What is a Buyer's Premium?

What is a Buyer's Premium?

Buyer's Premium?  A unique opportunity an auction for real estate provides is the ability to use a buyer's premium, which offsets some or all of the seller's auction transaction costs. The buyer's premium is an additional amount that is added to the high bid price to determine the total contract price the buyer will pay to the seller at closing. The agreement between seller and broker/auctioneer provides the particular percentage of the buyer's premium that is paid to the broker/auctioneer by the seller at the close of escrow.


In an active and aggressive bidding environment, the buyer's premium is perceived by bidders almost as a sales tax and can lead to higher net proceeds for the seller. Specified buyer's premium can range from 3 percent to 10 percent of the bid price and is an accepted part of the process throughout the auction industry.

The buyer's premium allows the seller to increase the gross sales price and is a way for the seller to transfer transaction costs onto the buyer. When implemented properly, the seller's total effective transaction costs (marketing expenses plus commission) can be less than that of a traditional brokerage sale.

Wouldn't you rather take home more of the transaction, rather than less?

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

Seller's Expense for Real Estate Auction

The Seller's Cost of a Real Estate Auction

There are some differences in seller costs in an auction program versus traditional marketing. With an auction sale, a normal six- to 18-month marketing program is compressed into six to eight weeks or less. To accomplish this, an intense marketing and public relations campaign is required to present the property to all potential buyers, get them to on-site inspections, and eventually have them attend the auction event to bid.

These high-profile marketing expenses are a seller's cost and often are paid to the broker/auctioneer in advance of the actual auction date. These costs can range between 0.5 percent and 1.5 percent of the property's value.
In addition to marketing, a few other fees may be part of seller's expenses. Most often, a title search or a preliminary commitment to title insurance is prepared by an abstract company. This is usually in the range of a few hundred dollars, and very often is returned to the seller at settlement if the title insurance is placed by the buyer with the same company. In addition, it has become more common for the auctioneer to recommend that sellers obtain a pre-auction mechanical inspection report of the subject property for distribution to prospects as part of the property information package. This is a great sales tool for properties that are in very good condition costing in many instances less than $500.00.

This recommendation is determined on a property by property basis at the auctioneer's discretion. If a property is in obvious disrepair, an inspection report may not be beneficial to the outcome. In this case, pre auction inspections are encouraged at the buyer's expense. In either case, the auction sales contract remains non-contingent.

For a large property or portfolio, a stand-alone auction for a specific seller is structured with the marketing costs paid by that seller. Alternatively, a number of sellers with small properties can be combined into multi-property, multi-owner auctions where all sellers share the required marketing expenses.

When one considers that the auctioneer's commission is generally paid via a buyer's premium, the seller of real estate at auction has a much lower exposure to commission expenses, carrying costs and contingency risks.

Omar P. Bounds III A.A.R.E., C.E.S.,G.P.P.A.
The Bounds Auction Company