With real estate sales and acquisitions picking up as the market strengthens in the US, we’re seeing people choose more aggressive methods of selling and buying real estate. One of these methods is auction. With roots dating as far back as 500BC, auctions are anything but a new and novel way to transact real estate. In fact, the sheer success of auctions has led it to become a preferred way to handle real estate, whether it be residential or commercial.
Auctions come in different shapes and sizes. For the brave, there’s the absolution auction, also known as an auction without reserve. It’s simple because real estate is sold to the highest bidder, regardless of how high or low the bid is. Then we have a minimum bid auction, in which the bidders have to bid over a certain dollar value, also known as the minimum bid. This mitigates risk for the seller, as he or she knows that the property will sell above the specified amount.
Another popular auction is the reserve auction, in which the seller can publish, or leave unpublished the reserve price. The seller eventually reserves the right to accept or reject the highest bid, give him or her maximum control over the process. Also widely used is the sealed bid auction, which works much like a conventional real estate sale. To better explain this auction process, Asad Kausar, our commercial real estate marketing manager has broken it down into four steps.
1 – Submit Sealed Bid
Bidders submit their sealed bid within the auction bidding window, as stated in provided due diligence package, also known as the Bidder’s Information Package. The bid is formally submitted by filling out the approved Purchase and Sale Agreement provided in the due diligence package. The bid is typically submitted with a cashier’s check, which goes hard if the bid is accepted, and is used for earnest money.
2 – Seller Evaluates Bid
The bid (signed contract + cashier’s check) is submitted to the Seller for evaluation. The seller reserves the right to accept or reject the bid. The bidder has nothing to lose, because if they seller accepts, then the bidder wins. If the seller rejects the bid, the cashier’s check along with contract are returned.
3 – If Seller Accepts Bid
If the seller approves bid, the cashier’s check is used towards the required earnest money. The buyer is expected to typically deposit a percentage of the total purchase price for earnest money within a specified duration.
4 – If Seller Disapproves Bid
Conversely, if the Seller disapproves your bid, the check is returned to you. There is some room for negotiation here typically, and we’ll try our best to execute the deal at favorable terms, both for the seller and bidder.
With both time and money being important factors in the sale and purchase of real estate, the auction provides a highly opportunistic avenue for buyers and sellers to perform transactions.