What is a stalking horse offer at auction? It appears that this is an offer made prior to the auction, to in essence guarantee the seller a certain minimum amount to be realized from the auction (a minimum bid) while still allowing others to outbid this pre-auction offer, often including the pre-auction offeror as well.
An example: Bill wants to sell his 1963 Pontiac Tempest at auction. Bill is a bit apprehensive about selling his prized car at auction, but nonetheless wants to go ahead with the auction. The auctioneer suggests to Bill that he can arrange for a “stalking horse” offer of, say, $10,000 to serve as a minimum bid.
Bill is hoping his ’63 Tempest demands $15,000 or more, but this stalking horse offer seems reasonable, so he tells the auctioneer to proceed with the arrangements with the stalking horse bidder. The auctioneer informs Bill that this is fine, but Bill will have to compensate this stalking horse bidder in some way if he is the highest bid at $10,000; otherwise, the stalking horse bidder won’t be willing to participate in this fashion.
The auctioneer tells Bill that if this $10,000 bid is the final bid at the auction, the stalking horse bidder demands Bill pay him $500 and guarantee the car for 30 days against any engine or transmission problems, given customary usage. Bill is surprised at this, as this would lower the $10,000 bid to $9,500, minus the cost of the warranty coverage.
Basically, these are the considerations in any stalking horse arrangement. The seller must consider that he has to buy the minimum bid he desires, in hopes that others bid more at the auction. If the stalking horse bid is the winning bid, the stalking horse bidder is compensated for such; if the stalking horse bid is not the winning bid, then the seller’s use of the stalking horse worked to his advantage.
Where does the term “stalking horse” come from? According to Wikipedia and other sources, the stalking horse term comes from:
- … the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle.
- Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses. Sometimes mobile hides are used for a similar purpose.
Our questions regard if it is legal and/or ethical for an auctioneer to treat one bidder differently than another? We asked this question here March 8, 2010: Can auctioneers treat bidders differently?
Clearly, in a stalking horse offer situation, the stalking horse bidder is treated differently than all the other bidders. While the stalking horse bidder is taking a risk that his offer will be the only one, or otherwise in excess of any other offers — the first bidder at any auction assumes this same risk.
Further, the fact that this offer is bought by the seller points further to how this bidder is treated substantially different than all other bidders.
It seems to me that stalking horse bidders are a result of misplaced distrust in the auction method of marketing. If Bill’s car is truly worth $15,000 or more, why would a stalking horse bid of $10,000 be necessary? Who wouldn’t pay $10,000 for something worth $15,000?
And, if Bill is necessarily convinced he doesn’t want to sell his ’63 Tempest for less than $10,000, then maybe a published minimum bid of $10,000 would be prudent? Or, maybe Bill shouldn’t be selling his car at auction, but rather try advertising it for sale privately or otherwise?
The stalking horse offer is deceptive at best. Other bidders drawn to the auction under disingenuous pretenses are treated as second-class bidders, and forced to outbid a minimum bid which really isn’t quite that in total. Just as hunters used horses to hide behind in order to get closer to prey, the staking horse bidder hides his own arrangement with the seller in order to prey on other bidders.
I would say that auctioneers, whatever the circumstance, are advised that if a minimum bid must be purchased to assure the seller a certain amount, maybe auction marketing should be reconsidered — because it would appear the seller’s expectations (or requirements) are not aligned with the market.
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 is Executive Director of The Ohio Auction School.