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In fact, our topic today is more something Manson talks about within his numerous responsibilities of this three-day seminar.
Our question is, “Is accepting sealed bids an auction?” In other words, is it ever an auction, involve an auction, like an auction, or something completely different?
Manson is known to say that the premise of a real estate auction is the “Firm and time defined sale of real property by competitive bid.” A sealed bid event accomplishes this — however, one of the foundations of an auction in general is transparency while the very nature of a sealed bid is to omit transparency.
In a sealed bid scenario, bidders are essentially submitting a competitive bid and counting on it being the most competitive to win. However, a competing bid implies that the bidders know what the other bids are, and in a sealed bid scenario they do not.
Manson recommends auctioneers and sellers strongly consider a sealed bid offering when the property being offered is:
- Complicated, unique or possibly undesirable, where you expect interest — but possibly not enough interest to conduct an open competitive auction
- Valued significantly different by different interested parties — where there may not be much of a consensus of value
In either of the above situations, a sealed bid process allows the seller to realize more in proceeds, contrasted with a open competitive bid auction. For example: Let’s say we have three bidders: Harry, Sheila and Frank. Harry is willing to pay up to $500,000, Sheila is willing to pay up to $325,000 and Frank is willing to pay up to $290,000. One might say this is not enough bidders and/or a wide consensus of value.
In an open competitive auction, if these bidders bid according to their pre-auction estimates, the property will sell for about $350,000 to Harry. In a sealed bid offering, Harry might be the winning bidder at or near $500,000. That’s potentially $150,000 more for the seller.
In a sealed bid event, there can be follow-up or subsequent rounds for further bidding. Generally one of two things happen if a second round is planned. The initial round of sealed bidding qualifies only the top few high bidders to:
- Participate in an open transparent auction
- Submit a second higher sealed bid offer
In a second round which is an auction, the first round would more correctly be considered the submission of initial bids. An auctioneer/seller might rightly say, “Only the highest 3 initial bids will qualify to participate in the auction.” This auction could be live, online, faxed, recorded conference call or the like.
However, if this second round is a “second round of bid submissions,” this second round isn’t really an auction … either. For instance, if the top three bids from the first round of the sealed bid processes could rebid one final time from the highest bid submitted, this is simply a second blind bid.
The danger with a second round of bidding is there will be instances when there is no one to challenge because only a single bid was placed or the high bidder is so far out front, nobody is prepared to challenge. In either of these cases, the high bidder may feel the remorse of bidding so much. In the best case scenario there is lots of bidding in this second round and/or substantial increases from the initial bids submitted.
Nevertheless, a key difference between a one-chance best bid and two-bid scenario is that bidders often leave room for additional bidding in the latter. In a best bid process, bidders generally bid the most amount they are prepared to pay and there is less risk the process goes off the rails.
Further, the security in a one-time best bid scenario is the bidder submits with his/her bid a fully executed and binding purchase offer. Upon being declared the winner, the buyer is already fully committed to the purchase and the seller merely needs to sign (accept) the offer.
The auction industry uses the term sealed bid auction because we know that the word auction will capture the interest of the marketplace. Manson nor I believe you need to be particularly concerned about your use of the word auction as it relates to the sealed bid process, unless of course someday you are asked to defend it.
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, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.
Manson Slik, Auctioneer / Broker, CAI, AARE, CES has been an auctioneer for 22 years and a real estate broker for 30 years. His company’s real estate auctions are located at Gordon’s Estate Services Ltd. and personal property auctions at MaxSold.com. Manson co-instructs the Accredited Auctioneer of Real Estate (AARE) designation program for the National Auctioneers Association (NAA).