A real estate auction is an intense, accelerated real estate marketing process that involves the public sale of any real property via open competitive bidding with the highest bidder taking ownership. A professional auctioneer moderates bidding to ensure a fair and legal process.

Real estate auctions are an effective and efficient way to buy or sell real property such as homes, land, commercial buildings, farms and ranches. The advantage of auction is that sellers know when their property will sell and that they will get true market value for their property.

Real estate auction companies are real estate brokers that utilize auction as a method of sale. They may sell property via the traditional ‘list-and-wait’ method too. In most states, real estate auctioneers are required to be licensed to sell real estate or work on behalf of a licensed real estate broker.

The auction method offers a property for sale in an open bidding process with the highest bidder taking ownership. Auctions are typically used when time is of the essence, giving sellers a proven tool to quickly sell assets without discounting. It is a unique platform that brings together motivated buyers and sellers to determine a property’s true market value through competitive bidding. In this article, we will delve into what a real estate auction entails, how it works, and discuss the pros and cons for both sellers and buyers.

All types of real estate can be sold at auction. Auction is the primary method of sale for farms, ranches, luxury homes, commercial and investment grade real estate. Which sales method is best depends upon the specific characteristics of each property and market conditions.

Eric Johnson described it best when he said, “every property is unique. We sit with the client and learn everything there is to know about the property…then help them determine the best sale method for their situation”

The advantage of real estate auction is that it creates the market and establishes a sense of urgency among potential buyers.

That’s why farm, ranch, luxury and other high-value properties are commonly sold via auction. While these types of properties are often sought after, the pool of qualified buyers may be small and geographically diverse. Aggressively marketing these types of high-value properties attracts buyers, generates demand and facilitates a quick sale at true market value.

Distressed properties such as foreclosed homes and bank-owned properties are also excellent candidates for auction.

Unique or historic properties can benefit from auction too. Properties with historical significance, architectural uniqueness, or located in sought-after locations can capture the attention of buyers who appreciate their distinctive characteristics.

Most people are surprised to learn that real estate auction companies and agencies perform many of same functions. Both are licensed professional businesses that must abide by the same laws and code of ethics. While their primary goal is to facilitate real estate transactions, there are fundamental differences in their approach and focus.

Real estate auction companies specialize in selling real estate and focus on delivering the highest sales price to property owners through competitive bidding. Real estate agents are generalists that help people find property through a local MLS and then facilitate a mutually beneficial transaction.

Real estate auctioneers and real estate agents possess specific areas of expertise that distinguish their services and benefit clients differently.

Real Estate Auctioneers:

• Are real estate marketing specialists
• Represent only the seller in a transaction
• Evaluate and establish property value
• Manage complex legal structures
• Give property owners more control of their sale.
• Provide guidance and facilitate legal compliance

Real Estate Agent:

• Are marketing generalists
• May represent both the buyer and seller
• Focus on localized services
• Rely on third-party evaluations
• Estimate asking price then list-and-wait
• Assist with paperwork

There are common types of real estate auctions that bidders may encounter.

1. ABSOLUTE AUCTION: In an absolute auction, also known as a ‘No Reserve’ auction, the highest bidder wins regardless of the amount of the bid. These are exciting events where you could bid $1 and win the auction. Absolute auctions attract the largest pool of bidders because all sales are final – the property will ‘absolutely’ sell.
2. RESERVE AUCTION: This is the most common type of auction. The seller reserves the right to review the bids and accept or reject the highest offer. Typically, the reserve price is not published and has been set in advance by an agreement between the auction company and the owner.
3. MINIMUM BID: In this type of auction, there is a minimum accepted bid amount. This is different than a ‘reserve’ because the minimum bid is generally the balance owed to a third-party such as a mortgage balance, taxes, or a lien. All sales at the minimum bid or higher are final.

Real Estate is offered ‘as-is’ at auction because the high-bidder is bidding on real property in ‘as-is’ condition without contingencies. This means that the seller will not repair or improve the property in any way prior to closing. Properties are sold in ‘as-is’ condition at auction because the high-bidder is legally obliged to purchase the property at the bid price offered.

Bidders should conduct their own due diligence prior to bidding. The real estate auction company will disclose things such as lead paint, inclusion in a flood plain, easements or other known potential issues in the printed auction materials and the auctioneer will verbally communicate any such disclosures in advance of the auction.

At a live auction, a bid represents a legal obligation. If you make a bid, you are committed to purchasing the property at the bid price you offered. Always perform due diligence prior to attending an auction. Ask questions prior to the auction. Read and understand the auction terms and conditions. Then, establish your bidding strategy and pricing parameters prior to auction and stick to it.

1. Preparation:

The auction process begins with the seller or their representative meeting with a licensed real estate auction company to help evaluate the best method of sale for their needs.  The property is evaluated, appraised, and the marketability is assessed. The auction company will review these findings with the seller, discuss the pros and cons, then determine if auction or listing is the best method of sale for that property.

2. Planning:

Once the seller decides to utilize the auction method, the real estate auction company will:

• Set the auction date, time and location.
• Package the property for maximum pricing potential through parceling.
• Organize all relevant documentation, disclosures and other legal paperwork.
• Prepare a marketing recommendation.
• Prepare marketing materials.

