Not all auctions are alike! When owners elect to sell their property by auction, they must decide which type of auction method they will use to conduct the sale. And the type of auction selected will provide early clues to potential buyers, indicating the extent to which the seller is motivated to sell. Following are the three most commonly used auction methods.
In an absolute auction, also called an auction without reserve, there is no minimum bid. The property is sold to the highest bidder, regardless of price. The biggest advantage of absolute auction is that it attracts more lookers and buyers. Since a sale is guaranteed, regardless of price, an audience's level of participation and excitement is heightened. The disadvantage is that it provides no safety net for the seller, which makes it difficult for auction professionals to recommend this type of auction to seller-clients.
MINIMUM BID AUCTION
A minimum bid auction, also called minimum published bid, is an auction for which the lowest, acceptable price is pre-determined by the seller and the auction firm. The minimum price is stated in the auction brochure and in advertisements. It is also announced during the auction. When the bidding reaches the minimum amount, the property will be sold “absolute,” with the highest bidder prevailing. Unlike an absolute auction, however, the minimum bid auction creates a safety net for the seller.
Disadvantages of minimum bid auctions are that they may limit a seller’s interest to buyers only willing to pay minimum bid price and that it is usually more difficult to generate excitement for minimum bid auctions on auction day.
In a reserve auction, the seller reserves the right to accept or reject the highest bid within a specified time period. A suggested opening bid may or may not be posted. The time period may be anywhere from immediately following the auction to 72 hours after it ends. The owner predetermines the price at which the property will sell.
In a reserve auction, sellers are not obligated to accept a price other than one that is entirely acceptable by them. The main drawback to a reserve auction is that many prospective buyers do not want to invest the time and expense of investigating a property when there is no guarantee they will receive that property, even if their bid is the highest.
Source: National Association of REALTORS® Introduction to Real Estate Auction Course