Often perception is more important than reality; auctions in the United States are no exception. Thus, our question today is, “Does it matter who the other bidder is?”
There are only two types of auctions: with reserve and without reserve. We have written various times about this topic, including here: https://mikebrandlyauctioneer.wordpress.com/2009/11/15/different-types-of-auctions/
In a with reserve auction, the seller may make or procure a bid (make the bid himself or via a proxy including the auctioneer) in order to protect his property from want of bids. Then of course, the seller hopes other bidders bid as well.
So for any other bidder, is that other bidder the seller or someone with the intent to purchase — rather than the intent to retain title? Does it matter? It appears it may.
As we’ve held, auctions are collaborative in nature, in that bidders should be able to (and do) gauge value by the bids of other interested parties — auctioneers and sellers should desire this. More on that here: https://mikebrandlyauctioneer.wordpress.com/2017/04/01/but-the-bidders-chose-to-bid-again/
If I bid $10,000 and someone else bids $10,500 I might well bid $11,000 given this $10,500 bidder is a arms-length genuine bidder as this $10,500 offer is an indication of value. On the other hand, if this $10,500 bid is from the seller, such a bid is not arms-length nor genuine in regard to the intent to purchase, so this $10,500 bid is not an indication of value and asking for $11,000 here might be considered a fraudulent inducement.
Fraudulent inducement (which was brought up in a recent auction case) is actionable when basically the injured party (the bidder) relied on a fraudulent claim (that the other bidder is another interested bidder, when the auctioneer had knowledge it was the seller) and the bidder would have acted differently if he had knowledge of the facts. Here’s a short article on the subject here: https://www.mccaberabin.com/business-copyright-faq/what-is-fraudulent-inducement/
There appears to be a trend developing where the public believes they are entitled to know if that other bidder is the seller or not. In fact, California now has law where the seller’s identity at auction cannot be shrouded so that it appears to be another non-seller bidder — as a result of a well-known Internet auction platform using aliases to bid up property for the seller.
And further, one doesn’t have to wonder why most sellers/auctioneers like to conceal the seller’s identity when bidding; the hope is the other bidders believe this subject bid is a bid of good faith — real, genuine and most importantly meaningful. Saying, “the seller reserves the right to bid” may not be enough.
Legally, there is no specific requirement to disclose if that other bidder is the seller or anyone else (other than in jurisdictions which have enacted laws prohibiting the seller’s bid to be portrayed otherwise,) but a claim of fraudulent inducement could possibly be made.
More importantly with more transparency in this regard, the auction industry will attract far more bidders and realize more for our clients. In fact, there is increased overall bidding when the other bidder knows the other bidder is germane and this outweighs the possible decrease in bidding when the other bidder realizes the other bidder is the owner.
Of course it certainly benefits the seller to market and sell property without reserve where the other bidders are reasonably assured the seller does not bid at all, with almost assuredly no claims of any kind of troublesome inducement.
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, 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.