Absolute Auction (or auction without reserve)
In an absolute auction there is no minimum bid. The property is sold to the highest bidder, regardless of price. The advantage of an absolute auction is that it attracts more buyers because they know the property is going to sell. The disadvantage is that it provides no safety net for the seller, which makes it difficult to recommend to seller client’s in some situations.
- The property is sold to the highest bidder, regardless of the price.
- Since a sale is guaranteed, buyer excitement and participation are heightened.
- Generates maximum response from the market place.
- Many sellers, including financial institutions and government agencies have begun to use this method more frequently.
Sometimes called a minimum published bid auction. In this type of auction the lowest acceptable price is predetermined by the seller and the auction firm. The minimum price is then stated on all the marketing materials. When the bidding reaches the minimum amount, the property will sell. This is a good type of auction to use when you have a property that might have been on the market for some time and is market weary. The advantages of this auction is that it lets buyers know what the minimum price the seller is willing to take for the property, and it still creates a safety net for the seller; unlike an absolute auction. The disadvantage is that sometimes the inexperienced agent and a demanding seller may set the minimum bid too high and buyers will not be willing to bid.
- The auctioneer will accept bids at or above a published minimum price. This minimum price is always stated in the brochure and advertisements and is announced at the auction.
- Reduced risk for seller as the sales price must be above a minimum acceptable level.
- 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, and therefore it must be low enough to act as an inducement rather than a hindrance.
Reserve Auction (an auction subject to confirmation)
In a reserve auction, the seller reserves the right to accept or reject the highest bid. The owner, with the advice of his agent, determines the price at which he would be willing to sell the property. This pre-determined price is not published or disclosed to the public. Sellers are not obligated to accept any other price than the predetermined reserve price or above. The advantage to this type of auction is that it provides a safety net for the seller while still giving the real estate professional the knowledge at what price the seller is willing to let the property be sold. The disadvantage is that many prospective buyers do not want to take the time or go to the expense of investigating the property when there is no guarantee that they will receive the property even if their bid is the high bid. Over the years I have had many buyers tell me that “We don’t come to auctions to bid, we come to buy, and so, until I know that the reserve has been met, I am not going to bid.” This can be a problem with this type of auction, so, it is very important that the seller and agent establish a very realistic reserve price.
In this scenario, the high bid is reduced, in effect to an offer not a sale. A minimum bid is not published, and the seller reserves the right to accept or reject the highest bid within a specified time — 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 are not obligated to confirm a sale other than at a price that is entirely acceptable to them. The main disadvantage of a Reserve Auction is that prospective buyers may not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder.
Sealed Bid Auction
All bids are confidential. Usually, they are submitted to the agent and then opened at a predetermined time and place. This type of auction can also be used in conjunction with the three listed above. The advantage is that if you have a buyer with a very strong personality or presence in an area and other buyers don’t want to publicly compete with him they can do so. The disadvantage is that by doing everything confidentially, some buyers may question whether there really were other competing bids. You also lose the excitement created at a public out-cry auction that often times will cause competing bidders to pay more than they thought they would for a property.
This type of auction works well for large parcels that need to be offered in smaller parcels to attract the most buyers. It allows the bidder to bid on one parcel or any combination of parcels. The advantage is that it allows bidders who want only one parcel and bidders who may want several or the whole thing to compete. The disadvantage is that the buyer who wants to buy the whole parcel does not need to compete until the end. It also requires a very knowledgeable staff to keep track of bids and help potential buyers submit bids that keep them in the winning position. There are other types of auctions that can be used, but these are the ones that work best for me. As technology has advanced, online auctions and online bidding is becoming more common. However, since I often hold auctions in areas that I don’t have even good cell phone service let alone internet connections, this type of bidding has been a problem for me. These auctions are being used very successfully in the selling of livestock and personal property, and I do see them becoming more common in the land business in the future.
Now, let’s talk about what makes a seller a good candidate for a real estate auction. Here is what I consider the top five questions you need to ask as the real estate professional:
- Is there adequate equity in the property?
- Is the property being sold to settle an estate or divorce?
- Has the property ever been listed?
- Does the seller have realistic expectations?
- Is the seller familiar with the auction process?
A “yes” answer to these questions would be positive towards an auction. A “no” answer would lead to the need for additional questions to be asked before deciding on encouraging the use of an auction.
*Part of the above information is from the Winter 2017 edition of the Terra Firma magazine.