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Real Estate Auction FAQ's
What is a real estate auction?
A real estate auction is a popular way to buy or sell real estate. The auction process is accomplished through a concentrated, accelerated marketing campaign.
Why should I buy or sell real estate through auction?
The real estate auction is beneficial for all parties. For the seller, the real estate auction is a way to sell property at an accelerated pace. The inherent efficiency in the auction process enables the seller to eliminate long-term carrying costs including maintenance, real estate taxes, and interest. The resulting competitive bidding atmosphere gives the buyer an opportunity to purchase property at a price they establish.
What are the elements that determine a successful auction?
A professionally conducted auction with follow-up through the closing.
Assertive advertising and marketing to attract prospective buyers.
Realistic price expectations by the seller.
The selection of an auction type that best represents the needs of the seller and the property being auctioned.
Ensuring that buyers are knowledgeable.
Location, condition and surrounding property -- factors that determine the desirability of a property.
What are the types of auctions?
Absolute Sale
The absolute sale is the purest, and in many cases, the most successful form of auction in terms of getting the highest price for property. With this type of sale, the property is sold regardless of price. This sends a strong message to the bidding public that the property will be sold for sure on auction day. Buyers can justify their time and effort knowing the property will be sold on auction day at their price. If the buyer feels he or she can buy the property at their price, then the buyer is more likely to bid. The buyer also realizes that a bid must be submitted because the property will be sold on a certain day and that there is " no tomorrow" to negotiate with the seller. Through aggressive bidding, true market prices can be obtained at auction. While the seller has a risk of being forced to sell the property at a price that is too low, the advantages of this type of auction far outweigh the risks.
Reserve Sale
With this type of auction there is no published amount at which the seller agrees to sell the property. The high bid is subject to the seller's confirmation typically at the auction or within 48 hours after the auction. This method protects the seller from selling the property for too low a price. The motivation for a buyer, once again, is that they may be able to obtain the property at his or her own price, not the seller's price. A seller may offer a cash payment or inducement to the highest bidder if that bid is rejected, which is called a buy back. This indicates to the bidders that their efforts will be rewarded if they are the highest bidder and a sale does not occur.
Minimum Bid Sale
This is a hybrid of the absolute auction and reserve auction. With the minimum bid offering, the seller determines a minimum price level above which he is committed to accept. This type of sale is effective only if the minimum bid is low enough to stimulate buyer interest. If the minimum bid is too high or near market value, potential buyers will often be discouraged from inquiring, inspecting, and therefore buying the property. Minimum bid levels can be difficult to determine in soft, slow markets where real value cannot be readily determined. This method of sale can both attract buyers and protect sellers from offers that are too low.
What is a buyer's premium?
The buyer's premium, expressed as a percentage of the high bid, is an additional cost to the purchaser. Ranging from 1% to 10%, it is the fee the seller charges the bidder to bring the property to auction. It helps pay for some of the auction marketing expenses.
In an auction setting, what are the advantages to the buyer?
The seller is comitted to selling.
The property is sold at a fair market price.
The auction situation translates to negotiating power for buyers.
Buyers may have a choice of several properties at once.
Buyers can set their own purchase price.
Long negotiation periods are eliminated.
The time it takes to purchase property is reduced.
Because purchasing and closing dates are known, buyers do not need to worry about contingencies.
Property owners sell at the lowest price possible.
Financing may be available to buyers.
How should I prepare to bid?
Attend at least one open house to determine the condition of the property.
Examine the property information provided by the auctioneer, including the sales contract.
Determine what is included in the sale.
Understand exactly what you are bidding on and the terms of sale associated with the auction process.
Seek the advice of an attorney, auctioneer, real estate broker or appraiser.
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