Mighty Bargain Hunter

Why absolute real estate auctions are big deals

May 15th, 2008 | by mbhunter |

On the way home from town this past weekend, we passed a farm that was going to be sold at auction. My wife saw that the sale was an absolute auction. She asked me what was so great about an absolute auction. When she said that, my ears perked up.

An absolute auction implies that a sale will occur as long as at least one person bids any amount on the item for sale. So if I were the only person to show up for that auction and I bid a dollar, I’d get the whole farm for a dollar. Neither the seller nor the auctioneer could rescind their offer.

Auctions, unless otherwise specified, may have a reserve price, meaning that the auctioneer can refuse to sell an item if the bid price isn’t high enough. Sometimes the auctioneer will state that a particular item has a reserve, but they don’t have to do this.

If the auctioneer has advertised the sale as an absolute auction, though, his hands are tied. He cannot refuse any bids. Now the flip side is that an absolute auction is likely to draw more bidders than an auction that isn’t absolute (that is, one that can have a reserve price), because the bidders know that they won’t be wasting their time by going to an absolute auction. (Basically, I’m not going to be able to get the farm for a dollar. Someone else will outbid me.)

I don’t know what the reason for the sale of the farm is, but the seller is taking a risk by selling it at absolute auction. The farm could go for peanuts. But the seller may not have a choice. There are some reports of foreclosure auctions failing to get any bids because the minimum bid, or else the reserve, is too high. The fact that the seller is giving up the right to refuse low bids is a really big deal.

I suspect that as this housing crisis wears on there will be more absolute auctions: sellers getting whatever they can.