The Pros & Cons of Real Estate Auctions

by Steve Lander

Real estate auctions are frequently used to either sell properties that need to be sold very quickly, to sell properties that are hard to price, or to sell properties that have not sold through other means. Their advantages and disadvantages vary greatly depending on whether you're a buyer or seller.

Fast Process

For both buyers and sellers, the speed of the auction process can be desirable. Typically, auctions are advertised within a month of when they happen, and closings happen within 30 to 45 days after the auction's date. The one drawback to the speed of the auction is that it may not leave enough time for a market to form, potentially leading to low attendance, low bidding levels and a low selling price for the seller. This is one of the reasons that auctions frequently are used for properties that haven't sold through other methods.

All Cash Transactions

Most auctions are structured to have transactions close on an all-cash and as-is basis. For sellers, this carries the benefit of a high probability of close, since there is no lender involvement and no renegotiating after inspections. While these terms are definite cons for buyers, they hide a larger benefit. The terms at many auctions limit the ability of many buyers to participate, which tends to limit the competition and make it possible to get very good pricing.

Competitive Bidding

Auctions bring competitive bidding among the buyers that can meet their requirements. For a seller, this carries the benefit of knowing that he got the highest price possible from the buyer pool assembled. It can also generate a higher selling price. From a buyer's perspective, this is a disadvantage since it makes it harder to get properties for a significantly below-market price.

Price Protection

One additional pro of an auction for a seller is that he doesn't have to sell his property for a price that he finds unpalatable. While auctions frequently work best when buyers know that any price they come up with can be acceptable to buy the property, sellers can also set a reserve price. Reserves are either publicly-posted or privately-set minimum prices for which the asset must sell. While reserves do not generally benefit buyers, they help to limit a seller's downside risk while allowing him to potentially reap the benefits of the auction process.

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