Justin Ochs of Diamond Ochs Enterprices, LLC recently suggested this question:
“Has the reserve confirmation system caused the industry to lose buyer confidence and thus decreased the buyer pool?”
First, let’s look at why the number of bidders or why the, “buyer pool” would be material to an auction. We discussed some time ago, Auctioneers looking for Alpha and Beta where Alpha would be the highest bidder, and Beta would be the next-highest bidder for any particular item.
We also discussed the difficulty in getting some people to react to an auction with a reserve in our article about Absolute Auctions.
What we have concluded in both these above articles, as well as contended in seminars and classrooms for decades is, it’s important to have as many of the right bidders at any auction in order to maximize the seller’s position.
Generally, for an auction seller, fewer bidders means less money and more bidders means more money.
So, given this premise, how does an auctioneer endeavor to maximize the number of bidders? How does an auctioneer increase the buyer pool? We coined the phrase, “Prospect of a deal” a number of years ago, and it seems clear the greater prospect of a deal buyers sense, the more they react.
It happens all the time, and it just happened again yesterday in Columbus, Ohio. Probate Court ordered auction of real estate for no less than 2/3 of the appraised value.
About five weeks ago, this house had an appraised value of $40,000 and a minimum bid of $26,666.67 — resulting in no registered bidders. The court ordered a new appraisal, and five weeks later (yesterday), the same property which was now appraised for $26,250 had a minimum bid of $17,500, resulting in four registered bidders and a final high bid of $31,500.
The lower the minimum bid, the higher the sale price? More precisely, the more, “prospect of a deal” buyers sense, the larger the buyer pool, and therefore, generally, higher prices.
The irony of this theory is when there is a more pronounced sense of the chance of a deal, there is actually less opportunity for such. Said another way, the more a seller allows the perception that they will sell their property for a low price at auction, the more chance the seller has at maximizing the final sale price.
Along the lines of what Larry A. McCool always said, “Auctions are an illusion.”
More to Justin’s question, I think the answer is clearly, “Yes.” Bidders given choices of auctions will tend to chose the auction format they perceive favorable to them — without reserve (absolute) over with reserve — almost every time. And therefore the, “reserve confirmation system” does indeed decrease the buyer pool.
I do think the reason for this is, “buyer confidence” but in regard to one specific issue: buyer confidence that the property will sell. In a with reserve and/or seller confirmation style auction, buyers are less confident their bid will be successful pitted against seller participation and/or expectation.
On the other hand, buyer confidence is heightened when the seller is taken out of the equation, as in a without reserve auction. In such an auction, the seller is not permitted to bid, nor permitted to set a minimum bid or reject the highest bid (other than at a forced sale.) As confidence increases, participation increases; and as participation increases, higher prices result.
Justin suggests there is a strong misconception with absolute auctions — in that they result in less money for the seller. I think that’s a fair assessment — when in reality, absolute auctions attract much larger buyer pools resulting in more money for the seller.
We wrote about The Death of Reserve Auctions and while they aren’t dead yet, more and more auctioneers are realizing an auction lacking seller-determined minimum sale prices results in, “full price discovery.”
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.