A pre-auction agreement, also known as a ”stalking horse” agreement, is a contract between a potential buyer and a seller before the start of an auction. This type of agreement gives the potential buyer the opportunity to set a bid for the property or asset being sold and gives them certain protections in the bidding process.
The purpose of a pre-auction agreement is to establish a minimum bid and reduce the risk for the buyer. The buyer can negotiate specific terms and conditions with the seller, including the purchase price, payment method, and closing date. The seller may provide due diligence materials to the buyer to ensure they have all the necessary information before making an offer.
Once the buyer and seller have agreed upon the terms of the pre-auction agreement, the seller can disclose the agreement to other bidders before the start of the auction. This allows the other bidders to know the minimum bid that the seller is willing to accept, which can encourage more buyers to participate in the auction.
One of the benefits of a pre-auction agreement is that it can help eliminate the uncertainty that comes with an auction. Buyers have the opportunity to set their bid ahead of time and have more control over the bidding process. Additionally, since the auction has a set minimum bid, the seller is more likely to receive fair market value for their property or asset.
However, it`s important to note that pre-auction agreements are not always a guarantee that the buyer will win the auction. Other buyers can still participate and potentially outbid the pre-agreed upon price. Buyers should carefully consider the terms of the agreement before entering into it, as they may be required to provide a deposit or pay a termination fee if they back out of the sale.
In conclusion, pre-auction agreements are an effective way for potential buyers to set a minimum bid and reduce their risk in an auction. They can also benefit sellers by encouraging more buyers to participate in the auction and potentially drive up the sale price. However, as with any legal agreement, it`s important for buyers and sellers to fully understand the terms and implications of a pre-auction agreement before entering into one.