What Is a Buyer's Premium in a Real Estate Auction?

A real estate auction can present a wonderful opportunity for a house-hunting couple. When you purchase real estate at an auction, you often pay much less than market value. However, before you start bidding, you need to understand the costs involved, such as the buyer's premium. This premium is an extra expense added to the cost of the auctioned home.


The buyer's premium is an additional fee that the winner of a real estate auction must pay before closing on the property. It is usually calculated as a percentage of the total sale price. For example, if an auction company charges a 10 percent buyer's premium and you win the auction with a bid of $200,000, the buyer's premium will be $20,000.


Auction companies exist to earn a profit on the homes they sell. Though most auction companies charge a fee to the owner of an auctioned property, they also impose a buyer's premium in order to transfer some of the financial burden to the buyer of the property. This allows the auction company to earn a higher profit without driving away potential sellers with unreasonable fees.


Each state determines the laws governing real estate auctions. Because buyers must typically obtain financing in advance, states typically require auction houses to disclose the buyer's premium before the sale begins so that potential buyers can prepare accordingly. To find the value of the buyer's premium for a specific auction, consult the written terms and conditions of the auction or contact the auction house itself.


Buyer's premiums vary considerably based on the price of the home and the percentage that the auction house determines. When you apply for financing before the auction, request a loan equal to the maximum amount you would be willing to pay for the property plus the amount of the buyer's premium. For example, if you determine that your maximum bid for auctioned property would be $175,000 and the auction house charges a buyer's premium of 10 percent, you should request a loan of $192,500.


About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.