What Is an Absolute Auction?
An absolute auction is a type of auction where the sale is awarded to the highest bidder. Absolute auctions do not have a reserve price, which sets a minimum required bid for the item to be sold.
Foreclosed properties are often sold via an absolute auction; potential buyers can find out from the mortgage holder (often a bank) if the property will be sold at an absolute auction or by a lender confirmation auction.
- Absolute auctions are a popular type of auction, especially for those looking to make a cash sale quickly and without complications.
- A well-advertised absolute auction will usually bring in a large number of bidders.
- Farm equipment and machinery are an example of items that are often sold at an absolute auction.
How an Absolute Auction Works
An absolute auction can occur in various venues, including the foreclosure marketplace, the online marketplace (such as eBay.com), or live auction events. For example, school foundations and charities often hold absolute auctions to raise money.
In this type of auction, the highest bidder "wins" the item, whether it is real estate property or any other type of product. Absolute auctions are often implemented where there is an immediate demand to sell an item.
Absolute Auction vs. a Lender Confirmation Auction
There are many different types of auctions. An absolute auction is the "classic" type of auction where the item is sold to the highest bidder, regardless of the price. Since there is no reserve price or minimum floor above which bidding must start; the bidding starts at $0 in an absolute auction.
One type of absolute auction relates to foreclosed properties, where the winning bid acquires the foreclosed property. For example, if only one person (highly unlikely) shows up to an absolute auction, his or her bid would be accepted, no matter how low the amount of money being bid.
An absolute auction is different from a lender confirmation auction, in which the lender must approve the bid in order to complete the transaction. In real estate, if a foreclosure is sold at a lender confirmation auction, the highest bidder does not necessarily win. The individual with the winning bid must not only have the money to spend but must be vetted and accepted by whoever is holding the mortgage, be it a bank or a government property.
Example of an Absolute Auction
For example, Bert and Ernie have decided to close their farm equipment business. They want to immediately liquidate all of the items in the business and do not have a minimum price they are trying to get for any of the items. They hold a live auction in which the bidding starts at $0 for the items and the highest bidder wins the item. This is an example of an absolute auction.
This is different from a sealed bid auction, in which people would submit secret bids or a dutch auction, with the auctioneer starting at a high price and decreasing it until somebody agrees to buy the item for that price.