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Types of Auctions

First is the absolute auction or auction without reservation. In this type of auction the seller is legally required to sell the property at the auction regardless of the final high bid price. The main advantage of an absolute auction is that it generates maximum response from the marketplace. Since a sale is guaranteed regardless of the price, buyer excitement and participation are heightened. As a result the price of the real estate can be maximized. That's the paradox with auctions: The lure of low prices, or possible low prices creates the likelihood of high prices. The main disadvantage is the real estate is sold irrespective of the owner's price requirements.

Second is the minimum bid auction. Here, the owners must sell at or above a stated minimum bid. The chief advantage of this type auction is that it creates the safety net the sellers lack in the absolute auction. However, it may limit interest in the auction only to those buyers who are willing to pay the minimum bid price making it difficult to generate the proper excitement level for higher bids.

Third is the auction with reservation. The seller reserves the right to reject the final high bid price. The chief advantage of this type auction is the seller isn't obligated to accept a price that's entirely unacceptable. But, many prospective buyers don't want to invest the time and expense investigating property when they have no certainty they'll get the property even if they're the high bidder.

Security of Auctions

Failure to close can happen, but it isn't frequent. If the failure to close occurs, a seller may be in a better position than someone facing a collapsed close with the private negotiated method. The auction seller can turn to the next highest bidders, who demonstrated their willingness to pay nearly as much as the buyer who failed to close.