How Do House Auctions Work?
What to expect when selling a house at auction, the top reasons to sell your home at auction, and how to ensure a successful real estate auction.
By Emily Southey | 10 minute read
Housing auctions are exciting and effective methods of selling homes. So as a seller, you might be curious about how they work. If so, then you’ve come to the right place.
How Does Selling a House at Auction Work?
Selling a house at auction isn’t as daunting as it seems. Although you may never have sold a property at auction before, or perhaps don’t know anyone who has, the process is a lot simpler than you might think.
The first step to selling a house auction is to find a qualified auctioneer. Do some research into the real estate auction companies in your area and be sure to find reviews or testimonials from sellers who have worked with them in the past. Before agreeing to work with a certain auction house, ask about their fee structures. Many sellers are surprised to learn that selling a house at auction may come with some hefty fees. For example, some auctioneers charge sellers a commission rate between 6% and 10% of the sale price (this is much higher than the average realtor’s commission rate). Understanding the auction company’s fees will help you determine whether selling your home at auction is a cost-effective option for you.
Once you’ve agreed to work with a certain real estate auction company, it’s time to make some decisions. As the seller, you have the power to make key decisions about the terms and conditions of the auction, including the buyer’s premium rate, the type of auction, the reserve price, the permitted bidding style (open bid or blind bid), and more. You can also take this opportunity to negotiate with the auctioneer company for a more advantageous fee structure (for example, charging a higher buyer’s premium in exchange for a reduced commission rate).
After the terms and conditions of the auction sale have been decided, the real estate auction company will create a listing for the home and publish it on its website. Marketing and advertising are typically paid for by the seller, though sometimes these fees can be negotiated. Depending on your preference, you may hold an open house or make your home available for showings, so that interested bidders can walk through the home before the auction date. Interested parties will register as bidders in advance of the auction. Then, on the day of the auction, you can sit back and watch the action unfold. Real estate auctions are conducted by a representative from the auction company, not by the seller. If the auction is successful, the property will be sold to the highest bidder, and the auction company will arrange the necessary paperwork. All that’s left is to sign the purchase agreement and get your money (less the agreed-upon commission).
“The first step to selling a house auction is to find a qualified auctioneer. Do some research into the real estate auction companies in your area and be sure to find reviews or testimonials from sellers who have worked with them in the past.”
Reasons to Sell Your Home at Auction
There are several reasons that a seller would want to sell their home at auction.
- Homes are sold as is, without conditions: The first reason to sell a house in a real estate auction is that your home will be sold as is. Homes sold at auction do not require the seller to make any repairs, upgrades, or improvements to the property for the sale to go through. This is not only extremely convenient but it can also save the seller some money.
- Home sales are not conditional. Similar to how most homes sold at auction are sold as is, most real estate auction home sales are firm. In other words, buyers are not permitted to negotiate for certain conditions, like financing, home inspection, or home appraisal contingencies, to be added to the deal. In essence, the sale does not hinge on any condition being met.
- Sellers set the auction terms and conditions: Another reason to sell your home at auction is that you get to determine the terms and conditions that buyers must agree to if they want to place a bid. This provides peace of mind to sellers, knowing the sale will proceed without any surprises.
- Sellers are more likely to get their asking price: Since bidders may not be able to inspect or appraise the property before the auction, they might have a hard time determining its value. In turn, the seller might be more likely to get their asking price.
- Homes sold at auction sell fast: For sellers looking to sell their homes quickly, a real estate auction would be a great option. From start to finish, the average time it takes to sell a home at auction is three to four weeks. This is significantly shorter than selling your house on the market, which can take anywhere from two months to six months or more, depending on the market. Plus, the actual auction is extremely fast, running anywhere from 10 minutes to an hour.
- Sellers can set a reserve price for guaranteed value: If a seller opts for a reserve auction, they will set a reserve price. The reserve price is the minimum amount of money the seller is willing to sell the home for. Most sellers work with home appraisers or realtors to determine an appropriate reserve price. Setting a reserve price ultimately ensures that the seller won’t walk away with less money than they are happy with.
Four Tips for Selling Your Home at Auction
Are you ready to sell your home at auction? Follow the four tips below to ensure success.
1. Find a real estate auction company that specializes in your type of home
As mentioned above, the first step to selling your home at auction is finding an auctioneer. However, you shouldn’t settle for the first one you find on the internet. Rather, you should prioritize finding an auction company that specializes in your type of home. For example, some auction companies sell other items beyond real estate, such as antiques, cars, or cattle. Finding one that has ample experience with real estate auctions is crucial. Ultimately, finding an auctioneer who has handled the sales of homes similar to yours increases the odds of your auction being successful. A local auctioneer may also better understand the housing market and can help you get an appropriate price for your home. To determine if a certain real estate auction company is right for you, ask them the following questions:
- How many homes have you sold before and what price did they sell for?
