These two women want to register for your auction. What should they have to provide you as an auctioneer in order to do so? Driver’s license? Credit card? Telephone number? Email address? A certain amount of money to be escrowed? Pre-approval letter? Letters of recommendation?
Here are the issues: (1) No matter what an auctioneer requires for registration, there is no assurance the buyer will pay, close nor take possession. (2) The higher the “bar” limiting registrants to only a select number meeting certain requirements limits the bidding pool. (3) The lower the “bar” allowing many to register increases the odds of nonpayment and/or nonperformance otherwise.
So is any auctioneer’s task — draw a line (essentially) that permits the most number of bidders while limiting the risk of nonperformance. Relatedly, many auctioneers say you only need the high bidder and the runner-up bidder and nobody else matters. Unfortunately, some say you only need one bidder …
Should an auctioneer base his or her (and the seller’s) bidder qualifications on what is being put up for auction? Probably. If we’re selling various boxed lots in the back yard of a home in the Midwest, we might let bidders “play” with virtually no evidence of ability to pay. On the contrary, for a $10,000,000 home, we may limit bidding to those with at least $1,000,000 in cash, as a firmed ability to pay the remainder.
The issue isn’t if they pay, close and/or take possession. The issue is what if they don’t — and in that event, how difficult and time-consuming (and costly) will it likely be to sell to someone else and/or sue for damages? What are the holding costs per hour/day/week/month, including but not limited to storage and depreciation?
In particular, depreciation can be a tricky issue for some assets. A difference between the “first time” something is put up for auction, and the “second time” can result (not always) in substantial depreciation. Further, some personal property assets maximize value at the 40/45-year-old mark, and an additional 7 years can materially matter as we discussed here: https://mikebrandlyauctioneer.wordpress.com/2020/01/14/1965-chevrolet-impala-sells-at-auction-again/.
If holding costs are low, auctioneers and sellers can lower that “bar.” If holding costs are high, so is the importance to close on schedule, and the “bar” should be higher. We conduct auctions of both types discussed here adjusting accordingly based upon the importance to close the first time and the potential costs of not doing so.
If the question becomes “just how many bidders do I need?” I believe to have the answer to that question here: If you need a good chance of having “Alpha” and “Beta” (the absolute highest bidder and second absolute highest bidder) then use this formula to see how many bidders you need to have a good chance of having both: https://mikebrandlyauctioneer.wordpress.com/2019/04/22/auctions-and-the-chances-of-alpha-and-beta-etc/.
In summary, our analysis says you only need 6 bidders for one lot to have about a 50% chance of Alpha and Beta; 14 bidders for one lot to have about a 75% chance of Alpha and Beta; 38 bidders for one lot to have over 90% chance of Alpha and Beta; 78 bidders for one lot to have 95% chance of Alpha and Beta … etc.
Most people who buy at auction go on to close the transaction. Your bidder qualifications are only valuable when that auction buyer doesn’t close — and then that only matters when the property is expensive to hold and expensive to remarket and attempt to sell again. If an auction buyer doesn’t close and you can easily and economically sell again … why not let virtually anyone bid in order to maximize the bidder pool? You should.
Some auctioneers claim a high bar (in regard to a substantial deposit and the like) to secure a bid number encourages [motivates] that high bidder to close because he risks losing it if he fails to pay the balance and take possession. However, it’s difficult to retain that deposit without showing equal or greater losses caused by the no-sale, and again — most buyers close because they want the subject property, and the higher the bar, the smaller the bidder pool.
This bidder pool serves two purposes — one obvious and the other not-so-obvious. More bidders mean those bidders presumably bid against each other pushing the price upward. Also, the more bidders (particularly in a live auction) the better those bidders feel about bidding as we frequently note, “the food tastes better in a busy restaurant” https://mikebrandlyauctioneer.wordpress.com/2016/05/31/large-auction-crowds-busy-restaurants-and-relevance/.
As well, for example, let’s say you have 20 bidders for a real property up for auction. Only the high bidder needs to close — so what are the chances the high bidder won’t? The other 19 bidders aren’t obligated to do anything so their qualifications are meaningless. Of course, despite being told otherwise, you will want to treat all bidders with the same terms and conditions as we wrote here: https://mikebrandlyauctioneer.wordpress.com/2020/10/02/terms-conditions-fairness/.
Lastly, this is a matter to be discussed with our client/seller. It’s not always obvious to you as the auctioneer what the seller’s risks are and his or her ability to mitigate those costs in the event of the transaction not closing. Once you have your seller’s opinion, offer your guidance with your years of experience to come to an agreement on where to set that bar.
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 and Western College of Auctioneering. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.