That article detailed this subject in regard to property selling, ultimately, to the high bidder.
Such an auction is denoted as a “without reserve” auction, versus an auction denoted as a “with reserve” auction.
That article can be read here: http://mikebrandlyauctioneer.wordpress.com/2010/08/20/so-where-do-you-start-the-bid/
Today, we discuss the same, but in regard to a “with reserve” auction.
First, it is important to note that in a with reserve auction, the reserve can be known or unknown (disclosed or not disclosed.) In other words, Alecia can be selling this Pieter de Hooch painting for no less than $100,000 (known, disclosed) or subject to her approval of the high bid (unknown, not disclosed.)
Secondly, the term “Starting the bid” is generally misunderstood. Auctioneers invite offers (invite bids) rather than offer (bid.) Therefore, by asking where the auctioneer “starts the bid” really means what amount the auctioneer initially suggests to the crowd, and/or the minimum opening bid denoted (such as, “Folks, the opening bid can be no less than …”)
With property selling “with reserve,” the actual reserve (if known) seems to be the material number used to decide how to craft the “staring bid.”
For an item with a reserve of $5,000 … some auctioneers suggest:
- “Start out asking $10,000, and then drop down to asking $5,000. If nobody bids, drop down further … until you get a bid and then hope the bids work up past the $5,000 reserve.”
- “Just tell your crowd the reserve is $5,000 and you’d like an opening bid of just that. Don’t bother playing games, taking bids for less, and then rejecting the high bid when it doesn’t meet or exceed $5,000.”
- “Begin by asking for $1,000 and once someone bids that, continue to take bids, hoping that the final bid is at or in excess of the $5,000 reserve.”
We wrote about “Staring where you want to finish” and the fact that it’s hard to do so:
Generally, bidders bid only what they believe something is worth. If the reserve is reasonable, or less, then it probably doesn’t matter where the auctioneer “starts.” However, if the reserve is unreasonable (or higher) then the auctioneer’s job is to try to convince the crowd that the property is worth more than they probably believe.
One way to convince people of value in an auction is to have bidders bidding. If this aforementioned $5,000 item can be purchased elsewhere for $3,500, then the reserve is unreasonable.
So, if a bidder bids $2,000, another bidder might believe the property is worth $2,100 based upon someone else believing it is worth $2,000. And, another bidder might bid $2,200 thinking that’s a fair price given that someone else thinks it’s worth $2,100 … and so forth.
But, do we get to $5,000 in this fashion? Probably only if the bidders get caught-up in the bidding, and forget that they can purchase this same property for $3,500 elsewhere.
Can that happen? Do bidders get caught-up and bid well past what they can buy the same property for elsewhere? Sure it can, and they sure do — but it doesn’t happen nearly as often as it used to happen.
While bidders can indeed have differing opinions of value of any certain property, the immense amount of information available to bidders via the Internet, coupled with the convenience of handheld devices which can provide that information virtually anywhere … bidders are more informed than ever, and less likely to overpay … than ever.
Of course, not all property has a specific value. Artwork comes to mind — where there may not be any comparable sales whatsoever and/or the artwork is unique. Given low or single “supply,” then the value at auction is strictly driven by “demand” of those bidders, and that result is largely independent of the seller’s opinion (reserve) of value.
Where do you start the bid, with a reserve? The more immaterial the reserve is, the less it matters; but the more material it is, the less it matters as well.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.