Sealed-Bid Auction Definition, How It Works in Real Estate Sales

What Is a Sealed-Bid Auction

A sealed-bid auction is a type of auction process in which all bidders simultaneously submit sealed bids to the auctioneer so that no bidder knows how much the other auction participants have bid. Sealed bid refers to a written bid placed in a sealed envelope. The sealed bid is not opened until the stated date, at which time all bids are opened together. The highest bidder is usually declared the winner of the bidding process.

Key Takeaways

  • A sealed-bid auction is a type of auction in which bids are not viewed until the auction date.
  • The bids are sealed, often physically in an envelope, and are all opened at once.
  • Sealed-bid auctions are generally used in bidding for government contracts.
  • Unlike an open bid, where buyers can make multiple bids and compete against each other actively, in a sealed-bid auction, they only get once chance.

Understanding Sealed-Bid Auction

In a sealed-bid auction, bidders can only submit one sealed bid and therefore cannot adjust their bids based on competing bids. This sets it apart from the more common English auction, also known as the open ascending price auction, where participants can make multiple bids and bid against each other. A sealed-bid auction process may also not be as transparent as an English auction. The seller retains a tremendous amount of control in a sealed-bid auction because they can see how each bidder values the property up for sale. Sealed-bid auctions are generally used in bidding for government contracts.

Ways Sealed-Bid Auctions Can Be Used for Real Estate Sales

The sale of real estate may sometimes be conducted through sealed-bid auctions. The process for conducting such an auction can include public advertisements showing that the property is up for bid and what the deadline and parameters are for submitting bids.

For such real estate auctions, a variety of considerations can come into play. The property should have enough demand to attract a broad field of bidders to increase the potential for a higher return. A small pool of bidders might still present worthwhile offers, but the options are also limited in such an instance.

From a certain perspective, it can be counterproductive for the seller to release such information as the assessed valuation of a property. The concern is that bidders would use that information to limit the value of their bids. Furthermore, posting a minimum bid amount might set expectations on the part of the bidders for how large their bids should be. Bidders naturally are concerned about overspending to win an auction. In a sealed-bid auction, there is an understanding that each bidder shares in that risk.

There can be instances where the highest bid is not chosen by the seller. This may occur if the offers do not meet the seller’s needs and expectations. The seller could reject the current bids and then ask for final bids from the two bidders who made the highest offers. The seller might also opt to end the auction and discuss terms with some of the bidders. Such an option may be put into play if the seller believes a more open approach can net better results.

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