This question has been posed to me many times usually by a real estate agent or broker. And now that auctions are becoming a much more popular way to sell real estate, I am beginning to see some “auctioneers” publish their reserve selling prices. If they do it’s a pretty good tip off that this is someone new to the auction business or they don’t use auctioneers but sell through a seal bid auction format or they are a real estate broker getting into the auction business. The reason being is that Realtors have a very difficult time working with out a list price. If they have been in the brokerage business for any amount of time at all, a “list price” becomes part of their DNA. For many Realtors, selling a property without a disclosed “list price” is like walking a tie rope without a net. For example a group of ReMax real estate brokers file suite with an auction company in Southern CA for fraud because they did not advertise the reserve selling prices of the properties they were auctioning. When their clients high bid was rejected by the seller and the reserve was revealed the ReMax agents accused the auction company of a bait and switch scheme. They evidentially did not hire an attorney with much auction experience however, it would have been a very simple matter for their attorney to consult the US Universal Commercial Code ( UCC - the law governing all auctions) to realize that the auction company and their sellers were within their right to accept, reject or counter the high bid if it did not meet the seller’s reserve selling price. A reserve selling price may or may not be made public, there are no laws requiring it to be made public. Another part of the UCC that buyers should be aware of, but may not, is the difference between an absolute auction and one with reserve. Absolute auction means the property will absolutely sell to the highest bidder regardless of the high bid price. Also the term Absolute auction or auction without reserve must appear somewhere in the advertisement for it to be an absolute auction. If the advertising does not contain one of those phrases the auction is assumed to be with reserve. Nowhere in the advertisement must the auctioneer advertise the auction as a reserve auction in order for the property to be sold with reserve - disclosed or otherwise. So if you do not see “Absolute Auction” in the ads then the property will sell with reserve.
Why don’t most auctioneers advertise the reserve selling price (some may use the term minimum bid, but it does not mean the same thing)? Please bare with me I will get to the answer but you need some preliminary information to better understand the auctioneer’s perspective. It’s not because we are trying to deceive buyers or to pull some bait and switch a roo. It has more to do with two things, 1) the nature of the auction selling system and 2) the nature of all real estate sellers. First, a closed system as opposed to a traditional or open ended sales method. In a traditional listing the seller posts a list price and waits and waits and prays and pesters the broker about when their property will sell. Brokers can’t answer that question because there’s is an open ended system and the broker doesn’t really know when the property will sell. In an auction sale, we have a time certain date of sale - auction day. What I mean by that is we gather all potential buyers together, on a particular date, to offer the property for sale. We use a dynamic pricing system (competitive bids) as opposed to a static pricing system (list price) to determine the sales price. In an absolute sale the high bid is the final selling price, in a reserve sale the high bid becomes an offer to buy. Research has proven the greater the number of qualified bidders in attendance at a particular auction directly correlates to the high bid. The higher the number of bidders the higher the final bid. Therefore it behooves me as an auctioneer to solicit as many “qualified” bidders as possible. If I advertise the reserve selling price of say a condo I’m about to auction for $795,000 and you are interested in that condo but the most you would pay is $750,000 you as a potential buyer would not even attend the auction, and I have one less qualified bidder. Also part of my job as a professional auctioneer is to convince you to bid more than you had originally plan to bid (not through deception, but by demonstrating value in the offering). Now you are saying, “that’s all very good and well Marty but the seller said he would not take less than $795,000”! And that leads me to the next part of the equation, the seller. Have you ever known a seller to change their mind regarding a selling price? Maybe the majority of the real estate brokers out there have never had a client change their mind but I have. Its not that big a deal for the traditional sales method but for my closed auction system its disastrous. And believe me I’ve had to learn this the hard way. The buyer tells me 6 weeks prior to the auction when we’ve listing his auction that he won’t take a penny less than $795,000 so we advertise the reserve selling price of $795,000. For the next 6 weeks we give the seller feedback from our marketing efforts every week. He now realizes there are problems with his property that he can no longer overlook or deny exists. Auction day arrives we have 15 registered, qualified bidders the auctioneer opens the bidding at $795,000 and no one bids. The auctioneer closes the bidding or “no sales” the property and moves on to the next offering, at which time the bidders file out of the condo and head for home. About thirty minutes after the auction ( you’re way ahead of me) the seller comes up to the auctioneer and says, “I’ve changed my mind, I would be willing to take less !!!” Or we're selling a hotel in Texas and we set, what appears to be a reasonable reserve selling price of $5.1M and publish that number. Day of auction we have no registered bidders, because all interested bidders believe the most the property is worth is this market is $4.5M. Well I wouldn't attend the auction either if I knew the seller wouldn't take less than $4.5M. But of course, now the seller has re-assessed his reserve and would take less. Great really helpful at this point in time. Because the current market is so soft and most properties are way overprice, trying to identify a reserve to publish is like shoot fish in a barrel. A simple reserve selling price will achieve the best results for everyone in the long run.
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