Accredited Auctioneer Real Estate (AARE), attorney, auction, auctioneer, auctioneers, auctions, escalation clause, expert witness, highest and best, litigation, National Auctioneers Association, sealed bid, traditional real estate
In so-called “hot” real estate markets (seller markets,) often sellers are presented with multiple offers soon after listing. In such cases, buyers will often be “fighting over” a particular property and offer to automatically raise their offer if another offer exceeds theirs.
Such an offer is known to contain an “escalation clause.” Sam DeBord wrote an article for Realtor.com talking about some of the details of these types of offers: https://www.realtor.com/advice/buy/what-is-an-escalation-clause-how-does-it-work-and-when-should-you-use-one/.
There may not be one auctioneer not familiar with this concept. “One bidder makes an offer and another bidder agrees to (likely up to a limit) outbid that bidder with a higher bid …” Sounds like almost any auction to me with competitive bidding.
However, most auctions are open (transparent) in that the first bidder — and all other bidders — see that first bid. Then, the next bid is known to the other bidders, and so forth. In this escalation model, the bids are kept undisclosed except to the agents involved, and worse yet, one or more “bidders” maximum bids are disclosed to these agents.
“Sealed bid” auctions are inherently “sealed” but are normally all opened at once and typically not competitive in nature. Here, in contrast, all the offers (bids) are open to one or more agents which might lead to a seller and/or agent placing a fictitious offer in order to maximize the seller’s position.
Of course, this kind of thing, unfortunately, goes on in the traditional auction business as we wrote here: https://mikebrandlyauctioneer.wordpress.com/2020/05/06/did-you-win-every-item-for-exactly-your-maximum-bid/. It’s clearly bad behavior in the auction business and would be equally bad business in the traditional real estate business.
As we have discussed, and cover in the National Auctioneers Association Accredited Auctioneer of Real Estate Designation Class, open (or closed) auctions may not be the best solution with a limited number of bidders — and rather a sealed bid auction may be the best solution.
For example, in our escalation clause scenario, with only a few bidders, Bidder A might bid $325,000 (with a maximum of $330,000), Bidder B might bid $320,000 (with a maximum of $325,000) and Bidder C might bid $315,000 (with a maximum of $319,000.) With $2,000 raises in all cases, the highest offer is $327,000, and not $330,000.
In a sealed bid auction, or similarly in traditional real estate, “highest and best offer by …” a certain date, Bidder A’s bid if $330,000 is the highest offer and the winning offer, grossing the seller $3,000 more than in our escalation plan.
One might ask, “So, does the escalation clause work better with many bidders (offerors?)” Actually, a real estate auction probably works better with many bidders when property values are known and consistent. We wrote more about sealed bid auctions here: https://mikebrandlyauctioneer.wordpress.com/2017/03/07/is-accepting-sealed-bids-an-auction/.
It would seem to me that escalation clauses are typically better than merely traditional multiple offers, but sealed bids (and/or “highest and best”) are even better with few bidders, and auctions are far better with many bidders. It appears to me real estate agents (and sellers) almost always have better options than escalation clauses in their attempts to maximize price.
Lastly, and not surprisingly, we heard from an attorney in litigation concerning an auctioneer who held a live open outcry auction for a property with very little demand and disparate views of value. His question? Wouldn’t a sealed bid auction been a better solution?
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, and an Instructor at the National Auctioneers Association’s Designation Academy He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.