Want to know the true market value of a property? Buy it at auction. A real estate auction is conducted in an open forum where all bids are known. This open competition allows values to ascend to the level determined by the market, levels that are neither inflated nor deflated. This makes for smart investment decisions for the real estate investor.

In a traditional real estate transaction, an appraisal is merely an informed opinion about what the property is worth. The real measure of a property’s value, at any given time, is what it will bring under competitive bidding from informed and motivated buyers.

The National Association of Realtors believes that one in three properties will be sold utilizing the auction method by 2008. Aristotle and Janelle Karas of Pacific Auction Exchange (PAX), Auction-Options, LLC believe they are on the cusp of helping to actualize that prediction.

The Karas’ have 22 years of combined real estate experience and have been working exclusively in the auction industry for the past four years and have had tremendous success. Aristotle is the managing broker and holds real estate licenses in Colorado, New Mexico and Hawaii, although they can hold an auction just about anywhere. In addition both are active members of the National Auctioneers Association and Janelle is on the Board of directors for the Colorado Auctioneers Association.

“There could be any number of reasons why a seller chooses the auction method,” Janelle says. “They just want to sell their property quickly to get out of paying two mortgages, or they have had the listing on the market for a while. Perhaps they have a very unique home or maybe it is a changing market and they are just ready to move on.”

So when is the best time for an investor to buy at auction? During a changing market: one that is shifting from a sellers market to a buyers market or a buyers market to a sellers market. Another good time is during a dull market where there might be too much product available but buyers are still interested. If you want to purchase a unique or rare property on a lakefront, a beach or in a popular mountain community, then auction is a great option. Another great opportunity for buying at auction is in an emerging market—new developments—commercial and residential. Developer pre-sales. And of course in a sellers market where there is known high demand a lot of competition from buyers.

Most auctions today do not result from foreclosure or distress situations. They are not “fire sales.” Today’s real estate auctions are the result of a seller choosing a cost-effective, accelerated method to sell a property. Builders and financial institutions and developers prefer auction rather than laboring for months or years to sell units one by one. Auction allows the seller to eliminate long-term carrying costs

Types of Auctions:

An absolute auction is an auction without reserve. In an absolute auction the property is sold to the highest bidder, regardless of price. A sale is guaranteed and no specific price has to be met. This type of auction generates the most response from the marketplace. Financial institutions and government agencies are beginning to use this method more frequently for selling property.

A minimum bid auction is one in which the auctioneer will accept bids at or above a published minimum price. The minimum price is always published and will be announced at the auction. At a minimum bid auction you know the bottom line going in and often a minimum bid auction has fewer interested prospective buyers to compete with for the winning bid.

A reserve auction is an auction subject to confirmation. In this scenario the high bid is an offer and not a sale. The minimum bid is not published and the seller reserves the right to accept or reject the highest bid within a specified time (up to 72 hours after the auction concludes). Because the highest bid does not guarantee a sale, buyers often don’t invest the time and money necessary to complete due diligence on the property if they are the buyer.

Auction basics:

At an auction a property is usually sold “as is-where is” without warranty or guarantee of any kind other than clear title. When buying at auction it is imperative the prospective buyers complete their due diligence in advance of the auction. To help you with this, the auction company typically prepares detailed information packages and inspection reports to assist all buyers.

The process is effective for the Auction-Option team, who boasts a 98 percent closing ratio for their auction-bought properties. “When going into the auction we know that the people in attendance are not only ready and willing, but they are able to make the transaction happen,” Janelle Karas says.

And as a buyer, you know the seller is fully committed to selling their property at a price you determine. There is no long negotiation period. No offers and counter offers. Purchasing and closing dates are known simplifying the investment process.

HOW CAN FAVORABLE FINANCING BE RECEIVED?

An auction-bought property typically closes within 30 days of the sale. The sale contains no contingencies and is settled the day of the auction typically with a 10 percent, non-refundable down payment.

Auction preparation:

In order to participate in a real estate auction, a buyer must register and provide evidence of their ability to bid by showing a cashier’s check, certified funds or money order for the required deposit as well as personal identification. The auction house provides specific instructions in the Property Information Package.

Before bidding, do your homework. Complete a thorough analysis of the property and the general area in which it is located. Personally inspect the property. Talk to tenants or neighboring property owners. Check the property records. Find out what is included in the sale. Obtain a pre-approved mortgage or line of credit. Review all auction documents—know exactly what you are bidding on and under what terms and conditions. Obtain professional advice from an attorney, auctioneer, real estate broker or appraiser.

If you are the high bidder, the earnest money deposit is generally non-refundable, unless the seller cannot close because of a defective title.

It is a good idea to attend a real estate auction to observe how they work before jumping into the bidding arena. A few weeks before the auction, an auction company will host an open house. During this open house prospective bidders are encouraged to ask questions and become familiar with all aspects of the property. A good auction company will hold a bidder’s seminar, when appropriate, to help educate buyers.

When attending auctions, look for sales contracts available for bidder’s to review. The registration process should be easy. The staff of the auction company should be knowledgeable and enthusiastic. Financial and prequalification services are often available to bidders on site. The materials used to conduct and document the proceedings should be of high quality.

Buyers typically pay a premium of 10 percent added to the high bid to create the contract price. This premium is the auction company’s commission on the sale.

Real Estate auctions are a smart way to invest in real estate. There is little waiting, once you are determined the high bidder you are guaranteed a clear title. You come to the auction with funds and walk away with a new investment.

Leanne Goebel (lgoebel@centurytel.net) is a freelance writer in Pagosa Springs, Colo. For more on real estate auctions and Aristotle and Janelle Karas visit their website at http://www.auction-works.com