Real estate auction terms are usually very similar for all auctions. The terms you will usually see that may be different from private negotiated sales have to do with earnest money, as-is, contingencies, closing date, and consistency. Auction terms are not subject to renegotiation after the fact, so only bidders willing to accept the terms should bid at a real estate auction. Buyers should read the auction contract carefully as a part of their pre-auction due diligence.
Earnest Money
Usually, substantial earnest money is required immediately after the auction. 10% earnest money is what is most typically required, but the earnest money requirement may be as low as 5% of the purchase price and as high as 20% or more. Sometimes the earnest money requirement is fixed at a particular dollar amount, such as a $10,000 cashiers check requirement, regardless of what percent of the sale price this is. Please take note of the required earnest money in the particular listing.
Often, the seller may require a portion of the earnest money to be in cashiers check, which must be presented at the auction in order to obtain a bid card. In some sales, the earnest money requirement may be for a portion payable immediately following the auction, and additional earnest money to be paid with some time period (usually 24 hours) to bring the total earnest money requirement to a particular level.
“As-is”
Another feature of most auction terms is that real estate is almost always sold on an “as-is” basis, with no obligation on the seller to perform any repairs on the property, and without warranting the condition of the property. This clause makes it imperative that the buyer do their homework on the physical property, as any physical issues with the property become the buyer’s responsibility. The auction contract usually contains a damage and destruction clause where the buyer can renegotiate or terminate if the property incurs notable damage between the auction date and the closing date, so it’s a good idea to read that portion of the contract carefully.
Contingencies
There are almost no contingencies in an auction contract. Aside from the damage and destruction clause, the only other contingency of note is seller’s ability to deliver marketable title at closing. In “title” states, this contingency is often addressed before the auction, where sellers can easily obtain a title report whose exclusions become part of the auction contract. In certain eastern US states, where title searching procedures are more antiquated and expensive, the title work is done after the auction, so it is possible that a buyer cannot discover title issues until a week or two after the auction. In those cases, the buyer can exercise the “marketable title “ contingency, is seller is not able to clear up title problems that affect marketability.
Note that auction contracts almost never contain contingencies for such things as financing, post-auction inspections, or buyer’s ability to close in accordance with the cash terms. A buyer’s earnest money is “at risk” from the day of the auction and can be forfeited for nonperformance.
Closing Date
Auction contracts usually specify a fixed closing date, usually 30 days after the auction, and often a particular hard “close by” date. Buyers not closing within the specified time frame are at risk of forfeiting their earnest money. Typically, the only allowable exception to this deadline is in a situation where a title problem has arisen, which the seller’s attorneys are not able to clear by the closing deadline. Most auction contracts have an automatic extension clause which allows the seller additional time to clear title problems when this happens, but there is typically a point at which the earnest money should be refunded, when it becomes clear that the title problem cannot be corrected.
Consistency
The greatest leveler of auctions as opposed to negotiated sales is that the auction contract is the same for all bidders on the property. There are no “preferred” or special terms for one buyer vs other buyers. All buyers are subject to exactly the same auction terms and conditions in the auction contract. This assures that the only variable in auction bidding is the price, rather than other variables such as financing, how quickly someone can close, or whether the buyer wants additional warranties or repairs.
When a seller chooses to auction an asset, they should really be ready to sell it! When a buyer buys at auction, they should really be ready to close it!
