The issue with secret reserves

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girl-1076998_1920Some auctioneers use secret reserves without hesitation and with some success. Other auctioneers call this technique “playing games” and “unethical” and always publish any reserve amounts, or sell without any reserves.

What is a secret reserve? It’s the number the seller believes he or she needs in order to sell the property — and that number is kept from the bidders until the auction is essentially over.

A seller owns a beach house along Lake Erie, Ohio. It has been in her family for over 70 years. She is in California, and is selling it as she doesn’t have the time to take care of it properly.

This seller hires an auctioneer to sell it “with reserve” and she will reserve the right to accept or reject the high bid at the auction to be held on September 5. She has a number in mind and has discussed it with her auctioneer, but doesn’t want nor has she authorized that number to be disclosed otherwise.

As the auction date grows closer, prospective bidders are inquiring; most all want to know, “What does she want for the property?” “What is the minimum bid?” “What does it take to buy it?” And thus, the problem with the secret reserve.

Even so-called traditional real estate is more forthcoming — more open — more transparent. At least there, the list price is published, and there is the presumption that a full-price offer with customary terms is acceptable.

And there are many auctions which capitalize on straightforwardness: Without reserve [absolute] auctions, and with reserve auctions with published minimum bids. Here, “What does it take to buy it?” can and is answered … “All we can get,” or “At least the minimum bid, and all we can get.”

For those auctioneers who say, “Well, my seller doesn’t know what he wants,” or “She isn’t sure what the property is worth …” I ask, “Why not?” Is it that difficult to develop some expectations or assess value? I’ll answer that … it is not, and it should not be perceived as such.

As the somewhat-younger generation (and maybe all generations) are moving to “buy-it-now” commerce websites in preference over auction sites, it would seem the more vague, uncertain and cloudy the auction is, the more it would discourage participation.

And as participation is a key component of any successful auction, maximizing it would be in concert with amplifying the seller’s position. Maybe it’s time to consider increasing the number of bidders as a way to protect the seller, rather than using seller-safeguards which actually deter bidders?

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, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.

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