The Different Types of Real Estate Auctions
As a real estate investor, you’re likely to come across a good amount of auctions. After all, acquiring properties at prices below market value is an integral part of your business, and auctions are a good place to find them. Everyone sees advertisements for auctions, but not all are aware of the differences between various types You’re likely to hear the words “absolute” and “reserve” come up, and it’s important to know exactly what they mean within the context of auctions.
Typically, auctioneers will use these words to describe an auction and how it will be conducted. Calling an auction “absolute” or “reserve” tells bidders what the auction rules are, so to speak. There are three basic types of auctions, which include absolute auctions, minimum bid auctions, and reserve auctions.
Absolute Auction
In an absolute auction, the property is sold to the highest bidder, regardless of the price. This means there is no “reserve” or minimum price, and the seller agrees to sell the property for the highest bid. This means a sale is guaranteed, so it has a way of exciting buyers and encouraging active participation. Since an absolute auction generates the maximum response from the marketplace, it’s considered to be truly representative of the market value of a property. This isn’t always true, obviously, but the seller doesn’t incur as much risk as you might think when choosing to sell via an absolute auction. The trade-off is heightened market response and buyer anticipation for the risk of no reserve price. Many sellers, including financial institutions and government agencies, have begun to use this method more frequently since an absolute action tends to offer the best performance results.
Minimum Bid Auction
In a minimum bid auction, the auctioneer accepts bids at or above a published minimum price. This minimum price is usually stated in the advertisements for the auction. Where an absolute auction incurs some risk on the seller’s part, a minimum bid action reduces that risk somewhat if the seller wants a set price or will not sell. The sales price must be above a minimum acceptable level, and buyers know they will be able to buy at or above the minimum. The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, so it must be low enough to entice buyers rather than turn them away (after all, the point of an auction for buyers is the chance at getting a good deal; why bother if the minimum bid is nothing special?). In a way, minimum bid auctions are a little more difficult on the seller than absolute auctions because hitting the right balance between enticement and deterrent regarding the minimum bid is pretty hard to strike, and there’s also the risk of setting some form of anticipated value by using this figure.
Reserve Auction
With a reserve auction, the high bid is reduced to an offer, not a guaranteed sale. A minimum bid isn’t published, but the seller reserves the right to accept or reject the highest bid within a specified time, usually anywhere from immediately following the auction up to 72 hours after the auction concludes. Sellers predetermine the price at which the property will be sold, and they’re not obligated to confirm the sale other than at a price that’s acceptable to them. The main disadvantage of a reserve auction is that prospective buyers usually will not invest the time and expense of due diligence when they have no certainty that they’ll be able to buy the property even if they are the highest bidder. The level of excitement at this type of auction is much lower, and this process affects attaining market value significantly.
Foreclosure Auction
A foreclosure auction is a slightly different animal than the last three types of auctions because it’s a legal procedure that forces the property to be sold, removing all existing deeds of trust on the property. It requires the sale to be promoted in the legal notices of the local newspaper several times prior to the sale and also requires the sale to take place within a time frame of several hours on a designated day on the courthouse steps. Although this procedure may resemble an auctioneer’s method in some ways, it can sometimes be a legal maneuver to allow the existing mortgagor to reacquire the title of the property.
There are also several formats under which an auction may be structured:
Single Seller/Multiple Property Auction (Portfolio Sale)
A portfolio sale allows for an offering at a single location and time, or at regional locations at different times, for a single owner offering multiple properties. A single location and time means buyers have several properties to choose from with bidding, but multiple locations tend to be a little more advantageous to the winning bidders because they can actually see the property they’re bidding on. Still, one location and one auction at a time means that only one bidder will come out with the property, while portfolio sales of multiple properties at a single location and time can be more enticing to bidders because several (in theory) will each walk out with a purchase.
Multiple Seller/ Multiple Property Auction
Multiple seller formats allow several sellers at a time to pool their properties, creating a larger auction event and heightened excitement for bidders. This has the same advantage for bidders that we mentioned above: several properties on offer mean that they in theory have a higher chance of winning a bid and walking out with a sale. For a seller who has flexibility in terms of time, this format provides an economy of scale, allowing inclusion of smaller properties for attractive advertising contributions and brings together buyers for various properties to the same event.
Sealed Bid Offerings
This format allows bidders to submit bids on pre-approved contract forms and the seller can accept or reject an offer. It’s almost the real estate equivalent of a silent auction in that buyers formulate their bids in advance as opposed to raising them as they hear the bids of others.
Sealed Bid Convertible
Convertible formats begin with a sealed bid program to identify the market segments and judge the depth of market. At sufficient market depths, the format may be converted to open outcry formats.
Real estate auctions are a staple of most investors’ business model, so it’s important to understand how they work and how they can work for you according to your own needs and circumstances. Remember, location plays a big role, as do other market characteristics, so be sure to keep those in mind when you see auction advertisements. For more on market trends and real estate advice, be sure to sign up for our Priority Access List and don’t forget to follow us on Facebook and Twitter!
– Get It Right Solutions