A sealed-bid auction in real estate is one where interested buyers submit their "best and final offers" for a property. These "sealed" offers are then revealed only to the seller, who reviews the bids all at once on the designated date. Let's take a closer look at what a sealed-bid auction looks like.
Sealed-bid auction vs. open bid auction
When one thinks of an auction, you might envision participants shouting bids at an auctioneer, increasing the bids until a final one is made and not outbid. This is known as an open-bid auction, also known as an English auction. It allows for live competition among investors, who can submit multiple increasing bids until one bid reigns supreme. Open-bid auctions are often used for bank- or government-owned properties that are in foreclosure or have been seized for unpaid property taxes, respectively.
A sealed-bid auction, on the other hand, keeps the competition fair in that everyone can submit their final bid for consideration in the same way -- no shouting required. Buyers will often send their sealed bids to the seller through their real estate agent.
When should a seller opt for a sealed-bid auction?
Sellers opt for sealed-bid auctions in an effort to drive up the price when they know there is a good amount of interest in their property. This is their opportunity to earn more of a profit, as some motivated bidders could go higher than the asking price in an effort to outbid the competition. Sealed-bid auctions are used in hot residential and commercial real estate markets when demand exceeds the supply of the property inventory. One might consider it a controlled bidding war — but the prospective buyers are only given the chance to fire a single shot.
If it is an absolute sealed-bid auction, then the seller must accept the highest bid. This is a risky move, as the offers that come in could be below asking price. If it is not an absolute auction, then the seller does not have to accept the highest bid if it does not fulfill their expectations. In this case, the seller may request another round of sealed bids from the top bidders, or even discuss offers with them to negotiate a better price.
What else goes into a sealed bid?
A sealed bid is not only limited to a dollar amount. An offer often comes with other pertinent information about the buyer, including whether there are any contingencies to the sale (i.e., the buyer needs to secure a mortgage first). Again, unless it is an absolute auction, the property owner can review all bids to see which is the sweeter deal -- and that doesn't always equate to the highest bid.
For example, the highest bid might come in from a buyer with a contingency of having to sell their current home first. A seller who wants to move along quickly with the sale might instead look to a lower-priced offer that's all cash for a quicker closing.
Depending on the auction, the potential buyer might be required to present a check for a deposit on the home to make their offer a binding one. This presents a risk for the buyer, as their "best and final offer" must be one that they are willing to commit to should the buyer choose their offer.
The downside of a sealed-bid auction
If a sealed-bid auction goes according to plan, it works out for both the seller as well as the buyer. The seller will have gotten a good price for their property, and the buyer does not have to wait months for the seller to consider properties as they roll in. Buyers are usually given a short time frame to submit their bids -- often within a week but sometimes within 48 hours -- to keep the process moving along.
However, not all sealed-bid auctions end well. The seller might not get offers anywhere near what they want, so they decline all offers and have to start again. On the other hand, if an offer is accepted but the buyer backs out -- again, not all auctions require offers that are legally binding -- the seller can't always expect there to be a waiting list of hopeful buyers. Some who have been outbid might have been disgruntled enough to have moved on to look at other properties. In the end, the seller will have to start the whole process again and hope for better luck this time around.
The bottom line
In hot real estate markets, sellers can opt for a sealed-bid auction in the hopes of getting higher offers on their properties. It can turn out to be a great success with offers above asking price, or it could be a big dud with a buyer who backs out. There's always risk in real estate, of course. But if a property attracts sizable interest from buyers, a sealed-bid auction could be the right strategy for sellers.