What Is a Buyers Premium in a Real Estate Auction?

by Lee Grayson

Auctions offer an additional avenue for homeowners to sell real estate. Prospective buyers can attend an auction sale in person or make offers through sealed proxy bids. Auction companies earn a profit by charging the buyer, seller, or both, a commission called a premium. Auctions may offer sellers a relatively fast way to sell residential real estate.

Traditional Listing vs. Auction

In a traditional listing, a seller puts his home on the open market, sets an asking price, and buyers make offers. When a buyer and seller come to an agreement, they sign a formal sales agreement. Auctions attract a group of potential buyers to bid on a property during a single session. The person with the highest bid wins the auction. The auctioneer ends the auction and the highest bidder signs a sales agreement based on the bid he placed.

Premium Charges

Agents earn a percentage of the final sales price as a commission in a traditional sales arrangement. The auctioneer earns a fee for services in real estate auctions. Auction fees, typically a percentage of the winning bid, come from the premium charge added to the final auction price for the property. Auctions sometimes set a flat premium fee for the seller and also charge buyers a percentage of the final bid made at the auction. After the auction, the property enters escrow, with both parties paying the typical fees and costs of a traditional sale.

Auction Types

The type of auction frequently determines the amount of the buyer's premium. An absolute auction begins with the highest bidder's figure as the final sales price and it has the potential for a small premium payment. Auctioneers may set a flat-fee premium in an absolute auction. Reserve auctions allow bidding, but if the final bid doesn't meet the undisclosed asking price, then the seller has the right to refuse the price. The seller typically absorbs the premium payment for failing to accept bids in a reserve auction.

License to Auction

A real estate firm may have real estate licenses to offer properties through traditional contract listings and also have an auctioneer's license to sell the real estate at auction. Such companies can list a property traditionally, then schedule an auction if the property fails to sell on the open market by a specific date. The real estate firm earns a traditional commission if sold under a regular listing agreement or earns a premium if sold at auction.

About the Author

*I have written chapters and articles for Oxford and Harvard University Presses, ABC-CLIO, and others. Arcadia Press published two of my local history texts and I have also written for numerous "article sites," including Pagewise in 2002. My "How to become a...real estate agent" is available as an online text from a Canadian publisher. *I taught writing courses at a branch campus of Indiana University. *I held a California real estate license and have remodeled four of my own homes and advised others on financing homes, repairing credit to qualify for loans, and managing construction (including meeting local, state, and federal regulations for restoration and development grants). *I served as an AmeriCorps*VISTA volunteer and wrote nearly $75,000 in small education grants (under $1,000). *My travels include frequent road trips in Canada, Mexico, U.S., and Europe. I attended school at Cambridge University and used this as a base to explore the UK and Europe.

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