What is an auction?
Updated August 2, 2021
A real estate auction is not unlike an art or automobile auction, in the fact that it allows multiple individuals to place a monetary bid on a home, and the winner is the person with the highest bid.
Home auctions are held in person and online, but both venues often require a refundable cash deposit in order to bid. Auction winners are typically required to pay for the property in full with a cashier’s check or cash. Winning bidders should also expect to pay bank, attorney and other fees.
In order to achieve a timely sale from a qualified buyer, owners of luxury properties can choose to hold a luxury real estate auction rather than list their home on the market in the more traditional sense (or they can do both at once). In the traditional real estate sales process, finding qualified buyers may be a challenge for high-end properties, but an auction tends to generate a strong pool of buyers.
Typically, the auction of non-distressed luxury properties are handled by luxury auction firms that run the process from marketing to completing the transaction. Interested bidders can gather information about promoted properties from videos and photos on the firm’s website.
Auctions are commonly used to sell homes in foreclosure, which offers prospective homeowners an opportunity to make a house purchase below market value. Credit: Bill Oxford/Unsplash
Luxury properties can be auctioned in three different ways. The first is a minimum bid where the auctioneer sets the lowest price that will be considered. The second is an absolute bid where the property will be sold to the highest bidder without a minimum. The third option is called a reserve auction where the seller can see all of the bids before deciding to accept or reject the top bid.
Certain countries, such as Australia, have adopted the property auction as a popular alternative to buying nondistressed properties from an agent, especially when prices are on the rise. At these auctions, interested buyers must conduct their research on the property before bidding, as opposed to waiting until after they have submitted an offer in the traditional method of selling homes.
Auctions are commonly used to sell homes in foreclosure, which offers prospective homeowners an opportunity to make a house purchase below market value.
When a property owner misses a number of months of mortgage payments, the lender or bank evicts the tenants and puts the property under foreclosure. This type of auction is led by bank trustees with the goal of covering the amount remaining on the mortgage; however, the bank is not allowed to profit from the auction. Similarly, when a property owner neglects paying property taxes for years, tax authorities seize the property and governmental authorities hold a tax lien auction.
One of the best ways to find home auctions is to search through multiple listing services (MLS). Certain listings may only be available to individuals with a real estate license, but often interested bidders can find photos and property details of house auctions through this program.
There are two types of foreclosure auctions: confirmation and absolute auctions. In a confirmation auction, the lender can decide whether or not they accept the highest bidder if the winning bid is too low. An absolute action guarantees the highest bidder gains possession of the property.
One of the biggest risks of purchasing a property at auction is that the auctioneer does not have the opportunity to inspect and confirm the condition of the property before bidding. Foreclosure properties are auctioned in “as is” condition. In addition, if the former homeowners missed mortgage or tax payments, they may not have had the cash to pay maintenance expenses. The cost for all repairs falls on the buyer, which is why it is a good idea for interested bidders to get a good sense of current renovation costs in the area before bidding.
Existing claims or liens from creditors placed on the property also default to the new buyer. If bidding on an auctioned home, it is important for prospective bidders to check to see if there are any claims on the property before making a bid. Also, bidders should tour the foreclosed homes with a real estate professional if at all possible.
Certain properties draw a lot of bidding competition at auction, so it is important for bidders to educate themselves about the current real estate market to better understand comparable prices.