Buyers Information Guide to Real Estate Auctions

Knowledge is power and understanding the auction process can prove rewarding in this turbulent market. This short primer on modern real estate auctions should help you gain confidence in experiencing the opportunities available in today’s real estate auction market.

Auctions are nearly as old as History itself. Some early historians describe early Babylonian wedding auctions where brides were won in the auction arena. Later, Roman plunder was often auctioned by auctioneers who followed conquering legions to dispose of the spoils of conquest.

The Savings & Loan Crisis of the 80’s proved significant in introducing the American public to auctions as a way of purchasing real estate and in todays’ volatile real estate market real estate auctions are increasing as a percentage of real estate transactions.

We are affected daily by auctions all around us; Treasury bill rates (T-bills), commodity prices and the stock market prices are all based on auction concepts. Auctions, quite simply, introduce willing and able sellers to willing and able buyers, letting supply and demand set the price - the market.

An understanding of some basic auction concepts should prove helpful to those hoping to participate in real estate auctions.

1. Absolute vs. Reserve Auctions: It is also important to recognize that all auctions should be considered to be sold on a “reserve” basis or “subject to seller approval” unless advertised as “Absolute” or “Selling Regardless of Price.”

In an “absolute” auction format the offer is made by the seller to accept the highest bid. Once the bid is made a meeting of the minds has occurred and a contract is created. It is generally understood in the auction industry that “absolute” auctions significantly enhance bidder response and deliver true market prices.

In the “reserve” auction format the seller is merely soliciting offers from the bidder without any commitment of acceptance. No enforceable contract is created until the buyers offer is accepted by the seller. Be advised you may be, and often are, bidding against the seller in a “reserve” auction format.

As a bidder it is important to fully understand the auction format as advertised by the auctioneer or auction company. Again be aware that without any advertised language to the contrary an auction will be conducted on a “reserve basis.” You may not wish to go through the considerable efforts to clear funds, examine the real estate, and attend the auction if there is no assurance the high bidder will prevail.

2. The Auction Contract: It is important to fully understand the terms of the auction and the provisions of the real estate purchase and sale contract. Is the buyer responsible for any outstanding mortgages, liens, taxes, or other assessments?

A reputable auctioneer should provide you with a due diligence or bidders information package in advance of the auction with all pertinent property data as well as a copy of the real estate purchase and sale contract that the high bidder will be asked to sign. Inspect those documents carefully or have your attorney do so on your behalf.

In addition arrive at the auction early, auctions often provide for inclusion of the opening announcements into the terms of the real estate contract. Listen carefully for any discloses on the condition of property or that of the title to be conveyed.

3. Research the Auctioneer and the Auction Company. Is the auctioneer specialized in used equipment or real estate? Is the auctioneer an experienced full-time auctioneer or merely a realtor trying his hand at auctions? How many years of experience does the Auctioneer or Auction Company have doing real auctions? Since Florida Real Estate Law allows any Real Estate Broker to conduct auctions under a Florida Broker License beware of a traditional realtor “open house” advertised as an auction. Often consignment property auctions (all sold with reserve) are merely a solicitation of bids with no commitment from sellers. Don’t hesitate to ask the auctioneer or the auction company what percentage of their auctions has resulted in a completed sale.

4. Research the Property, “As Is” – fully inspect any property before the auction. Most auctioneers will allow you or your home inspector access to the property prior to the auction. An inspection fee is far less expensive than finding significant roof, termite or structural damage to your auction purchase.

5. Be prepared to win! – Are your finances in proper order to consummate the transaction? Most auction contracts require a 10% or greater deposit the day of the auction with a specific time allowed for closing. Bid only with funds clearly at your disposal – if you default on an auction contract your deposit could be forfeited and/or you may expose yourself to a lawsuit for non-performance.

6. Understand the Type of Auction?

Traditional on-site auctions allow the bidder an additional opportunity to inspect the real estate and see the other competing bidders. This “open air” atmosphere helps assure bidders of a creditable auction where anyone can participate. Taking advantage of recent technological advances, many auctioneers have begun to offer bidders the opportunity to compete simultaneously on-line as well.

Sealed Bid Auctions – From a pure auction prospective sealed bid auctions are not really auctions at all. They are merely a solicitation of bids. They seem to be more commonly used by governmental entities perhaps more concerned with the process complying with traditional protocol than with the actual auction results. We may have to shoulder some of the blame for this flawed approach since we elected them.

Ballroom auctions - Ballroom sales are predominately used by banks and lending institutions in an effort to clear inventories of REO’s (Real Estate Owned by Bank thru foreclosures). While they are almost without exception conducted on a reserve basis, ballroom auctions offer investors a plethora of all types of property often on a regional basis. When bid prices are not accepted at the auction, the opportunity may yet exist for the high bidder to negotiate an acceptable offer.

On-line auctions – The internet and companies like eBay have introduced auctions to a huge number of bidders internationally. It remains the definitive method of marketing collectibles. In addition, a number of on-line auction sites offer the opportunity to bid on real estate online – most often in cooperation with on-site presentations.

In closing auctions can truly provide a win-win scenario allowing both seller and buyer to benefit from the process. A successful auction can be a good day for both buyer and seller. Auctioneers must approach this responsibility to the seller with honesty and integrity in determining whether an auction is truly in the sellers’ best interest. The auctioneer or auction company cannot create demand or set the market. They can only use their expertise to assemble all sources of demand and allow the market forces to set the price. “Something is only worth what someone is willing to pay for it" Quote Jonathan Reeves

KC Daniel is a second generation auctioneer and is the current reigning Florida State Bid Calling Champion. He currently teaches law at Indian River State College and is on the board of directors for the Florida Auctioneers Association. He is the principal auctioneer for Associate Auctions and can be reached at 772.252.3030.