How does an auction work?
- The auction is conducted by an auctioneer either directly hired by the vendor, or by their chosen real estate agency.
- The home is advertised with the date and time of the auction displayed.
- Potential buyers (bidders) compete against each other, by making increasingly high offers until only one buyer remains.
- The house is then sold to that highest bidder.
This is provided the reserve price (the price that the vendor has specified as being the minimum they will accept) has been exceeded or reached, or if the vendor concedes to a lower price than they originally hoped for.
If the home doesn’t reach the vendor’s reserve price, the property is ’passed in’ and the current highest bidder then has the right of first refusal to any further offers.
Advantages of selling by auction
- In an auction scenario, it’s harder for the buying public to determine true market value because it’s difficult to compare other properties when they are not fully aware of the vendor’s sale price expectations.
- People bidding are buying with terms and conditions determined by the vendor.
- Vendors are protected by the reserve price. They set the reserve together with the real estate agent after assessing the bidding strength of the potential purchasers. This determined in part by information collated during the open–house inspections.
- The vendor controls how much is spent on the marketing plan by choosing how much the auction is advertised.
- If the property doesn’t sell at the auction, the vendor is commonly put in direct contact with the most likely buyer and can enter further negotiations.
- The property is usually exclusively held by one real estate agent/auction house for a fixed period of time (normally four to six weeks). Marketing is usually intense over this short period of time, with either no price or a possible price range advertised.
- An early sale can occur when a buyer feels ‘pushed’ to make an offer to buy the home before the auction day. Usually because they believe competition on auction day will be too fierce.
- The sale contract is usually deemed ’unconditional’, meaning the sale will conclude on settlement day rather than waiting for the buyer to receive finance or further inspect the building.
- Homes with unique features often do well at auctions as they may attract more competition between bidders.
- If more than one person wants to buy the property, the competitive nature of an auction can cause people to bid higher than they originally wanted to spend. This can result in large profits for the vendor.
Disadvantages of selling by auction
- Sometimes, properties are ‘passed in’ on auction day and, despite the owner still intending to sell over the coming weeks, it can upset or eliminate some potential buyers.
- Bidding is a fickle process and if, for whatever reason, bidding is slow, this can send an incorrect message about the true value of the home.
- Some potential buyers don’t like the competitive nature and immediacy of the auction process and won’t even bid.
- Now that auctions are highly regulated, many states require that buyers must formally register. Some potential buyers may not like this process and will not sign up.
- Marketing and advertising campaigns for auctions can be quite intense, which can be expensive for the vendor.
- If you are in a hurry to sell, an auction offers the best chance of selling by a specific date, but there is no guarantee the property will sell or that you will receive the price you desire.
- Auctions don’t always necessarily offer you the best sale price, as the winning person only needs to bid marginally higher than their competitors. You’ll never be sure that they offered the maximum amount they were willing to pay.
- Most real estate agent auction contracts provide the agency with sole selling rights until the auction and then for a period of time afterwards. This then locks the vendor in with one agency for a defined period of time. In the event your property does get ‘passed in’, it’s a good idea to prepare for this by only giving the agency a specific period of time to retain exclusive selling rights after the auction (one month, for example).
Source: Sell My Castle