Take a look at the many advertisements for auctions, and you're bound to see the words "absolute" or " reserve" making their way into the text. Even have a conversation about auctions with an auctioneer, and chances are you'll hear the words at some point, too. These two words are part of auction jargon, part of the lexicon of language that surrounds the auction industry.
Auctioneers use the words "absolute" and "reserve" to describe an auction and how it will be conducted. Calling an auction "absolute" or "reserve" tells bidders what the auction rules are, so to speak.
Types of Auctions
Essentially, there are three types of auctions: absolute auction (or auction without reserve); minimum bid auction; and reserve auction (an auction subject to confirmation). Another type of auction is a foreclosure auction. The characteristics of each type of auction are outlined below:
- Property sells to the highest bidder, regardless of the price.
- Since sale is guaranteed, buyer excitement and participation are heightened.
- Generates maximum response from the market place, thereby being the only auction process to ensure attaining true market value.
- Many sellers, including financial institutions and government agencies, have begun to use this method more frequently since an absolute action offers the best performance results of all.
Minimum Bid Auction
- Auctioneer accepts bids at or above a published minimum price. This minimum price is usually stated in the brochure and advertisements.
- Reduces risk for seller if the seller wants a set price or will not sell. The sales price must be above a minimum acceptable level.
- Buyers know they will be able to buy at or above the minimum. The seller may, however, limit interest in the auction to only those buyers willing to pay the minimum bid price, and therefore it must be low enough to act as an inducement rather than a hindrance. It is not only difficult to set this lower figure, but there is a great risk of setting some form of anticipated value by using this figure.
- With a reserve auction, the high bid is reduced, in effect to an offer, not a sale.
- A minimum bid is not published, and the seller reserves the right to accept or reject the highest bid within a specified time --anywhere from immediately following the auction up to 72 hours after the auction concludes.
- Sellers predetermine the price at which the property will be sold and are not obligated to confirm a sale other than at a price that is entirely acceptable to them.
- The main disadvantage of a reserve auction is that prospective buyers usually will not invest the time and expense of due diligence when there is no certainty they will be able to buy the property even if they are the highest bidder. The level of excitement at this type of auction is much lower, and this process affects attaining market value significantly.
- Mortgagor, through a legal procedure, forces the property to be sold thereby removing all existing deeds of trust on the property. This procedure, among other things, requires the sale to be promoted in the legal notices of the local newspaper several times prior to the sale and also requires the sale to take place within a time frame of several hours on a designated day on the courthouse steps. Although this procedure may resemble an auctioneer's method in some ways, it simply can be a legal maneuver to allow the existing mortgagor to reacquire the title of the property.
- An auctioneer's marketing strategy usually is much more detailed because the specific property is marketed throughout the community and other market areas. Advertisements, brochures and auction signs are utilized, along with soliciting as many bidders personally as possible. This marketing strategy entices the entire market place to be at the auction site, not on the courthouse steps, at a specific time, not within the time frame of several hours, to competitively bid among each other, attaining the true market value.
- Any artificial bidding such as a foreclosure by a seller or a mortgagor to protect his/her interest has nothing to do with the true value of the property. Artificial bidding can be a detrimental influence on the bidding of the market place itself, thereby diminishing the odds significantly that the property will sell for true market value. Such practices are not looked upon favorably by the real estate auction industry.
Single Seller/Multiple Property Auction (Portfolio Sale)
This format allows for an offering at a single location and time, or at regional locations at different times, for a single owner offering multiple properties.
Multiple Seller/ Multiple Property Auction
This format allows multiple sellers to pool their properties, creating a larger auction event. For a seller who has flexibility in terms of time, this format provides an economy of scale, allowing inclusion of smaller properties for attractive advertising contributions and brings together buyers for various properties to the same event in a synergistic way.
Sealed Bid Offerings
This format allows bidders to submit bids on pre-approved contract forms and the seller can accept or reject an offer.
Sealed Bid Convertible
This format begins with a sealed bid program to identify the market segments and judge the depth of market. At sufficient market depths, the format may be converted to open outcry formats.