While once never used to sell real estate in the amount and quantity that is business du jour today, this method is becoming ever more popular. I am not talking about the auction process that takes place on the court house steps. I’m talking about auctions that sell homes by the boat load.
Most auctions are pretty daunting for the first timer. The action is fast and the price isn’t always the price you think you bought at (see below). In order to demystify the process, I thought I’d run over a few explanations and give a few tips.
A buddy of mine in California was an auctioneer and held one every Saturday morning. I used to help him bring in the merchandise during the week and on Saturday be one of the pointers. That’s the person who points at you when you bid. (S)he also points at you and hollers out your number if you are the successful bidder.
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Types of Auctions
If you are an Ebay hound you probably are pretty darn familiar with what you are about to read. For those who don’t qualify for my first statement, here are the three types you will most likely find at a real estate auction.
1. Auction with a reserve – This type of auction means a price has been set between the seller and the auctioneer. In order for the sale to be complete, this price must be met. Sellers use reserves to feel secure they will receive a predetermined amount of money.
2. Absolute auction – The property up for bid is sold to the highest bidder. This type of auction does not have a reserve price.
3. As Is, Where Is – This simply means the property is being sold without warranty and there are no contingencies based on the status of the asset being sold. If you’ve visited a used car lot, you probably have seen this sticker on their for sale autos. that means you buy what you buy. You can’t go back on the seller if you find defects.
4. Minimum bid – This auction provides prospective buyers with an initial price range where bidding will begin. For example, an auction with a “minimum bid” of $50,000, means the auction will start with an opening bid of $50,000. The asset will not sell for anything less than $50,000. Minimum means exactly that, minimum. By the way, a minimum bid should not be confused with an “opening bid.” An “opening bid” simply means a price where the bidding opens. Pay close attention to what the auctioneer says when the property is presented. That way you will know if it is a minimum or opening bid (s)he is asking for to start the auction.
Real Estate Auction Tips
Always inspect the property before the auction. Due diligence on your part is important. Contact the auction company managing the auction and inquire about times when open houses will take place, as well as any paperwork available on the property. In this day of email, you probably will receive an email with everything you will need to make up your mind about even attending.
My auctioneer buddy always had a little jewel called a buyer’s premium. This is nothing more than a form of payment for the auction company. In other words, this is pure over and above profit for the auctioneer.
The buyer’s premium comes in two forms. It is always in the advertising flyer so read the flyer from top to bottom. My auction buddy used the percentage method. He charged 10% of the high bid. If someone won the bid at $1000, they paid him $1100 after the auction. He not only made the 10% buyer’s premium but he also made the contractual percentage amount. The second form of buyer’s premium is a flat fee added on to the high bid.
If you are a little queasy about buying at an auction, attend one as a spectator. You are not obligated to bid even one penny. That is the beauty of an auction. You can sit there all day and just watch the proceedings and soak up the knowledge and learn firsthand.
More Auction Advice
Auction companies are like any other business today. They have websites. These websites have a “Frequently Asked Questions” section. You can almost always find a list of the the terms and conditions of a particular auction. This is an important section as it means you can avoid unwanted surprises.
I will repeat myself: Do your research and due diligence prior to showing up at the auction. If you’re not comfortable looking at a property on your own, bring someone with you. You don’t have to have a professional inspector just someone who can determine if repairs need to be done to a home. And, of course, it stands to reason, they should be able to give you an estimate of how much any repairs will cost.
I’ve watched people at my buddy’s auction get caught up in the moment and go hog wild bidding. The best way to avoid becoming involved in a bidding war is to set limits and stick to them. If someone bids above your threshold price, stop bidding. It’s that easy, at least in theory.
I hope the above helps out all potential auction attendees. It isn’t the end all be all in auction advice but it will help you understand the process as it exists. What you do with the information is up to you. Good luck if you go auctioning.