What Does a Reserve Price Mean at a Home Auction?

by Tracey Sandilands, Demand Media Google
    Buying a home at auction can help you to find a bargain property.

    Buying a home at auction can help you to find a bargain property.

    Real estate auctions are a popular way to buy and sell homes, if you know the ropes. Sellers of the home up for auction have several milestones in mind based on the value they want to get out of the sale. An absolute auction has no reserve prices, while a reserve auction requires the setting of a minimum or reserve price. The reserve price differs from the starting price, which is commonly based on the value the seller hopes to get.

    Reserve Price

    The reserve price is the lowest price the seller is prepared to accept for the property. If the auctioneer is unable to get the starting price or higher, the reserve price gives him a baseline to which he can drop if necessary. If the auctioneer is unable to get the reserve price, the seller may instruct him not to sell the property. Alternatively, the seller can tell the auctioneer to get as close to the reserve price as possible. In this instance, the auctioneer will announce the home sold subject to owner confirmation, and the owner has a few days in which to decide whether to accept the price. For example, if the reserve price is $200,000 and the highest bid is $195,000, the owner may decide to accept it.

    Starting Price

    The starting price for a home on auction is the price at which the property is listed. Although most real estate auctions begin at a lower starting price in the hopes of raising the final amount through bids, auction-savvy sellers often set their starting price slightly higher than the price they would like to achieve for the sale. This is practical because they know a good chance exists that the price may go up or down once bidding opens. The ideal situation is obviously for the price to increase, but this depends on the region’s real estate market at the time of auction.

    Benefits

    The main benefit of having a reserve price on a home selling at auction is that the seller knows the property will not be sold for a lower amount than he is prepared to accept. This means he can set the reserve price at an amount that ensures a return on his original investment, whether it is practical in the marketplace or not. He can then choose whether to accept any bids that are slightly below the reserve, depending on how vital it is for him to sell the home.

    Disadvantages

    The reserve price is often the point at which serious bidding begins. This may result in a lower sale price being achieved or it could result in the property not being sold at all. If the owner fails to give specific instructions to the auctioneer regarding reserve price flexibility and the home attracts only lower bids, the owner may find himself unable to sell. The property will need to be listed again, which requires payment of an auction listing fee. Also, a reserve auction may attract fewer bidders than would a no-reserve auction.

    About the Author

    Tracey Sandilands has written professionally since 1990, covering business, home ownership and pets. She holds a professional business management qualification, a bachelor's degree in communications and a diploma in public relations and journalism. Sandilands is the former editor of an international property news portal and an experienced dog breeder and trainer.

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