3. Marketing:

Real estate auction companies are expert marketers. They will tailor the marketing to attract a pool of the most qualified buyers through a comprehensive marketing campaign. Marketing typically involves broad reaching and highly-targeted online marketing reinforced with eye-catching signage and intense local advertising as well as personal outreach to insiders and investors. The goal is to create interest, build competitive excitement to attract a pool of qualified bidders.

4. Inspection:

Interested buyers are typically provided with the opportunity to inspect the property before the auction. This allows them to assess the property’s condition and evaluate its suitability to meet their needs. Buyers are encouraged to conduct thorough due diligence to minimize risks.

5. Auction Day:

On the auction day, interested buyers will have one last opportunity to inspect the property in-person for an hour or two prior to auction. At auction time, the auctioneer will make pre-auction announcements that include disclosures and then ask the audience if there are any questions for the record. Once all questions have been answered, the auctioneer opens the bidding with an initial starting bid. Potential buyers make successive bids, each higher than the previous one. Those new to the process may have trouble keeping up with the fast and exciting pace. The auctioneer is responsible for moderating the process and ensuring fairness and transparency. Auctioneers often work with a team consisting of the auctioneer, ringmen and an auction manager.

The auctioneer is the public face of the auction. The top role of the auctioneer is to expedite the sale and keep track of the bids ensuring a transparent process in a fast, exciting and hectic setting. Auctioneer Ronn Cunningham put it best, “people are amazed… in 20-30 minutes we’re selling a ranch that they’ve called home for many, many years.”

Ringmen assist the auctioneer. During the auction, ringmen monitor the bidder activity. Also known as bid spotters or bid catchers, Sam Grasso says that, ‘the correct title is ringman’. They use their bodies and voices to create energy, encourage sales and ensure that the auctioneer recognizes every bid through voice and hand signals.

The auction manager is responsible for setting up the sale day operation including the stage, seating, lighting, public address system and more. They help ensure that all bidders have access to property information and answer prospective bidder questions about the property or auction process. After the auction, auction managers help process paperwork and inform winning bidders of the next steps to closing the sale.

6. Closing:

Once the auction concludes, the winning bidder is legally obligated to complete the purchase. Typically, a deposit is required, and the remaining balance is settled at closing within a specified timeframe, usually 30-45 days upon the completion of the auction. If the winning bidder fails to fulfill their obligations, the property may be offered to the next highest bidder.

Pros:

1. Speedy Sale: Real estate auctions can expedite the selling process, as properties are typically sold within a specific timeframe, avoiding prolonged negotiations and reducing carrying costs.

2. Competitive Bidding: Auctions foster a competitive environment, which can result in higher sale prices. The public nature of the event and the urgency it creates among buyers can generate enthusiasm and increased interest.

3. Market Value Determination: Auctions help determine the true market value of a property, as the price is determined by the bidding process. This transparency provides sellers with assurance that their property is sold at its highest possible value.

4. Control: Sellers have control over the terms and conditions of the sale, including setting a reserve price and a specific auction date. This control allows them to streamline the selling process and align it with their specific needs.

Cons:

1. Uncertain Outcome: The final selling price of a property at auction is uncertain, as it is entirely dependent on bidding. There is a possibility that the property may not sell if the reserve price is not met.

2. Limited Exposure: Auctions may limit the exposure of a property to a specific pool of buyers who are interested in auctions. This could potentially exclude a broader range of potential buyers who may be interested in a traditional sale process.

3. Costs: Auctions involve various costs, including auctioneer fees, marketing expenses, and potentially commissions. Sellers should carefully consider these costs to ensure they align with their budget and overall financial objectives.

Real estate auctions provide a proven platform for buying and selling properties. Real estate brokers like CJ Real Estate offer sellers a quick and efficient way to sell their properties at potentially higher prices, while buyers can benefit from competitive bidding and access to unique opportunities. Understanding the auction process and weighing the pros and cons can help both sellers and buyers make informed decisions regarding their real estate transactions.

Pros:

1. Competitive Environment: Buyers have the opportunity to compete against other bidders, which can result in purchasing a property at a potentially lower price than in a traditional sale.

2. Efficiency: Real estate auctions provide a streamlined and transparent buying process. The competitive nature of auctions encourages buyers to make swift decisions and complete the purchase within a specified timeframe.

3. Access to Exclusive Properties: Auctions can offer access to unique properties that may not be available through conventional channels. Buyers can discover rare investment opportunities and properties with potential value.

Cons:

1. Limited Time for Due Diligence: Buyers must conduct thorough due diligence within a limited timeframe before the auction. The inspection period is typically shorter than in traditional sales, which can increase the risk of unforeseen issues.

2. Competitive Pressure: The competitive nature of auctions may result in buyers feeling pressured to bid higher than their initial budget. It is essential for buyers to establish a clear budget and stick to it to avoid overpaying.

3. Non-Refundable Deposit: Winning bidders are typically required to provide a non-refundable deposit. This may pose a financial risk if the buyer encounters difficulties in securing financing or backing out of the deal.