Confused? Angry? Learn what the difference is between Absolute and Reserve Auction?

Let’s face it.  An Auction is NOT an estate sale. PERIOD.  We have written about what an estate sale is versus an auction, and there are many who still get it confused.

What is Market Value and Why is it important?

So, let’s start with the basics.  The Market and market value.   The Early definition of what a Market Value was brought forward in the courts of Sacramento Southern Railroad v. Heilbron in 1909.  The courts stated:  “Market value . . is . . the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all of the uses and purposes to which it was adapted and for which it is capable”

Now there are different value standards for different types of property.   Mortgage Lending, Eminent Domain, Real Property, Marital Dissolution, Property Taxation, Estate Tax, Casulaty Loss, Federal Land Acquisitions, Personal Chattels, and comes with different assumptions about the market.

Location, what is able to be turned over for a profit.  Fair market value is the price for which a property will sell on the open market between a willing buyer and a willing seller, neither being forced to buy or sell as of a specific date. Since auctions are the purest form of free enterprise, where the laws of supply and demand prevail, fair market value is the price that a property will fetch at a well-advertised auction. Other factors that come into consideration are location, age, condition, quality, size and desirability.  Nor can the buyer be compelled to buy at an inflated or a value that is not based on the willingness of the buyer.

In no so many words, the buyer derives the price of a particular item, and not the seller.

Why is this important?   Well, there are some folks who believe that a reserve price is something that a person should be compelled to buy at, and that is not the role of the auctioneer, because now – you are asking the auctioneer to force a sale, which is not conducive to rational or legal standings.

So let’s talk about the kinds of auctions you can have.

Absolute Auctions

There are many different types of auctions. A sealed bid auction, for example, is an auction in which people submit secret bids, while in a Dutch auction, the auctioneer starts at a high price and decreases it until somebody agrees to buy the item for that price.

An absolute auction is the “classic” type of auction where the item—whether real estate or any other type of produce—is sold to the highest bidder, regardless of the price.

Let’s review that statement.   An Absolute Auction… is where an item is sold to the highest bidder regardless of the price.

Since there is no reserve price or minimum floor above which bidding must start, the bidding in an absolute auction starts at $0.

Absolute auctions can occur in various venues, including the foreclosure marketplace, the online marketplace (such as eBay.com), or live auction events. School foundations and charities, for example, often hold absolute auctions to raise money.

Absolute auctions are often implemented where there is an immediate demand to sell an item.

Example of an Absolute Auction

Bert and Ernie have decided to close their farm equipment business, sell their home, and move to different parts of the states.  They want to immediately liquidate all of the items in the business and do not have a minimum price they are trying to get for any of the items. They hold a live auction in which the bidding starts at $0 for the items and the highest bidder for each piece of equipment wins it. This is an example of an absolute auction.

Sellers become afraid of Absolute Auctions

Some Sellers are afraid of Absolute Auctions because they fear the property will sell for a ridiculously low price. However, Absolute Auctions bring out the most bidders and therefore the highest prices. Property will usually bring what it is worth on the Auction Date at Absolute Auction if the Auction is well advertised and well conducted by the Auctioneer.

Experienced Auctioneers generally have a feel for what a property may bring at Auction. Sellers should always ask the Auctioneer’s honest opinion as to how much the property should bring at Auction. “Should Bring” doesn’t mean “Will Bring.” Since no one knows the future, no one can guarantee how much a property will bring at auction.  And you should never, ever hold anyone to a “Should bring” or “You may have…” or “My best guess…” because it is wrong 100% of the time.

Reserve Auctions

There is some confusion that a reserve is a price in which a buyer is compelled to buy something for the price the seller sets.   That is not the truth and unfortunately too many arguments have been fought over about a reserve price.   Let’s look at a reserve price and why many auctioneers will not spend the time or the effort in marketing items with a reserve or they have a “Buy Back Fee” to cover expenses.

An auction reserve is the minimum price the seller is willing to accept for an item. In this type of auction, the seller is only obligated to sell the item if the bid amount meets or exceeds his or her reserve price.  If it does not sell at or above the reserve price, then the seller is responsible for that items next steps, not the auctioneer.  While the reserve price protects the owner of the item from having to part with it for less money than he or she wants to, we have found for ALL personal property, none of it sells.     

