How Do Real Estate Auctions Work?

Sellers list properties with licensed auction firms rather than using traditional real-estate market listings for a variety of reasons. Foreclosure auctions force the owner to sell in order to pay past-due mortgages. State or county tax auctions offer government-confiscated properties. The proceeds from these auctions pay any taxes owed, with the remaining cash returned to the homeowner. Sellers contact an auction company directly, and sign the auction sales agreement, typically to avoid buyer negotiations. Some sellers hope the auction process increases the final sales price when bidders compete for the property. Most sellers set a minimum price for the sale, called a bid reserve. Some auctions, however, offer the house as an absolute auction, without any minimum sales price.

Buyers register to bid prior to the day of the auction at some sales. Auction companies occasionally require all potential bidders to deposit cash to participate in property auctions of high-priced properties. Auction firms also sometimes require buyers to bring loan-qualification or bank-guarantee letters.

The auction house handles the advertising and places a sign on the property announcing the sale date. Auction firms generally allow potential bidders time to inspect the property for damages or problems. These inspections, done by the bidder or the bidder's professional contractors, take place at open houses or by appointment with the auction company. The bidder hires and pays for all inspectors. Some auction companies and government foreclosure auctions offer homes "as-is" and refuse any advance inspections. Prior to the auction day, bidders arrange for financing or arrange for cash payments.

Buyers arrive at the auction and register to bid, when preregistration isn't required. Auctions typically take place at the sale house or at the county courthouse, in the case of foreclosure auctions. Bidders receive bidding numbers or numbered paddles to indicate an offer during the formal bidding process.

The winning bidder signs the purchase agreement for the property. Buyers typically pay a sales commission above the purchase price to the auction firm. The amount matches the real estate commission in some states (a percentage of the final sales price), but other firms set a flat commission fee. Foreclosure auctions typically require the buyer to pay immediately, often in cash, or set a limited number of hours after the auction for payment. Some auction houses allow a period for loan processing. The sellers sign the property deed after the winning bidder completes the financing or makes cash payment for the property. Lender foreclosure auctions require court approval before the property transfers to the buyer.