We start today with the fact there are [only] two types of auctions. Just as state law dictates all across the United States, we noted as such here: https://mikebrandlyauctioneer.wordpress.com/2009/11/15/different-types-of-auctions/
The right for the seller to bid — outside of a forced sale — is dictated by which type of auction is being conducted. In a with reserve auction, the seller may bid and in a without reserve auction, the seller may not bid.
Further, in a with reserve auction, the right for the seller to bid must be disclosed or the buyer has the right to void the sale or take the property at the “last good faith bid.” What is the last good faith bid? The last bid before the seller bid the first time in bad faith … we noted more details on this subject here: https://mikebrandlyauctioneer.wordpress.com/2017/05/22/bidders-last-good-faith-bids-and-recourse/
Our questions today involve why a seller may bid beyond the price necessary to retain title, and if such bidding is illegal or problematic. We’ll start with that we don’t hold it to be illegal per the UCC 2-328, but it may be illegal otherwise, and is certainly problematic.
Why would a seller bid beyond the reserve necessary to retain title? For the most part, sellers are doing so to make the property appear to be worth more than it is — and why would sellers want to show that?
They would want to show that if they have other similar property selling in that same auction event for which they want bidders to think it too may be more valuable than previously thought … what would we call such practice? Misrepresentation. Let’s take a look at an example:
Valerie has 25 rare architectural statues in a with reserve auction event. Her auctioneer has reserved the right for Valerie to bid and she intends to do just that. The general consensus is that these statues are worth between $1,000 – $2,000.
These statues are somewhat unique, and not commodities, and as such their value is not widely known nor established. Prior auction prices might be a good indicator of value.
The first statue is put up for auction and Valerie bids continuously (or causes such bids to take place) up to $7,600. The substantial crowd in attendance now thinks maybe these subsequent statues are worth more than the previously-thought $1,000 – $2,000 values and bid accordingly.
Do bidders use similar item’s sale prices to gauge value? Do appraisers use recently sold like items to gauge value? In both cases, so long as the prior transaction is “arm’s-length” the answer is, “yes.” This ruse of the seller bidding on the first statue is meant to suggest an open, disclosed, arm’s-length transaction even though it is everything but such.
“Arm’s-length” transactions are regularily defined as: “… one in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s length transaction ensures that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party. It also assures third parties that there is no collusion between the buyer and seller.”
Lastly, do auctioneers/sellers use prior sales to suggest or imply current value? Most large auction houses around the globe make it somewhat easy to find prior sales figures — which those vendors hope suggests value … that’s virtually the sole purpose of such disclosure.
Mike Brandly, Auctioneer, CAI, CAS, 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, an Instructor at the National Auctioneers Association’s Designation Academy and America’s Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.