If you’ve ever searched for any kind of product online, you’ve probably seen online auction sites like eBay, but have you ever seen auctions for homes? They do exist, both online and in-person.
Chances are that you’ve even seen the perfect house as you search listings with something in the description that says it’s available at auction with a reserve price. What exactly does that mean?
What is a Real Estate Reserve Price?
Over on Realtor.com, someone had the same question. The individual was interested in a foreclosed property that was owned by a bank. Originally, the asking price was $34,900, and later the price was dropped to $31,410.
The property reportedly had a lien and was up for auction. According to the individual, the reserve was met, but there was no indication of what the reserve price was. In the end, there were questions about how much to offer.
A real estate reserve price is a price that the lender, or bank, is willing to accept on a given property. It isn’t always public, and it can be difficult to guess what an appropriate amount would be when making an offer.
Making an Offer on Home with a Real Estate Reserve
If the reserve isn’t met, then the owner can refuse any and all offers that were made. When deciding what to request as a reserve price, that depends mainly on what the owner is willing to do. Banks that own foreclosures typically let homes go at values that are much lower than market price but are still fair to the property and the situation.
When the reserve is not public, then you need to be fair and put out the highest number you’d be willing to pay for that property. Consider what is fair given the condition of the home if you can see it, and compare market values in the area.
In making an offer, you do need to realize that if you offer a lower price than the asking price, you may or may not get the property. It’s all a risk and a chance that you’re participating in when you make an offer on a home that is up for auction. If you make a fair offer, then you’re likely to fair better, but it’s still no guarantee your offer will be the one that is accepted.
What Happens When the Reserve is Met?
As discussed, the reserve is the absolute lowest price that the seller, most often a bank, is willing to accept for a given property. Once that reserve has been met, the seller is legally obliged to sell that property at the highest bid that exceeds the reserve price.
If the offer only just makes the reserve price, the seller is still legally bound to sell the auctioned property. With that, it’s in the best interest of the seller to set the reserve price for an amount that they will be satisfied with receiving.
Generally speaking, reserve prices remain hidden, and the only person that actually knows the reserve is the seller. In setting the reserve price, it has to be equal to or greater than the starting price. In the scenario mentioned above, it is entirely possible that the reserve price was $34,110, and hence the reserve was met. More often, the starting price is lower than the reserve to encourage higher bids.
At the same time, the reserve could have been $60,000 if that would have been fair for the condition of the house. Fairness includes taking into account the lien that would have had to be paid and the surrounding market value of the property. The bottom line is it’s a risk you have to be willing to take.
What Happens When the Reserve is Not Met?
The simple side of things is that if the reserve is not met, then the seller is not obligated to accept any offers. The seller has the opportunity to accept the highest offer, but they are not legally forced to do so.
Instead, the seller is more likely to offer the house in a subsequent auction in hopes of receiving better offers. If this happens again and the reserve is not met, it is possible to continue the cycle for as long as the seller chooses. The alternative is to have the house listed with an agent.
At the same time, if there is a house that has been on the market before in the same situation, the seller may be more willing to accept a lower offer just to be rid of the property. If you come across a house for auction, check the history to see if it has been foreclosed on and how long ago that happened.
If a house was foreclosed on a while back, then there is a good chance that this house has been up for auction before. Like any seller, the longer a house or other property stays on the market, the more likely is that the seller will be willing to accept a lower offer.
Buying Real Estate in an Auction
The process is reasonably straightforward, even if it seems complicated at first. Most sites and auction houses list properties as “as-is” which means that if you bid on one, you’re going to receive the property exactly as it stands. You may not get to see it, so you’re putting your faith in something you’ve never laid eyes on.
That also means you can’t renegotiate on price if you find something afterward like something significantly wrong with the property. It doesn’t matter if you find black mold in the walls because you agreed to buy the house as it stood. That’s what makes it scary and uncertain.
Once you’ve come to terms knowing that you have no control over the final condition of the property, you can start by getting to know the auction process.
Establishing an Account or Presenting Cash
If you’re bidding on a property online, then you’ll need to open an account and have some way to prove that you have your earnest money ready if your offer is accepted. You may require financing before getting to this point, so check with your auction site to see what their policies are regarding financial requirements.
If you’re bidding in an auction at a brick-and-mortar auction house, you’ll need to have your earnest money available right then and there along with the remainder in full. Typically, you’ll go up to a counter and present your funds as proof that you have the finances available should you win the auction.
Understanding How Earnest Money Works
In some cases, they will hold your funds for you as their guarantee that you will not back out of your bid if you were to win. Many auction sites and houses will require you to present your earnest money before being allowed to bid to protect themselves, too.
You may have even read situations where people lose their earnest money at auction sites or auction houses, but that’s generally not entirely true. Earnest money is only lost if someone makes a bid, wins the auction, and then chooses to cancel the offer.
The Short Sale Auction
Short sale auctions are auctions where the bank may not necessarily own the property, but the property might be in foreclosure proceedings. The seller, which is not the bank in this instance, could have already accepted an offer pending the bank’s final approval.
This is where it feels like things get shady. The bank can actually place the home in an auction with the purpose of getting a higher offer. It is entirely legal and allowed as the bank is legally entitled to the highest offer it can get. In short sale auctions, the bank makes the decisions even though it does not yet own the property.
If the bank puts down a reserve price on the auction, but the price is not met, then the previous offer accepted by the seller becomes the selling price. This is markedly different from a normal auction that can be placed on the market repeatedly if the reserve price isn’t met.
Making the Bid and Meeting the Reserve Price
Understanding the difference between bidding on a bank-owned, foreclosed property and a privately-owned property in foreclosure has an impact in how auctions take place, especially where reserves are concerned. It can be the difference in keeping or losing your earnest money if you don’t understand what type of auction you’re participating in and the rules that govern.
Even though sometimes these types of sales seem complicated, it’s an excellent opportunity to purchase homes well below market value, therefore, saving you thousands of dollars. It might take a little more work on your behalf, but if you’re prepared, you could walk away the proud owner of a steal of a home.