Why do some REO (real estate code for bank owned) properties come on the market at a list price that actually seems too low? In my opinion the seller / broker is trying to move the property quickly by creating a silent auction.
What is a silent auction?
An auction that is conducted by submitting bids in sealed envelopes before the sale.
How does this work with real estate?
The low list price generates a lot of buyer activity. Potential buyers are watching the Internet sites and getting alerts from their Realtors that a new listing is available. In some cases the sign by itself attracts attention, especially if the home is in a popular neighborhood.
As buyers view the property they realize the value (what you get/what you pay) seems to be high relative to other properties currently on the market or recently sold. Frequently, they actually see other buyers in the process of viewing the property. The need to act quickly is clearly understood. If a buyer is going to have a chance of submitting a successful bid they feel the pressure to submit an offer at or above the list price.
What is Highest and Best?
If the gamble pays off there are multiple offers. Now the seller (bank) instructs the broker to go back and solicit Highest and Best offers from everyone who has already submitted a bid and any other potential buyers who may have scheduled a showing. This amounts to a silent auction. Everyone knows there are other buyers in the process and everyone knows more than one offer is already on the table. A deadline is given for submission of the Highest and Best offers which puts pressure on the buyers to act quickly. In order to be successful, a buyer has to put the most attractive offer on the table usually within two business days.
Does the bank always accept the highest $$$ bid?
Not always. There are other factors such as the type and dollar amount financed, the length of time to close the transaction and the number of contingencies required. In actual fact, the seller doesn't have to accept any of the offers or they may pick one and try to negotiate even more favorable terms than were offered.
One additional benefit to the seller is they now have a list of buyers who have indicated more than a casual interest in the property. If the successful bidder backs out for any reason, the broker can immediately go other auction participants and try to get a replacement contract settled. Based on the length of time some REO properties sit on the market and the succession of price reductions they undergo, I am surprised this method isn't used more frequently. Like so many other things, the seller just has to have faith the process will work if correctly applied.