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Selling strategies – How does a reverse auction work?

How does a reverse auction work?

Almost all sales of real estate begin as a reverse auction with the goal of maximizing income and profits. The primary exception is a foreclosure auction sale on the courthouse steps where the goal is to minimize losses.

As the name suggests, a reverse auction refers to a scenario where the roles of the buyer and the seller are reversed. In a normal auction you, the buyer, sets the price and competes within a short time frame to buy at the highest offered price. In a normal auction, highest price and shortest time frame are complementary variables.

In a reverse auction the seller makes offers and waits for buyers to respond. The seller controls the pace driving down the price over a set time frame to attract and sell the property to a buyer. Under reverse auctions, the seller is the bidder, not the buyer, and waits for buyers to respond. In a reverse auction, highest price and shortest time frame are opposing variables.

Buyers and sellers in a reverse auction

Transparency is of the utmost importance when selling real estate. You’ll find that most buyers have participated in very few, if any, property purchases. By being transparent from the beginning, sellers build trust and comfort with buyers, leading to confidence when participating. In a reverse auction, transparency speeds up the process. The more information buyers have regarding the property the more confident they are in making an offer.

In a normal auction, transparency is limited and buyers factor risk into the offer price. The less information a buyer has results in lower selling prices.

Marketing is critical to a successful reverse auction. In a reverse auction sellers are seeking buyers and competing with other sellers for their purchase. The only way to knowingly achieve the highest price is to fully expose the offering to all buyers In the marketplace. In real estate, the MLS and the Internet have made full market exposure possible. For sale by owner offerings are typically limited to a subset of the full market and can’t knowingly achieve the highest selling price.

The price must entice. Sellers have a set time frame of when they wish to complete a transaction. Ideally, there is an optimal starting price in relation to the desired time frame. A reverse auction figures this out for the seller. If you set a price and buyers don’t make offers you have two choices. Either reduce the price, or wait. As the saying goes time cures all problems in real estate. If you can wait long enough inflation will eventually give you any price you desire. But that could be a very long time.

Notice: This website contains general information about possible legal and financial matters. The information is not advice, and should not be treated as such. You must not rely on the information on this website as an alternative to legal or financial advice from your attorney, accountant or other professional legal services provider. If you have any specific questions about any legal and financial matter you should consult your attorney, accountant or other professional legal services provider