12 Things You Need to Know About Deposit Funds at Auction

When you are participating in a real estate auction as a seller or buyer, the purpose of a bid deposit is to ensure that only serious bidders will compete for the property. Most notably for players new to the auction game, understanding the requirements of – and protections afforded by – deposit funds isn’t always easy. To help minimize confusion as a potential investor, here are a dozen things you need to know before committing your hard-earned bucks to a deposit at auction.  

Things You Need to Know About Deposit Funds at Auction

As the seller, any real estate auction without a deposit is not a good idea. That said, here are some additional deposit-related facts that all auction participants need to know:

What do you need to do before an auction?

When you’re a potential bidder who’s preparing for auction, it’s essential to understand all aspects of the sales process – including the deposit. In addition, you’ll need to research the local market while focusing on similar properties that have sold within the last few months. And finally, be sure to find out the amount of the bid deposit and let the auction house or agent know that you intend to participate.

Should auctioneers and agents discuss deposit funds prior to the auction?

To ensure that the sale goes through once the gavel falls, the auctioneer should speak beforehand to all agents involved – notably those representing potential buyers. The primary purpose of those conversations is to determine who will be signing the contract on behalf of the buyer, along with how the buyer will be paying their bid deposit.

As an agent, it’s essential to sit down early in the process with your qualifying buyer and prepare them for auction by discussing purchase contract specifics, including the deposit amount.  

How do you pay deposit at auction?

Although the deposit at auction is usually paid with a money order, check, debit card, or credit card, ask the agent about any other payment options before the auction date.

How much deposit do I need to pay at an auction?

To qualify as a bidder in a traditional property auction, you must pay a “good faith” deposit equal to 10% of the sale price during the specified auction registration period.

Can you pay more than 10% on a contract?

A higher or lower deposit amount can be negotiated with the auctioneer if you can show proof that you have enough cash on hand or that a bank guarantee has been arranged. Unless you are feeling overly confident about your chances, paying more than the required deposit amount isn’t usually necessary.

On the flip side, a seller may request a deposit amount over 10%. If so, that higher figure must be clearly included in the auction preamble. The downside for a property owner when requiring potential bidders to pay more is that some may balk at the idea and walk away.

What is earnest money in auction?

“Earnest money” is just another common term used to describe a bid deposit at auction.

Are auction deposits refundable?

If you are the winning bidder, your bid deposit is non-refundable and is instead placed into the closing agent’s escrow account. Any deposit-related funds are then deducted from the total purchase price (bid amount plus buyer’s premium). If you bid on a property and lose, your money is usually refunded.

However, in certain auction scenarios – for example, a bank-owned foreclosure property – your deposit may not be refundable. Be sure to clarify the deposit terms with the agent or auctioneer prior to the auction date to avoid any surprises.  

What are reduced deposit clauses?

A property owner reserves the right to ask for earnest money deposits less than 10%, for example, 5%. However, any seller who accepts a smaller deposit needs to stipulate in the purchase contract when the winning bidder’s remaining balance is due. This section of the purchase contract is legally referred to as the “Reduced Deposit Clause.”

What do you do if the buyer does not have a deposit?

If this happens, you as the seller should notify the brokerage firm immediately. Additionally, let the person who submitted the second-highest bid know that you are now ready to sell the property to someone else. Unfortunately, this may lead to a negotiation battle between you and the next highest bidder, during which time they may decide to lower their initial bid.

Post-Auction Factors You Should Be Aware of

Once the hammer drops and the winning bidder is declared, they are required to pay the deposit, sign a Sale Memorandum, and verify that funds are available to complete the purchase before the closing date (typically 30 to 45 days after the auction).

Under the terms of the contract, the buyer may also incur additional charges, or disbursements, such as legal fees, documentation costs, charges resulting from searches, supplements, inspections, etc. Those disbursements become payable upon completion of the purchase agreement.

How long does it take to get money after auction?

Although the timeline varies, as the seller you can usually expect to receive fair market value for your commercial property within 30 to 45 days of the contract’s execution date.

What happens if finance falls through after auction?

Although only about 1% of property auction sales fall through, it can happen. For example, the winning buyer could fail to come up with the financing necessary to compete the transaction because their bank decided that the property wasn’t worth as much as it sold for.

In other cases, the winning bidder may simply change their mind and choose to walk away. Because auction sales are legally binding once a winning bid has been accepted, the buyer automatically relinquishes their deposit to the seller. Additionally, the seller reserves the right to take further legal action against the winning bidder to cover issues like property depreciation or damages.

What does sold post-auction mean?

Some auctioned properties come with an undisclosed “reserve” amount, which refers to the minimum price that the owner will accept. Also referred to as “buying after auction,” if an auctioned property fails to meet its reserve it is then classified as unsold and may then be resold to another interested buyer.

The main benefit of purchasing unsold property post-auction is that the auctioneer will usually reveal the reserve price to potential buyers and their representatives.

Due Diligence Is the Key When Auctioning a Property

As a commercial property owner, it pays to be organized and informed when considering selling your investment at auction. As part of our extensive Brokerage Services portfolio, Millennium Properties R/E proudly offers live and sealed bid auction services for commercial property owners throughout Chicago. Our experienced team uses both live and sealed-bid auctions to sell all manner of properties.

We thoughtfully market and promote your auction property through a combination of digital ads, eblasts, social media posts, and other digital tools to show off your property and generate interest from investors and buyers alike. Contact Millennium Properties today to learn more about the auction process or submit your property for an upcoming auction.