How Much Do Auction Houses Take From a Sale?
What you need to know about how much auction houses charge, including their commission rates, and how much money you can expect to pay in fees.
By Emily Southey | 9 minute read
Real estate auctions can be worthwhile events for investors, homebuyers, and sellers alike. However, a successful auction for all parties ultimately comes down to money (that is, how much money a seller makes from the home sale or how much money a buyer pays for a home). Therefore, understanding auction fees is of the utmost importance, as these fees can cut into a seller’s profits or increase a buyer’s financial obligations. The types of fees paid, along with the amounts, vary by the auction house and the type of auction.
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What to Expect at a Real Estate Auction
Before we dive into real estate auction fees and rules, we’re going to cover what to expect at an auction. Scroll down to learn about preparing for the auction and inspecting the home, registering to bid, placing a bid, and (hopefully) winning.
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Step 1: Prepare for the auction
If you’re considering buying a home from a real estate auction, preparation is vital. At the bare minimum, all bidders should thoroughly review the auction guide, which details the terms and conditions of the sale. The auction guide will reveal the starting bid (the price the auction starts at), reserve price (the price below which the seller is not required to sell the property, which is above the starting bid), and other key information like whether the home will be sold as is, what type of auction it is, and whether purchases must be paid in cash or can be financed with a mortgage or other loan.
“Understanding auction fees is important, as these fees can cut into a seller’s profits or increase a buyer’s financial obligations. The types of fees paid, along with the amounts, vary by the auction house and the type of auction.”
Step 2: Visit and inspect the home (if permitted)
Since most homes sold at auction are sold as is without any conditions (including a home inspection condition), some sellers allow prospective bidders to visit the home before the auction. Be sure to take advantage of this if it’s permitted. Beyond walking through the home yourself, we recommend hiring a home inspector to come with you to confirm the condition of the house. This can significantly minimize the risks of purchasing a home at auction.
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Step 3: Register to bid
To bid at a real estate auction, each bidder must register with the auction house in advance. Typically, people need to provide basic personal information and identification to register as bidders. Most housing auctions have a registration deadline, so be sure you don’t miss it.
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Step 4: Bid
The fourth step is the fun part — placing your bid! Registered bidders will likely receive an information package when they sign in on the day of the auction. This package typically includes a bidding card, as well as information about the property. A representative from the auction house will introduce the property, state the starting bid price, and then the bidding begins, with bidders raising their cards and stating the prices they are willing to pay.
Step 5: Winning the home
If you place a bid and no other bidders raise their cards afterward, the auctioneer will announce you as the winner, restating the sale price. Shortly thereafter, you will be contacted by someone from the auction company who will send you the necessary paperwork and you’ll sign the purchase agreement.
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Auction Sale Rules
Now that you know how real estate auctions work, let’s cover some of the most common real estate auction rules. All house auctions have a clear set of rules. These rules relate to who can bid, how they can bid, the fees that buyers and sellers must pay, and the condition of the property. For example, many auctions stipulate that homes are sold in as-is condition, meaning the buyer cannot negotiate with the seller to complete certain repairs or improvements before the closing date. In addition, conditions are usually prohibited in home sales at auctions and most sales require a deposit of a set amount (often 10% of the reserve price). There are also rules about how bidders can bid. There are two main bidding methods: open bidding and blind bidding. Open bid auctions are those where bidders can see what other people have bid, whereas blind bid auctions are when buyers cannot see what others have bid. Generally, buyers prefer open bid auctions as it allows them to strategically raise their bid and avoid overpaying for a home. In contrast, sellers prefer blind bid auctions, as they are more likely to lead to a higher sale price.
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What Are House Auction Fees?
House auction fees are the fees that real estate auction companies charge for their services. These fees can be hefty and may be charged to both the seller and the successful bidder. The three most common types of auction fees are advanced deposits, buyer’s premiums, and commissions.
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Advanced deposit
Most real estate auctions have a minimum deposit amount that the winning bidder must pay. These deposit amounts are high, usually around 10%, and they must be paid quickly (often the day of or following the sale). Some auction companies even require bidders to pay this deposit in advance (the deposit will be calculated based on the estimated value of the property or another amount agreed to by the seller and auction company). If an advanced deposit has been made, either in cash or by credit card authorization, it will be held in escrow by the auctioneer until the end of the auction. If you win the auction, the funds will be withdrawn.
