Absolute Auction: An Industry MysteryApril 29th, 2007 by PA - Bloger
The auction terms “Absolute” and “Reserve” bring to mind different responses based on a person’s personal experience.
Buyers love real property auctions billed as absolute auctions because they believe they will slide into a great deal potentially securing property at less than market value.
Sellers have mixed emotions about absolute real property auctions. If their motive is quick turn around and asset liquidation, absolute real property auctions are a great tool. They may simply want to court a big crowd, hoping that the resulting feeding frenzy will push the hammer price higher than an auction advertised with reserve conditions or terms. Of course the seller stands to lose if the highest bid doesn’t cover the investment and expenses.
The National Auctioneers Association takes ethics and auctioneer transparency seriously. They produced a great position paper on the concept of absolute versus reserve real property auctions. Many sources cover the ins and outs of real property auctions advertised as “Absolute”. Every state in the USA has auctioneer regulations requiring auctioneers to “announce, give notice, display or disclose terms and conditions of the sale “. If an auctioneer is suspected of misrepresenting an auction in any way, buyers may have legal recourse. If the auctioneer is a member of the National Auctioneers Association, membership sanctions and penalties based on the position paper referenced above may be invoked.
An “Absolute Auction” is called an absolute auction because the buyer with the highest bid absolutely wins the sale, period. No hidden terms, no secret agreements and no restrictions of any kind maybe used during an auction billed as an absolute auction. If any terms or conditions appear that limit the size of the opening bid or limit the sale price in any way, you are not at an absolute auction no matter what it’s called.
We have seen so many variations over the years of the absolute auction, particularly in the real estate sector. The absolute “bait an switch” is our favorite: The auctioneer advertises the auction as absolute, to be sold regardless of price. The auction day comes and the sale is cancelled due to lack of interest however the auctioneer, not to disappoint, opens the auction and offers the property to the buyers with reserve. Other issues surrounding this method of sale include the way in which absolute auctions are advertised. For example the terminology, “to be sold absolute, subject to a minimum bid” is often used but what does that really mean?
Unethical auction practices are uniformly illegal throughout the USA. Steve Proffitt in Auction Law and Ethics: Absolute Remedies covers many of the issues regarding absolute auctions and references real estate auctions as being the most affected.
Trust is the key factor for any auction. Knowing the auctioneer and seller’s reputation has as much to do with a positive outcome as any label used to advertise the auction.
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