- What is your marketing/advertising strategy for selling a home at auction?
- Do you have any licences or certifications (that is, what are your credentials)?
2. Negotiate the fee structure
Our next tip for selling a house at auction is to negotiate the fee structure with the auction company. Selling a home at auction comes with significant fees. While some fees are the responsibility of the buyer (for example, the advanced deposit of 10% or the buyer’s premium between 3% and 10%), others, like the marketing fees and commission rate, are the responsibility of the seller. The real estate auction company’s commission rate typically falls between 6% and 10% of the sale price. The exact rate is determined mutually by the seller and the auction company based on the estimated price of the home and the condition of the current real estate market (whether it’s a buyer’s market or a seller’s market). When the property is sold, the auction company will keep the agreed-upon commission amount and release the remainder to the seller. Luckily, almost all real estate auction fees, including the commission rate, can be negotiated by the seller. For example, a seller could negotiate with the auctioneer to give them a cut of the buyer’s premium proceeds after the auction is over. Alternatively, they could negotiate for the auction company to pay the advertising and marketing expenses by increasing the buyer’s premium by a couple of percentage points. Ultimately, negotiations are a key part of real estate auctions for sellers, so be sure to take advantage of this and avoid agreeing to a disadvantageous fee structure.
3. Think carefully about whether to host a reserve or no reserve auction
Sellers get to determine the type of auction for their home. Therefore, one of the most important considerations is whether to host a reserve auction or a no reserve auction. A reserve action is one where the seller sets a reserve price in advance. If the highest bidder does not reach the reserve price, there is no home sale. Oppositely, a no reserve or absolute auction means the highest bidder walks away with the home, no matter the bid. To a seller, this option guarantees a home sale but it could mean accepting less than what you think the home is worth.
No reserve auctions are undoubtedly more dramatic, creating a sense of urgency among buyers that could lead to a bidding war, and therefore a higher sale price. However, reserve auctions are less risky and are generally seen as fairer, especially in an unstable market.
Before settling on whether to host a reserve or no reserve auction for your home, find out how much the no-sale fee is, if applicable. Some real estate auction companies charge a fee to the seller if the home is not sold or if they change their mind. These fees can be hefty, sometimes even as high as the commission fee if the property had been sold.
4. Allow financed purchases
Our next tip for sellers who want to sell their homes at auction is to allow financed purchases. Sellers get a say in how bidders are allowed to fund their potential home purchases. While some auctions have set rules prohibiting financed purchases, such rules instantly narrow your pool of buyers. To increase the odds of your home sale going through and the purchase price being as high as possible, we recommend permitting financed purchases. That said, if you agree to allow financed purchases, include a rule that all potential bidders must provide a pre-qualification or pre-approval letter from their bank or mortgage lender.
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Frequently Asked Questions
Why would someone choose to sell by auction?
Selling by auction offers many benefits to sellers. For example, home auctions often result in faster sales than selling your home the traditional way (just three to four weeks compared to several months). They are also extremely convenient, as most homes sold at auction are sold as is, without any conditions. Sellers also have lots of control over real estate auctions, as they are allowed to decide on the type of auction and bidding method and set the auction terms and conditions. They can even negotiate with the real estate auction company to keep commission fees to a minimum.
What are the different types of real estate auctions?
The different types of real estate auctions include public auctions (also known as foreclosure auctions), private auctions, open bid auctions, blind bid auctions, no reserve auctions, reserve auctions, online auctions, and in-person auctions.
What happens during a foreclosure auction?
A foreclosure auction is similar to other types of real estate auctions. The auctioneer will announce the home and the starting price, bidders place their bids, and the highest bid wins the house.
What are online house auctions?
Online house auctions are real estate auctions that are conducted virtually over the internet. Rather than attending an auction house in person, bidders can register for an auction and place bids from the comfort of their own homes. As with an in-person auction, bidders will try to outbid each other in an attempt to purchase a home.
Are online auctions better than in-person real estate auctions?
Online auctions have certain benefits that in-person real estate auctions do not. Namely, they are far more convenient as bidders can participate in the auction from the comfort of their own homes, rather than attending an auction in person. In addition, for online auctions, bidders can quickly and easily register online, where they can also find pertinent information relating to the home sale. They may also be able to upload a digital copy of their mortgage pre-approval or a pre-qualification letter, if necessary. Finally, online auctions are more accessible, as bidders can bid from all over the world. This usually translates to a larger pool of buyers, which can increase the competition and result in a higher sale price.