Today I was contacted by a real estate auction buyer with the question;
What's the purpose of a reserve in an auction?
To me, why waste time conduction an auction is all bid are below the reserve?
We have FAQ's but for some reason nobody has ever asked this question before and I tool a few minutes to write a response that I think could be helpful to many of the ActiveRain.com readers.
Dear Mr. Real Estate Auction Bidder:
That's a good question and I am going to put it in my FAQ's
http://www.jacksonholeauctions.com/faq.php
The purpose of a reserve price in an auction is twofold.
First: The ONLY legal way to advertise a property 'Absolute or unreserved' is if the seller is ready to complete the transaction to the last and final bidder regardless of price .
This works well with free & clear properties but if a seller / owner has a mortgage they must be able to pay it off out of pocket if the high bid comes in below the reserve price.
The fact that one must provide a certificate of release to professional real estate auctioneers (not bogus ones who advertise absolute OVER a retail price) if they have a mortgage knocks most people with loans against a property from selling absolute.
The other reason property is sold with reserve is:
Its the only way yo get the auction listing, the seller wants either some sort of protection or they think they are smarter than the marketplace.
I sell a lot of high end waterfront and resort property here on the East Coast and around the country.
I deal with a *LOT* of high net worth individuals who can pay cash for anything they bid on at our auctions. They won't even come to an auction if its with reserve or think the seller is playing games.
One of my buyers lost out on making a million dollars neat from an auction because it was sold with a very reasonable below market reserve & the time of the auction was the same as his sons little league game.
Personally I have had days where I would blow off a million to spend time with my kids so I totally understand.
Another guy who was very interested in a nice beach house told me he would rather play with his dog at home than get dressed and go to an auction where he would be the high bidder but the seller could turn him down.
Ask any auctioneer and they will tell you that they will take an absolute auction over an auction with reserve any day of the week, but they are hard to find.
That is why we keep our reserve "secret" and let everyone know we will annouce if it has been reached right there at the auction. If the high bid is below the reserve we write up the contract and hold the deposit check uncashed, then give the seller two business days to accept or reject the high bid.
I call it a reverse rescission for sellers.
It started when we had a killer waterfront home in June of 2006 that comped right at $1 million any way you looked at it, except recent sales. But there had been no comparable sales for almost a year and the sellers' wife was a REmax agent.
She told me we had more activity in the first 7-days of auction marketing than they had seen in the past 7-months of her marketing with REMax.
There were 145 people at the auction and a 7-registered bidders for that property, the reserve was around $800,000 so I thought it was reasonable... going into the deal.
Auction day the high bid was $660,000.00 and the seller came out and started cussing out the crowd, you dumb Mother F*ckers you know what its worth, half of you are realtors... blah blah blah.
Two days later he said they would take the $660,000.00 but I had not written up a contract because it was not our policy at the time.
I called the buyer and they said there was no way they would do business with someone who talked to them like that, same answer from the second high bidder.
That was when I stopped allowing sellers to attend their own auctions and started the two day rule.
Also if they refuse the cash we charge a painful no-sale fee of $2,500 or 4% of the difference between the cash market value and their wish sandwich price.
If you watch the Barrett Jackson car auctions on TV this week none of those autos are sold with reserve anymore. I know their lead auctioneer and his wife, they told me they used to charge "just" the seller commission of 8% as a no-sale fee until it started driving the prices down.
Spanky Assiter Hammered down a Shelby Cobra last year for $5 million plus 8% Buyers fee absolute with no reserve setting the highest price for a car ever for Barrett Jackson Auctions.
But the bottom line is the reserve is to either protect the sellers' position or to make the auction legal.
Your best bet especially since you are in California is to have the title company run a preliminary title report, then do the math on the mortgage to see how much the sellers owe. If it's more than you want to pay then stay home and play with your kids or the dog.
Sincerely,
Billy Burke, CAI - AARE Auctioneer
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