Pitfalls of Real Estate Auctions

Published: 20th September 2009
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A real estate auction is one way of selling real estate properties. It is effective and revolutionary that most buyers and sellers couldn't resist engaging in this transaction.

There are four types of real estate auctions. The first one is called absolute auction. In this method, the property is sold to the highest bidder with no regard for the price. Second method is called reserve auction where a reserve price is established. The reserve price is the lowest price that a seller could settle for. Reserve prices are not usually published. The third one is called the silent bid. This is not your usual auction wherein buyers undergo outcry bidding. In here, bidders do not have any idea who they are bidding against. Bids are sealed when submitted and they are reviewed. And the last kind of bid is the minimum bid. It is just like the reserve auction but the only difference is, the minimum price (which is the initial bid) accepted by the seller is known to the public.

Real estate auctions are public affairs that have evoked excitement and great involvement for the community. Homebuyers are caught up to the thrill of auctioning because of its competitive process. They have also enjoyed the reduction of cost in purchasing properties and speed of the sale process.

However, real estate auctions have two faces: the good and the bad. Although they have tremendous benefits, it also has known pitfalls for buyers. Everyone should be aware of this to perform the necessary preparations to ensure a successful auction transaction.

Pitfalls of auctions

This is the other face of real estate auctions. Every buyer should be aware of this, as all are known facts in kinds of auction. Here are some of them:

1. This is not a contingency sale. There are no contracts or purchase agreements, wherein the buyer can put contingency clause to ensure the property is in good condition before the purchasing could push through. Buyers buy the property as it is. They cannot even demand for the essential repairs or ask for discounts.

2. Since pre-inspection of the property is uncommon in auctions, buyers cannot ascertain the real condition of the property. They end up relying on information contained in the diligence packets sent by the seller.

3. In the case of reserve bid, the seller can withdraw from the auction if the highest bidder's price does not reach the reserve price.

4. Bidding normally works to drive the price of the property up. In addition, of course, only willing bidders can do this. When you join an auction, buyers cannot just expect to get the property with its minimum price (unless no one else will bid). If you want to be the highest bidder, you have to know how much you can put up to win. Sometimes, seller may hire someone to bid for them in order to drive the bid up until their desired price. Moreover, competition is great. Any buyer may be bidding against investors or big people, who have great financial interest on the property.

5. Buyers cannot choose his or her lender for financing. There are pre-selected lenders, who will be providing financing for interested bidders. This means, you cannot shop for rates nor can you do any other stuff to ensure you get the best possible deal for mortgage.

See Phoenix Real Estate and Residential Real Estate in Phoenix AZ for more information about real estate auctions.

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