How Does an Auction Work?

An auction is a chance for someone selling property -- a Picasso, a race horse, an apartment building -- to find a new buyer. With multiple people competing for the same item, sellers hope the price rises above what a private sale would bring in. For their part, the bidders hope they can pick up something at a bargain price. It's a gamble on both sides.

Gavel
Auctioneers gavel.
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Reason for Auctions

One reason for auctions is speed. If someone wants to sell fast, bringing the potential buyers together with all the items for sale is a good way to do it. If a family has a set date to move or a business plans to close by a given date, auctioning off property may get rid of it profitably before the clock runs out. Foreclosure auctions let a bank or local government sell off real estate fast and get cash in exchange.

The Auction Process

Typically, the auctioneer opens by describing the item for sale and suggesting a starting bid. If nobody bites, the auctioneer lowers the starting bid until she gets a response. Bidders then take turns offering higher and higher bids until someone makes an offer nobody's willing to top. The winning bidder becomes the legal owner, and must settle the bill and collect her property before leaving. A typical auction may involve dozens of different items.

Special Rules

Some sellers, worried about losing money, will set a minimum bid price. If the minimum is $1,000, say, an $800 top bid won't win the item. The price is secret, so nobody knows just how much they have to bid. Some auction houses allow absentee bids, where the bidder sends his offer to the auctioneer in advance. A proxy bidder submits a maximum offer to the auction house in advance. Every time someone else bids, the proxy automatically goes up to top it unless and until the bidding goes above the maximum.

The Auction House

The auction house's take may be as much as a 20 percent commission on the sale price. In return for the money they not only organize the auction, they promote it in advance with advertising and catalog sales. The auction house also vets the buyers, requiring they register and -- in the case of big-ticket items -- show proof they can afford to pay for their items. During the bidding, the auctioneer watches for calls or signs from the audience and keeps track of who has the current high bid.

The Online Auction

Sellers can and do auction off anything from a Babe Ruth card to a house on the Internet. On a typical auction site, such as eBay, the seller posts pictures and information, sets a starting bid price and gives the beginning and ending times for the auction. Unlike a bricks-and-mortar auction, the bidding can stretch to a week or more. The winner sends payment and the seller mails her the item or transfers title. Some online auctions follow different formats. Know the rules before you bid or you may be hit with unexpected costs.