A Dutch auction is a type of auction in which the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer’s price, or a predetermined reserve price (the seller’s minimum acceptable price) is reached.
The winning participant in a Dutch auction pays the last announced price. This is also known as a so-called clock auction or an open-outcry descending-price auction.
The material difference between this type of auction, and a more traditional English-style incrementally increasing auction is that instead of the auctioneer inviting offers, with the bidders offering and the auctioneer accepting (contingent upon not receiving another, higher offer,) in a Dutch auction, the auctioneer is offering, and the bidders are accepting.
Why is that material? Because in a Dutch auction, if the auctioneer says, “$15,000?, $14,000? $13,000?” and someone says, “I’ll take it at $13,000” the auction’s over. And it’s over because a contract has been formed by the auctioneer offering and the bidder accepting — without any traditional contingencies.
The reason this subject has merit is that some are looking for other ways to sell using the auction method — such as sealed bid auctions, silent auctions, and Dutch auctions. However, some of those same people may not be considering all the implications of such methods.
For the Dutch auction, the imperative notion that must be kept in mind for the auctioneer (and seller) is that once a bidder accepts, there can be no other (higher) bids accepted. Further, no withdraws of this subject property in order to combine with some other property are permitted.
For instance, in a multi-parcel auction, if a “Dutch auction” approach is used to establish the base amounts on each parcel, with the desire to then allow bidders to combine parcels if those bids exceed the sum of the individual parcel amounts … this would be highly problematic as the individual bids on each parcel would be binding, and no other bids would be valid.
Or, equally problematic would be a “with reserve” Dutch auction where the seller wished to have the right to accept or reject the high amount. Due to the Dutch auction’s reversal of the offer-and-acceptance, the right to reject would not exist after the high bidder accepted the auctioneer’s offer.
Lastly, it doesn’t seem clear that the Dutch auction realizes any more money for the seller than the English-style incrementally increasing auction, except in very particular circumstances where one bidder believes the value of a subject property to be much more than all others.
Let’s say bidders Alex, Dina and Jessica are interested in the same parcel of land. Alex believes the parcel is worth $50,000, Dina $60,000 and Jessica $175,000.
In a incrementally increasing auction, the high bid is somewhat likely to be $65,000 or $70,000 with Jessica being the winning bidder. However, in a Dutch auction, Jessica might bid at the “$200,000? $190,000? $180,009? $170,000? …” range, fearing Alex or Dina will bid first and win the parcel, with Jessica unaware that both Alex and Dina feel the parcel is worth much less.
Therefore, Dutch auctions can be beneficial for the seller in isolated cases. But, more that likely if a sufficient bidder pool is present, the incrementally increasing auction will result in more money.
For those who practice in “traditional real estate” listings, the Dutch auction is eerily similar to the widely used, “We’ll list it a bit high, and then keep lowering the price until someone makes an offer” method. Of course here, a incrementally increasing auction can realize just as much or more if a sufficient bidder pool is attracted to participate.
A Dutch auction is worth considering, but there is certainly a material difference.
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.