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auto-1022457_1920Pinhooking in general, and maybe “alley trading” if happening in real time such as right before they go in the ring, is a business arrangement as old as the auction industry itself.

If alley trading, owner A is set to sell his car in the auction. Just before, B buys the car from A for $10,000. Then B runs the car through the auction (portraying that it still belongs to A) and can either sell it, or bid on it if B wants to keep the car — whichever.

At this point, B is essentially the owner of the car. B can sell the car in the auction to another bidder (C) or keep the car if it doesn’t realize enough. Basically three possibilities exist thereafter. Either B remains the owner, a new bidder C becomes the new owner, or A is deemed the high bidder.

    1. If C becomes the new owner C’s proceeds are paid to A who has agreed to give them to B. If the auction sale price is more than $10,000, B makes a profit. If the auction sale price is $10,000 or less, B breaks even or loses money.
    2. If B is deemed the high bidder, B keeps the car. If the auction sale price is more than $10,000, B forgoes that profit in lue of the car. If the auction sale price is equal or less than $10,000, B keeps the car and avoids losing any money … at this point in time.
    3. If A is found to be the high bidder, A pays B the high bid amount and is the car’s owner. If the auction sale price is more than $10,000, B makes a profit. If the auction sale price is equal or less than $10,000, A owns the car and B breaks even or loses money on the trade.

Of course, there are costs of sale — commission, fees, etc. A and B in our example would also have to discuss who is paying the auctioneer, auction company, title fees, document fees, etc. This would effect the particular profits or losses of A and B.

Nonetheless, no matter how all this works, many ask — so what? Does it matter who the owner is when property sells at auction? I would offer it does, and misrepresenting that owner is a material fact.

We previously wrote about the concept of “contagion” and “imitative magic” here: https://mikebrandlyauctioneer.wordpress.com/2011/03/11/contagion-encourages-auction-purchases/ suggesting that auction bidders/buyers often consider ownership significant — and sellers realize that.

Thus, if auction bidders consider ownership a material issue, it becomes the seller’s (and auctioneer’s) duty to not expressly misstate nor imply incorrect proprietorship — even if title to the subject property just changed minutes ago.

And why would ownership be misrepresented anytime? Relatedly, the Supreme Court of the State of New York ruled in 2012 that the seller’s identity had to be identified to have a valid auction sales contract (William J. Jenack Estate Appraisers and Auctioneers, Inc., respondent, v. Albert Rabizadeh, appellant, Case 2010-08747.)

Pinhooking (and particularly alley trading) is akin to taking one in the hand, versus that possible two in the bush. A seller (A) might think he could get more than $8,500 for his car, but he might not. And a seller-favorable alley trading agreement could even guarantee a minimum return and a share of any upside.

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.