid sale with immediate effect, and will have to spend considerably lesser on closing costs and other details. It is also the responsibility of the buyer to ensure that the property is in good shape. This can only be achieved by inspecting the property with the help of a specialist. The buyer must also remember that his finances should be in order, because if his bid is accepted, he will have to make the payment pretty fast. Usually a hefty deposit sum is demanded by the seller, and the buyer must have this amount ready. If he backs out of the transaction at a later date, this deposit will be non-refundable.

Sellers have pretty easy access to auction specialists, either through the bank or from online sources, and it is pretty easy for them to set up the auction. The announcement of the auction date will have to be released well in advance, and potential buyers must also be given an opportunity to inspect the home on open days. In most cases, an auction is aimed towards a specific market segment with assured demand expected, so the auction specialist will handle the advertising processes to inform this market about the sale. In other special cases, the seller himself may function as a sales agent and thus save the money that he would be required to pay auction specialists. These are known as FSBO (For Sale By Owner) sales.

As already mentioned, a seller should not have unrealistic expectations from a home auction, unless he is selling a really hot property (for instance, an ocean facing property) or he is selling at a time when the industry is booming. Either way, learning all about buying and selling real estate at auctions is not a difficult task at all.