For the most part, Harry’s real estate auctions have led to successful closings — with generally happy buyers and happy sellers.
However, the last two of Harry’s real estate auctions have been less successful. In fact, both resulted in the same outcome: the high bidder refused to sign the purchase contract.
Why is this important? Because the Statute of Frauds dictates that sales of real property are only enforceable if memorialized in writing. In other words, without a signed purchase contract, there is no enforceable contract to purchase — suggesting the word, “Sold!” isn’t enough.
Although Harry is familiar with Samuel Williston’s writings on this subject, which we wrote about some time ago, he is hesitant to sign “for the buyer” in such instances:
On the contrary, Harry has another idea. He will “obligate” the backup bidder to be deemed the winning bidder if the true winning bidder refuses to sign the paperwork. Of course, Harry will get his seller’s consent for this policy … in writing.
For instance, at an auction Harry held last Saturday, there were essentially two bidders at the point the price reached $500,000: Richard and Carter. Richard bid $550,000 and Carter bid $575,000. Richard bid $585,000 and Carter bid $600,000. After no further bids, Harry said “Sold!” to Carter.
Carter then refused to sign the purchase contract citing that he understood the property included an additional five acres to the north. Harry told Carter that the terms were clear that the property offered only included 63 acres, not 68 acres. Nonetheless, Carter walked away.
Under Harry’s new plan, he would have told Richard that his prior bid of $585,000 would be deemed the winning bid if Carter refused to sign the paperwork at his high bid of $600,000. On the other hand, if Carter signed the paperwork at $600,000, then Richard would be relieved of his obligation.
Harry even thinks, “I wonder if I can ‘obligate’ the high bidder for the true high bidder amount?” In the prior Saturday auction, that would mean that if Carter refused to sign at $600,000, Richard would be obligated to sign for the $600,000 purchase price. Harry thinks probably not … so he stays with his original plan.
Harry changes his terms and conditions to reflect his new policy. He changes his auction listing contract as well, noting the seller grants Harry the right to obligate the backup bidder to sign if the high bidder refuses. Harry will have all bidders acknowledge this new policy upon registering.
At Harry’s next auction all these new policies are in place. Harry even announces that, “All bidders are here put on notice that if the high bidder refuses to sign, the backup bidder will then be deemed the winning bidder.”
This auction is for 160 acres (the NW 1/4 of Section 17, Harris Township.) Harry is expecting about $7,000 per acre, or a final bid price of about $1,100,000.
Here we present two possible troublesome scenarios:
- Harry registers 15 bidders. Dale and Sammy are two of the registered bidders. The bidding starts out at $500,000 and then Dale bids $505,000. Just then, Sammy bids $2,000,000. Stunned — but happy — Harry accepts Sammy’s bid of $2,000,000 and asks Dale to bid $2,100,000. Dale declines, and with no further bids, Harry says, “Sold!” for $2,000,000 to Sammy.
- Sammy almost immediately refuses to sign the purchase contract, and says, “Harry, per your terms and conditions, Dale would be then deemed the winning bidder at $505,000, right? So, let’s get that paperwork adjusted accordingly.”
- Unbeknownst to Harry, Dale and Sammy were working together to take advantage of Harry’s new plan. Despite there being bidders willing to pay $800,000, $900,000 and even $1,000,000 — none of their bids were in play, as Dale bid low, and Sammy then bid high, knowing then that Harry’s low bid would be the backup bid.
- Harry registers 15 bidders. The bidding starts out at $500,000 and continues $550,000, $600,000, $700,000, $800,000, $850,000, $900,000, $950,000 … $1,150,000 and then $1,200,000. With no further bids, Harry says, “Sold!” to the high bidder, Ken Williams. Virgil Collins is the backup bidder at $1,150,000.
- Ken then refuses to sign the purchase contract. Harry quickly comes to Virgil Collins, alerting him that he is the winning bidder at $1,150,000. Virgil says, “I am? Didn’t Ken bid $1,200,000? I was out at that point, right? How am I back in just because he won’t sign?” Harry counters, “Virgil, those are the terms of this auction — you must now sign.”
- However, Virgil has been the county’s Common Pleas Judge for 27 years. “Judge Virgil,” as he’s known, is fully aware that (1) he can refuse to sign, just as Ken has refused to sign, and (2) the basics of contract law at auction dictate that only one bidder can be “on” and all others are “out.” He can’t be forced to re-enter into a contract unilaterally — terms and conditions notwithstanding.
It seems to us likely that if such a plan of “obligating the backup bidder until the high bidder signs” was announced to crowds, it would be only a matter of time before Scenario 1 would come into play, costing a seller a substantial amount of equity.
It also seems to us that even if Scenario 1 wasn’t played out, Scenario 2 is equally likely. Suggesting terms and conditions can override basic contract law and/or state law is always a hard argument to make. We discussed that topic here: https://mikebrandlyauctioneer.wordpress.com/2010/03/20/can-the-auction-bidder-waive-rights-granted-under-state-law/
Harry’s “obligate backup bidder” plan is certainly interesting, and we can’t blame Harry for trying to solve his problem with high bidders not signing — but this isn’t the solution.
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.