Answer for "What is an Auction?"

Brad Firestine real estate agent
  Allen Tate Real Estate, LLC

The definition of “auction” is derived from the Latin word “auctus” which means “increasing”. A home auction is a sale where bidders place one bid after another until the last and highest bid. At that point, a winner is declared. First auctions took place as early as 500 B.C. and as early as the 1600s in America. Several types of auctions are known today:

  • Open outcry
  • Sealed bid
  • Sealed bid convertible
  • Online auctions

Among the goods that can be sold at auction are unique paintings and sculptures (art in general), automobiles, collectibles, designer clothing, historic documents, treasury bonds, government loans, stocks and bonds, real estate, luxury homes, storage units and many more.

Auctions sales are a way of finding how much someone is willing to pay for something - the true price of a product. The price is determined on competitive bidding that begins from a starting bid. In an open outcry auction, bidders openly shout out their bids (in person or by phone) in predetermined increments.

Auctions are surrounded by myths and misconceptions and most people think that an auction means liquidation of a distressed property or the last resort. In fact, home auctions are an efficient method to buy and sell residential or commercial properties. The property benefits from an intense marketing campaign that reaches a huge number of potential buyers. The sellers avoid the costs of keeping a property listed with a broker for a long time and won’t have to pay maintenance costs, property tax, and interest.

Sealed-bid auctions are another way of selling real estate. All the bidders send their bid in an envelope and the winner, the one with the highest bid, pays the price to the seller - this is the first-price auction. In this case, winners often overbid and the situation is known as the winner’s curse.

The rules of the auction are well known to the public from the beginning. So, in the case of a second-price auction, the winner - the one with the highest bid - pays the second highest bid in the end. This type of auction is also known as Vickrey auction.

When two or more bidders place the same bid and a winner cannot be easily determined, a sealed-bid auction is turned into an open outcry auction.

Finally, online auctions might be silent but more stressful. People interested to buy a certain product or house through an online auction can place their bids over a certain period of time. There is usually a clock that counts the time remaining to the end of the online auction. Ebay made this kind of business popular, but there are more websites specialized in home auctions: Auction[dot]com, Hubzu, Hudson & Marshall, Concierge Auctions, RealtyBid or Foreclosure[dot]com.

In real estate, properties for sale listed online could be sold either by the owner or by the bank which is foreclosing on a property. In an absolute auction, the property will be sold to the highest bidder no matter how low the final bid. In a reserve auction, the seller sets a reserve amount that must be met for the sale to go through. When engaging in online home auctions, there are a few fees to be paid: buyer’s premium (5-10%) or auction service fees, transfer fees, and earnest money/bidding deposit. Winners who do not pay the full amount owed at the end of the auction within 30-45 days, lose their earnest money and might not be allowed to bid on that website.

The definition of auction sales is important for home sellers who struggle to sell their properties traditionally. Auctions are not only a fun way to sell a house but also a fast and reliable method.


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