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Buyer’s premium
The next house auction fee that buyers and sellers should be aware of is the buyer’s premium. Buyer’s premiums typically range between 3% and 10% of the listing price and are charged by the auction company to cover the cost of the sale. In essence, buyer’s premiums act as an additional stream of income for the auction house, which helps them pay for the costs associated with conducting an auction. Therefore, all real estate auction bidders must factor in the buyer’s premium when deciding how much they can afford to spend on a property.
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As mentioned, most buyers’ premiums fall between 3% and 10%. For example, if a home sells for $200,000 at auction and there is a mandatory 5% buyer’s premium, the buyer will have to pay an extra $10,000. Therefore, the purchase price will actually be $210,000 rather than $200,000.
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Commission
Beyond the advanced deposit and the buyer’s premium, both of which are the responsibility of the successful bidder, the seller is responsible for paying a commission to the real estate auction company. The commission rates that auction houses charge often range between 6% and 10% of the sale price. However, they can be negotiated. Typically, the seller and auction company will negotiate this commission based on the estimated price of the property and the condition of the current real estate market (whether it’s a buyer’s market or a seller’s market). When the home is sold, the real estate auction company will keep the agreed-upon commission amount and release the remainder to the seller.
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How Much Commission Does an Auction House Take?
Unfortunately, the answer to this question varies, as different auction companies charge different fees. In addition, commission fees are ultimately based on the sale price of the home, which means they vary by auction.
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That said, most real estate auction companies charge a commission rate between 6% and 10% to the seller. In some cases, the commission rate hinges on the buyer’s premium. For example, a real estate auction will charge a 10% buyer’s premium and the commission will be split between the buyer and the seller (the buyer pays a 5% commission and the seller pays a 5% commission).
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Calculating Real Estate Auction Commission Fees
To calculate how much you will pay in real estate auction commission fees, you need two key pieces of information: the commission rate (as a percentage) and the sale price. Although sellers can calculate the estimated commission fee according to the listing price of the home, they won’t know the exact commission fee until the home is sold. The following is an example of how a seller would calculate the real estate auction commission fee. If your home recently sold at auction for $400,000 and you and the auctioneer had agreed to an 8% commission rate, all you need to do is multiply $400,000 by 0.08. The result is the amount of commission you owe the auctioneer. In this instance, the commission fee would be $32,000. Therefore, the seller would walk away from the sale with $368,000.
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Other fees
A few other fees associated with real estate auctions that the seller must pay include the cost of the pre-auction home appraisal and all marketing and advertising costs associated with the auction. It’s worth noting that sellers have the power to negotiate auction fees with the real estate auction company, and they often do. For example, a seller could attempt to negotiate with the auctioneer to give them a cut of the buyer’s premium proceeds after the auction is over. Alternatively, they could suggest that the auctioneer raise the buyer’s premium from 5% to 7% in exchange for covering all auction advertising expenses. In essence, a seller can negotiate to have the buyer offset some of their costs.
Frequently Asked Questions
What percentage do auction houses take?
The percentages that auction houses take vary. On average, real estate auction companies charge commissions between 6% and 10% of the sale price to the seller. However, they may also charge fees to the buyer, known as a buyer’s premium. Buyer’s premiums can fall anywhere between 3% and 10% of the purchase price and are only paid by the winning bidder.
How do auction charges work?
Auction charges are negotiated between the seller and the real estate auction company. There are various charges and they are often paid by both the buyer and the seller. Some of the most common real estate auction fees include the advanced deposit (paid by the successful bidder), the buyer’s premium (also paid for by the buyer), and the commission (paid by the seller).
What are the rules regarding an auction sale?
Real estate auction terms and conditions vary greatly, but all typically include rules relating to fees, bidding, registration, and the property itself.
Why is there no reserve in an auction?
Some auctions are no reserve auctions, while others are reserve auctions. At a no reserve auction, the home will be sold to the highest bidder regardless of the price.
On the other hand, there are many reasons that REALTORS® and sellers continue to favour open houses. Open houses offer a more relaxed environment for prospective buyers to tour the home. They also generate foot traffic, and the heavier the traffic, the more likely it is that a serious buyer will schedule a follow-up visit.
How are auction fees calculated?
Auction fees are listed as percentages and calculated according to the sale price of the home. For this reason, they vary considerably. Advanced deposits are typically 10% of the sale price, buyer’s premiums fall between 3% and 10% of the sale price, and commission fees range from 6% to 10% of the sale price.
Can a buyer refuse to pay the auction price?
When you bid on a home in a real estate auction, you are legally obligated to pay that price if your bid is successful. So although a buyer could attempt to back out of a home sale at auction or refuse to pay the auction price, the auctioneer could take them to court.
Emily Southey
Wahi Writer
