How does an auction work?


A property can be transferred through a sales agreement, where the seller establishes the price and the buyer engages in negotiations for the most favorable terms. Another method involves property auctions, where interested buyers can submit bids for the property. This article will explore property auctions and their functioning.

Auction: Meaning

An auction is a method of exchanging goods or services through competitive bidding, where items are presented for sale, and the highest bidder acquires them or, in some cases, the lowest bidder sells them. Usually, an auctioneer oversees the proceedings, announcing the prices, and participants bid the maximum amount they are willing to pay for the product or service.

Auctions: How do they work?

Auctions can take the form of open auctions or closed-format auctions. In an open auction, participants gather at a physical location or join online to bid openly. Participants are aware of the competing bids and continue to raise their bids until declared the highest bidder and winner of the auction. In contrast, many business transactions involve closed auctions where interested parties submit sealed bids directly to the seller. The bid amounts remain confidential, known only to the seller, and participants are unaware of others' bids. The seller may opt for a single round of bidding or select multiple bidders for additional auction rounds.

Also Read: 5 Key notes about Property Auctions

Auction: Rules

  • Auctioneer: An auctioneer is the person who conducts an auction sale by announcing the product put up for bidding and calling for bids from prospective buyers.
  • Reserve price: The reserve price refers to the minimum price at which a seller is willing to sell the property. If no bidder meets or exceeds the reserve price, the property remains unsold.
  • Bidding increments: Usually, there are predetermined bidding increments that define how much a bid amount can be increased.
  • Auction closing time: The auction sale should have a specified ending time.
  • Sale completion: In an auction, the seller is required to complete the sale once a bid has been accepted.

Types of Auction Sales

  • Public auctions: In this type of auction, the seller is the government.
  • Private auction: This auction sale is conducted privately if the seller and buyers are known to each other.
  • Live auction: This is an open auction where potential bidders participate live by either physically attending the event or virtually.
  • Advertisement auction: In this auction, the seller publishes a notice in a newspaper or online about the product or item he wants to sell.
  • Sealed bid auction: In this auction, prospective buyers send the bids to the seller in sealed envelopes. The highest bidder is the winner at the end of the bidding process.
  • Sale in lots: It is an auction sale in which the items are sold in lots or batches.
  • First lot auction: In this auction, each lot is sold to the highest bidder at a time during the auction process.
  • Second lot auction: This auction involves batching goods into two parts and offering those as individual lots to prospective buyers interested in buying them.
  • Auction sale of unsold lots: In this auction, the seller offers only those lots that he was unable to sell during the first or second lot auctions to interested bidders.

Properties auctioned by banks

In India, banks have the authority to conduct a real estate foreclosure auction under the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act of 2002. This legislation empowers banks to auction properties that have been repossessed or foreclosed in order to recover financial losses.

The initiation of a bank auction for a property occurs when a borrower fails to make a loan payment. The foreclosure process is triggered when a borrower misses three consecutive EMI payments on a home loan. Subsequently, the borrower is granted a 60-day period to respond to the bank's notification, explaining why the bank should not proceed with the auction due to payment default.

If the borrower makes the necessary payment within this period, the bank withdraws the notification. However, if the payment is not made, the borrower has the option to object within 60 days, providing reasons for the non-payment of EMIs. In the event that the borrower does not respond, or the bank finds the response unsatisfactory, the bank auction process is initiated. Once the 60-day notice period has lapsed, the bank has 30 days to conduct an auction for the property.

Also Read: Benefits and Risks of Buying a Bank Auction Property

Frequently Asked Questions

Ans 1. The different types of auctions include open and closed auctions, private and public auctions, and live auction.

Ans 2. An auction is conducted for the public sale of a property to get the highest financial returns for the owner.

Ans 3. The government may conduct a public auction for the sale of land. The government gives a notification for the same.

Ans 4. Auctions in India are governed by various laws and regulations.

Ans 5. An auctioneer cannot sell an item or property below the reserve price.