What is an “opening bid incentive?” Essentially, this is a rebate paid to the buyer based upon a percentage of his or her opening bid.
For instance, say a [thought-to-be] $10,000,000 property is up for auction. The auctioneer says that he will pay a 13% opening bid incentive to the ultimate buyer.
Samantha is interested in this property and submits a $7,000,000 opening (pre-auction) bid. When the auction takes place, Samantha is the high bidder at $9,500,000, and the seller accepts this highest offer.
With this high bid of $9,500,000 minus 13% of $7,000,000 [$910,000] the contract price is then reduced to $8,590,000. The opening bid incentive is just this simple … or is it?
Commonly used by so-called luxury property auctioneers, who often portray that property is selling absolute, the opening bid incentive is actually too often used to gauge pre-auction interest so that the auction can be cancelled if there is insufficient interest — counter to what an absolute auction is all about.
Let’s begin with this: An absolute auction is the “genuine intent to transfer to the highest bidder regardless of price.” We wrote about that here: https://mikebrandlyauctioneer.wordpress.com/2015/11/27/genuine-intent-to-transfer-to-the-highest-bidder-regardless-of-price/.
Given Samantha’s pre-auction opening bid of $7,000,000 the auctioneer then consults with his seller to see if he wants to proceed with the auction — obviously without the genuine intent to transfer to the highest bidder regardless of price.
The ruse is the auctioneer secures the highest opening bids and then decides to cancel the auction — “bidding Closed | available for offers” — therefore the opening bid incentive costs the auctioneer/seller nothing.
Essentially an opening bid incentive requires a with reserve auction in that the incentive is used to reserve the right to cancel the auction — although absolute auctions can be cancelled prior if nobody registered to bid, for example.
Of course if the auction is with reserve then the opening bid incentive has little value as the seller can cancel the auction after the highest bid is received if it is viewed as lacking.
It is clear the value of the opening bid incentive is knowledge of the highest pre-auction bid (often depicted as non-revocable) so it can be used to decide if the auction will proceed or not … which is not at all compatible with an absolute auction and unnecessary in any other type of auction.
Mike Brandly, Auctioneer, CAI, CAS, 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, Executive Director of The Ohio Auction School, an Instructor at the National Auctioneers Association’s Designation Academy and America’s Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.