Recently I saw a Daybreak home for sale come onto the market that was to be sold via auction. Now auctions have been around for a long time, but usually they are used to sell HUD homes, that is a home that has been foreclosed on with a FHA insured mortgage, but they are not usually used for normal resale homes.
Now with the advent of a strong property market, it seems that some homes, albeit a very small percentage, are being sold by auction. This is how I have seen it work:
The listing agent lists the home on the MLS but uses an auction site to accept bids. There is a minimum starting price and bids go up in increments. The highest bidder wins. Once the auction is over the sale proceeds just like a normal real estate sale, the same paperwork and process. Really the auction takes the place of a multi-offer bid process, where buyers compete against each other.
So, does not sound so bad does it, but what’s the catch. Well all of a sudden there is an additional party involved with the transaction, and they are going to want their cut. The example I saw on the MLS wanted 3% of the purchase price, paid by the buyer.
So from the sellers point of view there are no additional costs but that extra 3% paid by the buyer can be a real deal breaker. Now while this 3% can be rolled into the mortgage, this is not something they have likely budgeted for and most people will just not want to pay it, therefore they will not make a bid. Even if they could come up with the money, why would they, they could go buy another home and not pay that fee.
In addition to the 3% fee, the listing I saw also said that you would have to enter a credit card before making a bid. Under certain circumstances they could charge your card $500, not sure in exactly what circumstances, but I am assuming its to stop fake bidders and time wasters.
So the biggest drawback seems to be the 3% fee paid for by the buyers, but are there any others. Well the biggest one I can see is that it prevents the sellers agent representing their sellers best interest. Using the auction the highest bid is always the one that is accepted, which may not be the best offer for the seller. There are many other aspects of an offer which the sellers Realtor should be presenting to their seller, but the auction process bypasses this ability, with only the highest bid being presented.
So given all the drawbacks discussed in this article why would a seller sell their home via an auction? Well to be honest I really cannot think of a reason. The only thing I can think off is that it makes the sellers Realtors life easier. In a hot real estate market homes often have multiple offers, if this happens the seller can go back to the buyers and ask for highest and best offer. This process is pretty labor intensive for the sellers Realtor. The auction process negates this process, allowing for people to bid and raise their bid in an automated manner.
So having summed up the pros and cons of selling a home via auction, I really cannot see any benefit of using this method. Oh and that home I saw up for auction failed to sell. No bids were received and the home was listed in the conventional manner for more than $100,000 more than the auction minimum bid price.