House Auctions and Foreclosure Sales

How do house auctions work?

1 Answer

At first glance, house auctions carry the stigma of foreclosure. Many house or real estate auctions are the result of foreclosure (after a bank's foreclosure sale, often one-sided with favor on the bank's side), but many auctions are the method of choice for exclusive properties or properties that are unique. Many hard to sell properties with special amenities or eccentricities go the route of the house auction.

Foreclosure sales differ from house auctions in that bidders compete with the bank or lender regarding the home price. If the bank deems the bid too low, it will counter with its own offer and is not averse to the back and forth. Many foreclosures are sold "as is" and the bank is not liable, as are conventional real estate professionals, for unforeseen property blemishes or structural problems. The bank wants to make money despite the mythology that good deals are to be made through foreclosures. It's caveat emptor or "let the buyer beware."

In real estate auctions, bidders compete with the other. The seller, along with the auction specialist, determine a comparable market value (CMV) for the house. If there are no CMVs, a minimal or reserve price may be set to begin the auction. The auction ends when the reserve price is met or exceeded. There is no reserve price (absolute auction) in a foreclosure sale, and the best bid is awarded. The house auction sale has a reserve price (restricted auction).

Furthermore house auction services are not free. Typically, home auction fees are 8% to 9% of the home price compared to an average agent commission of 6% in a conventional sale.

The average homeowner has access to professional auction services, which mainly serve the high-end specialty properties. But the common misconception is that an auction's winning bid will exceed the seller's asking price since auction participants will aggressively outbid the other, driving up the asking or reserve price. This is rarely the case in a normal real estate market. In a hot market, as witnessed recently in the hyper-inflation of home prices in key areas, house auctions do occur especially in a hot seller's market when demand outstrips supply.

For the average homeowner in a normal market, a house auction, generally, does not save the seller money nor does it make the seller money. More often than not, the main benefit of a neighborhood auction is time. The auction is a one-time event. Hopefully, a specified bid will be accepted from targeted bidders at a specific time. The benefit is, the house is sold quickly, eliminating the conventional string of open-house window shoppers.

Generally, house auctions do not appreciably save or make the seller money as compared to conventional sales methods, especially if it's a FSBO (for sale by owner) sale. The FSBO may save commission or service costs to an agent or auction specialist, respectively. But acting as the agent, the homeowner is now responsible for all the marketing and advertising costs, open-house visitations, and is on-call all the time. Prospective buyers may also be leery of dealing with the owner as sales agent since the owner's interest in commanding an optimal home price may compromise full disclosure and due diligence.

As mentioned earlier, most house auctions are reserved for unique or high-end properties that appeal to a specific audience. The seller commissions a house auction specialist to market and advertise the unique property to a targeted list of prospective buyers. The seller and auction specialist determine the property's minimal or reserve price. Then the specialist markets the property, advertises to the target audience, and sets the auction date. Again, this is a one-time event.

The seller is under a lot of pressure from the auction specialist to take a "reasonable" offer at or above the reserve price. If the reserve price is not met, the auction specialist is still paid the agreed upon commission (minus the fees for selling the house). Once again the house can be put on the market.

The pressure on the seller starts all over again. Furthermore, the public now knows the price of the house and will not pay a penny more, which can dampen future profit for the seller.

Bottom line: house auctions are not for the average homeowner.