What You Need to Know About House Auctions

The sales method is growing more popular in a turbulent real-estate market.
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If you're looking to buy or sell real estate this year, get ready for a roller-coaster ride.

This kind of buyer's market hasn't been seen in years. Sellers? Well, they just have to hang in there.

A growing method of moving property is the old-fashioned auction -- but it's not what you think. As foreclosures have risen, of course, so have public auctions to sell off distressed homes. But there's also been a rise in conventional buyers and sellers turning to the auction block in order to get a clean, quick deal for both sides.

Real-estate auctions accounted for $16 billion in sales in 2006, the latest year data is available, according to the

National Auctioneers Association

, which represents a 13% increase from 2005. That number is expected to grow over the next few years as more sellers look for creative ways to market their homes, and as buyers become more comfortable doing most of their due diligence online before seeing the property.

Some of those checking out auction homes online include investors from overseas who have seen their euros and yen climb significantly compared with the dollar and would love to have a Manhattan pied a terre or a Palm Beach cottage all their own.

How to Haggle Down a Home Price

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"It's a trend that's going to be around for a long time to come," says Carl Carter of the

Albert Burney Auction Company

, which is based in Gadsden, Ala. "Luxury home sellers are looking to expand their market, and auctions give buyers more options to select from."

While any property can be auctioned, certain types of homes are ideal for the process. For instance, a unique property in an out-of-the-way location may be difficult to appraise. It may be a movie producer's former getaway in Montana with 7,500 square feet and five bedrooms, three baths and a fully equipped screening room -- and the largest nearby property is a 500-square-foot A-frame cabin.

The inability to find a nearby home that's comparable makes it difficult to price on the open market, which is why an auction makes sense.

There are three basic types of property auctions you need to be aware of. Most common is probably the "reserve" auction, in which the seller sets a minimum price for the house, which isn't revealed to the bidders. (If you've purchased Bobby Mercer rookie year baseball cards or any other nonsense on

eBay

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you know how this works.) When you don't hit the seller's minimum, he's free to reject it and offer it up again.

The "absolute" auction is the free market at its finest. The seller has stripped away any reserve and offers the title to the buyer with the best price. Bidders line up like sharks for a no-reserve property auction (hey, just like eBay), but it's rare that you'd pick up a mansion for the price of a Mercedes C class.

More common is heated overbidding, in which potential buyers who've fallen in love with the home just can't bear to let it out of their grasp at the auction. In the middle is the "hybrid" auction, in which there is a reserve, but you as the buyer are told what it is so you can bid above it.

Most auctions have "open house" days that allow potential bidders to check out the property. Serious buyers will also bring along a home inspector to do an extensive overview, since your ability to back out of the deal after the auction is over is generally limited. In many cases, you'll need to register with the auctioneer and bring a certified check for $10,000 or more to show you're not there to pull anyone's chain.

If you win and get cold feet, you're reminded that the deposit is nonrefundable. For this reason, it's critical to know everything about the house beforehand -- including whether you can get an amenable mortgage in today's market.

Auction costs generally favor the seller. He or she pays the upfront costs covering advertising and other marketing, which is often about 1% of the home's value.

Once you win, you're on the hook for the auctioneer's commission, 10% of the sales price.

Still curious?

"Try watching a real-estate auction a couple of times to see how it's run and get a feel for the process," says Carter. "You don't want to go in there with limited information, after all, this is a pretty big investment for anyone."