Friday, October 23, 2009

Reserve or Absolute? What’s the Difference

An excellent question, and one we hear often. In reality, there are several other names that auctions go by (reserve, subject to confirmation, minimum, right to refuse, etc…), but these are your only two categories. According to the UCC (Uniform Commercial Code), all auctions are considered "reserve" unless marketed or publicized as "absolute".

Reserve auction means that the seller has "reserved the right" to establish a minimum price that he will accept before completing the sale. In other words, if the bids don't reach the reserve price, the seller won't sell the item. The reason behind this is simple – it protects the seller. Let's say we're selling a huge excavator for a client, and the client still owes some money on the loan. He needs to make at least a certain amount of money on the item or he won't be able to pay his debt. Rather than let it go for less than he wants, he simply won't sell. Normally, it's not an issue. Auctioneers are pretty good about bringing the buyers to the sale, and pretty good at bringing a price that's fair and reasonable. However, there are some things beyond the control of the seller or the auctioneer.

For example – and I know this is rare in Colorado – a blizzard hits. The sale is set for 2:00, and no one can get there because roads are closed. 2 bidders show up instead of the expected 200. The odds of getting the best price for the seller have now been significantly reduced. If the bids don't reach the minimum amount, the seller is protected and can avoid letting the items go at a loss. The plus side of the "reserve" option is that it protects the seller.

There is another advantage too, in that by not disclosing the reserve to the bidders, the seller can change his mind. He might let the item go for a lesser amount that he thought, if the bidding stalls or falls short. Again, the seller "reserves" the right to sell where he wants to.

There's a downside as well.

Some bidders may be reluctant to attend if there's a chance the items won't sell. It's a risk we take, and a calculated risk. It's right for some sellers and some situations, and not right for others. As a buyer, you may or may not know what the reserve price is. It might be published, or it might not. The theory is that by disclosing the reserve, the seller may end up placing a cap on the bids. If you say the reserve is $7,500, someone who was willing to bid $9,000 may think twice. The flip side is some bidders may not even be thinking their top bid is anywhere close to the reserve, so by publishing it, you may prevent them from bidding. This is not a bad thing in some cases, because you won't be wasting your time or theirs with bids that are beyond their reach or their desire.

In some cases, the opening bid is the reserve price. If the opening bid is met, there's a pretty good probability the item will sell. Again, the seller has the right to accept or reject the top bid.

The other auction type is an "absolute" auction. This means that if there's a bid, the item will "absolutely" sell. No matter the bid. There are pros and cons to this too. An absolute auction is likely to bring a much larger audience to bid, and bidders know that someone (hopefully them) will go home with the item. The seller may actually realize a greater price that what they had hoped for, or what they may have been considering as a reserve. For a motivated seller, this is an excellent option. However, there's one big risk to an absolute. The item will sell, and MUST sell, if it's advertised as absolute. That means if the bids are well below what was anticipated, the item must sell regardless. It's a risk, and one that many sellers are willing to take.

The next question is: "Which one is right for me as a seller?". The answer is: "It depends". It depends on a lot of factors, and these are things we can discuss with you when you are getting ready to sell. Reserve works great in some cases and absolute in others. There's no magic formula, just good old fashioned pros and cons that you need to consider as a seller. Don't worry. We'll help guide you through the questions. Just ask us.