7 Things You Need to Know About Competitive Bidding

When buying or selling a commercial or residential property, most buyers and sellers have a preconceived notion as to how the process will unfold. Usually both parties work with a real estate professional, a negotiation process takes place, the listing price often gets whittled down, and ownership transfers after lots of back and forth. But the transaction can unfold entirely differently when buyers and sellers employ competitive bidding.  

In the following sections, we will discuss seven things you ought to know about competitive bidding in real estate transactions, including how it works, competitive bidding examples, types of competitive bidding, and competitive bidding advantages and disadvantages. 

#1: What Is a Competitive Bid?

There’s perhaps no better way to define and describe the importance of competitive bidding than by examining its opposite: negotiated bidding. In negotiated bidding, the seller and usually one buyer are trying to reach an agreement regarding price and terms. This typically will require multiple rounds of communication and results in a lower price than the one originally proposed by the seller. 

Competitive bidding working in an almost entirely opposite manner. Rather than discussion ensuing with a single buyer over a price set by the owner, multiple buyers seek to outdo one another in offering incrementally higher prices through open competitive bidding until only one remains willing to pay the final sum. In short, competitive bidding is exactly what you’d expect to see at a standard English auction. 

#2: How Competitive Bids Work

A traditional real estate auction is often anything but, and many different auctioneering wrinkles can complicate the process. Types include: 

• English auctions or open-cry auctions where multiple bidders raise the price through publicly discernible bids 
• Swedish auctions, which are similar to English auctions, but sellers can decline any bids and buyers aren’t legally bound by their bids 
• Vickery auctions or sealed-bid auctions where bidders raise their price by bidding, but don’t know what others’ bids are 
• Japanese auctions or ascending-clock auctions where prices increase according to set time increments and sellers drop out until only one remains 

Despite their differences, all of these auctions employ competitive bidding. How? Because the potential purchasers all vie with one other as they set the price. No matter the variations involved, competitive bidding strategy and potential complications tend to develop in somewhat predictable ways. Both buyers and sellers should know the following: 

• Bidders may intentionally place a bid price above the next increment in an attempt to reduce the number of bidders. 
• Bidders may signal that they will indefinitely increase their bid in an attempt to reduce the number of bidders. 
• The auction may be simultaneously held in person and online, increasing the total number of bidders. 
• Some auctions may include a non-disclosed reserve (i.e., minimum price). 

#3: The Buyer’s Viewpoint on Competitive Bidding

For a buyer, competitive bidding serves as something of a tightrope act. The buyer wants to act with confidence and give the impression that he or she is prepared to bid far more that other potential prospects. This may lead to actions such as: 

• Dressing extremely well to create an image of wealth 
• Starting off with a relatively high starting bid 
• Quickly counter-bidding 

At the same time that the bidder seeks to project a Scrooge McDuck-like aura of endless coffers of coin, he or she will also want to ensure that the bidding doesn’t pass his or her uppermost limit. That’s why you may see the following:  

• Bidding in increments that don’t end with round numbers in order to slow down the auctioneer and give the bidder time to think 
• Bidding late to take advantage of other bidders’ dwindling enthusiasm  
• Hiring a non-emotional professional to bid  

#4: Seller’s Viewpoint on Competitive Bidding

Sellers have the exact opposite goals when selling a property: They want many emotionally entangled buyers to bid early and often, driving up the price as high as possible. That’s why sellers will rely on a canny auctioneer who knows how to tease out reluctant buyers and set appropriate bidding increments to keep the action moving along. Though sellers play a much more passive role in competitive bidding, they still can take steps to attempt to nudge offers in their preferred direction. We will discuss some of these in the following section. 

#5: The Seller’s Bidding Process

So if sellers don’t actually bid on properties, what can their so-called “bidding” process look like? Well, sellers can take several pre-auction steps that help guide the process. Auctions tend to break down into absolute auctions (the highest bidder wins regardless of the price), minimum published bid auctions (also known as reserve auctions where the property will not sell below a certain, universally known price), and undisclosed reserve auctions (also known as sold subject to owner confirmation auctions where the seller comes to an agreement with the auction house that the property will not sell below a certain price). In addition to selecting the timing of the auction, which can heavily influence the outcome, sellers can choose which of these three arrangements best benefits them. 

#6: The Benefits of Competitive Bidding to the Buyer

If the seller’s goal of open competitive bidding involves getting buyers to ratchet up the price, why would sellers ever agree to it. In truth, while overbidding sometimes happens, buyers enjoy a much higher likelihood of getting a fair-market price for their purchased property since information is easily and abundantly available. Buyers also have the advantage of knowing that the seller truly wants to sell and that the sale will occur promptly. (Most auction purchases close in about 30 days.) Finally, they understand that they’re competing on a level playing field with all other potential purchasers. 

#7: The Benefits of Competitive Bidding to the Seller

Competitive bidding provides substantial advantages to sellers, too. Some of these include: 

• No buyer contingencies, such as financing, inspection, and appraisal contingencies 
• Sellers are automatically prequalified and must provide a substantial deposit prior to bidding 
• Minimizes carrying costs since sales occur far more quickly under competitive bidding 
• Eliminates the need for property showings 
• Allows sellers to determine final sale date with a large degree of certainty 
• Accelerates buyer interest and marketing reach since auctions live or die based on the number of interested parties 
• Increases competition and can lead to above-average sale prices in certain situations 
• Minimizes hassles and inconveniences associated with traditional real estate transactions 

If you’re interested in selling or buying a property using competitive bidding, contact us today here at Millennium Properties by calling (312) 338-3000. We have worked with residential and commercial buyers, sellers, and investors throughout the Chicagoland area since 1994, and we have facilitated transactions involving properties as diverse as distribution centers, office complexes, apartment buildings, and condominiums.