So let’s reiterate:  This is an auction where the final bid for an item can be rejected by the seller if it is not high enough to satisfy them. They may set a particular fixed reserve, or they may alter the reserve over the course of the auction in response to the bids placed. Bidders are often unaware of the reserve price, and are not required to be told what the minimums are. If the final bid does not reach the reserve price, the property remains unsold.

Let me say this again:  If the final bid does not reach the reserve price, the property remains unsold.

When it doesn’t sell – what will the auctioneer do?

One more time for clarity: If the final bid does not reach the reserve price, the property remains unsold.

You probably hear sarcasm in there somewhere – you are right. We have had our share of people who think that a reserve should sell for what they set, and if people don’t bid up to the reserve, they should be forced to pay that price.

Sometimes the seller leaves it up to the auctioneer as to what to do with the items if it doesn’t sell.   Well, after the price for moving the item, and cost of marketing, and much of the other expenses, the buy back fee (normally anywhere from 2-5%) covers some of those expenses.  That which is not covered by the fee is the responsibility of the seller. 

We only have two options.   Donate it (if they accept it) or Dump it. 

But we will not hold on to it unless you pay a monthly rental fee.  Our fee is $110 per month to rent space to hold it.

So – let’s see an example of an auction with a reserve:   A seller is selling a vehicle at auction. He sets a reserve price of $6,000. The auctioneer opens the bidding at $4,000 and bidders work their way up until the price is $5,900.

Nobody wants to bid more than $5,900 for the vehicle.

The auctioneer passes on the sale of the vehicle from the auction because the reserve price has not been met.  The seller wants the auctioneer to compel the last bidder to buy the car at the reserve, which the buyer has already said “No.”   Auctioneers are not folks who strong arm buyers to buy at a preconceived reserve.

It now falls on the seller to figure out what to do with the vehicle, as contractually, the auctioneer has done everything in their power to sell it.

Don’t blame the auctioneer for it not selling, we are doing what YOU tell us to do. If it don’t sell – you alienate potential buyers and that hurts the next person down the line.

If you’re a seller who wants to set an auction reserve price, make sure you talk to the auctioneer about it before you make a decision.  The auctioneers may not accept the items that you have in a reserve format at all – the reason is that they understand the market, and you may have sentimental value attached to the item.  

The auctioneer does not sell sentimental value because it is an attachment to the property – they only see it as stuff.  You could alienate potential buyers who are looking for a bargain – and your item may not sell. The auction house you’re working with can give you specific guidance.

What is Ample Marketing?

Marketing refers to activities a company undertakes to promote the buying or selling of a product or service. Marketing includes advertising, selling, and delivering products to consumers or other businesses. Some marketing is done by affiliates on behalf of a company.

For any auction it takes 30-45 days of marketing in order to allow the word to get to everyone.  Any less than that, your values and your frustrations will peg the needle, and it has nothing to do with the actions, but it has to do with time.  At the end, you will wind up with less than what you want, and still have to pay for the expenses.

We have found newspaper marketing to be entirely ineffective in today’s world (in 2013 we spent over $100,000 and generated less than 3,000 measured visits to our website). However, it still has a place in marketing, as a multiple week campaign.  Anything less than 30 days just won’t help you get where you want to be in your sale. These ads will be small and drive traffic to our website. Approximate cost for those is $2,500 and will require an up-front payment before the ad is created.

If the auction is going to bring enough bidders because of the quality of the merchandise (industrial and commercial properties and equipment) we will do Direct Mail, List it into LoopNet, and flyers to other like companies and investors.

For Personal Property, we will put it on Social Media, GotoAuction.com, and syndication across the nation for free, and for higher quality personal property sales, we will place it on AuctionZip, Paid Facebook Advertisements, Websites.   We have a marketing budget that we review with you on your initial consultation.

Does Ample Marketing mean dragging people from the street and forcing them to buy?  Absolutely not.  That is undue influence in the purchase, and no only does it make any and all contracts void between the sellers and buyers.

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