FAQ
General Auction Questions
What is an auction?
An auction is a sales process where assets, goods or services are offered up by a seller, and bidding is opened to participants who compete to offer the highest price. The asset is then sold to the bidder offering the highest amount at the end of the auction. The winning bidder enters into a binding purchase contract and is obligated to pay and complete the transaction.
Auctions may be run as live in-person events at a physical location, online via digital platforms, or a combination of both.
What are some examples of auctions?
- Some examples include:
- Business liquidations
- Bankruptcy or insolvency proceedings
- Estate or household items
- Art, collectibles and memorabilia
- Luxury cars, boats or planes
- Industrial machinery
- Farm equipment & livestock
- Foreclosed properties
- Luxury real estate
- Government and police seizures
- Surplus inventory or returned merchandise
- Storage unit contents
Why should I participate in auctions? What are the benefits?
- Some key benefits of participating in auctions are:
- Opportunity to acquire items at attractive prices: An auction creates competition among interested buyers, potentially resulting in a “bargain” for the winner.
- Wider selection in one place: Auctions aggregate a range of similar or diverse items across sellers – allowing buyers to discover multiple purchase options.
- Level playing field: Each bidder has equal opportunity during the transparent auction process.
- Fair price discovery based on market demand: The final price is objectively determined by competitive bids rather than arbitrary subjective valuation.
- Quicker transactions and sales completion cycle compared to traditional sales that rely on negotiations.
- Often no contingencies, backup offers or financing requirements – streamlining deal closure.
What are the risks or downsides of auctions?
- While offering advantages, auctions have some inherent risks such as:
- Uncertainty of final price: Bidding heat and auction momentum varies making the closing price unpredictable.
- Risk of overpaying if emotions or ego take over rational bidding judgement (Winner’s Curse).
- Auction momentum can limit bidder control causing rushed decisions in the “heat of the moment”.
- Limited timeframe to conduct due diligence before placing binding bids. If restrictions exist, bidders may have to rely on exterior opinions or available descriptions of item condition or specifications – which may not always fully capture facts.
- In case of disputes over item condition post-purchase, legal recourse and settlement options are typically limited since auctions are usually considered “As Is, Where Is” with minimal seller representations or warranties over quality.
How do traditional auctions differ from online auctions?
- While the rules, bidding process and sequence remain similar, traditional live in-person auctions and online auctions vary mainly in:
- Access and Convenience: Online auctions provide 24/7 access from anywhere allowing participation at bidders’ comfort and convenience. Live events require physically attending the venue which limits participation to date/time of event.
- Transaction Platforms: Online auctions utilize digital platforms and technology for distributing auction assets details, registering participants, enabling online bidding, determining winners, making payments and overall streamlining processes. Traditional auctions rely predominantly on manual paper-based processes and in-person communication.
- Bidding Display and Transparency: Live auctions openly broadcast emerging leaders and bid amounts (in formats like English auctions) allowing bidders to continuously adjust their strategy based on behaviors displayed by competition. Online auctions offer flexibility where all bids may be publicly displayed, or sealed formats may be utilized to maintain confidentiality of individual bids.
- Auction Scope and Scale: Technology and internet access expands the discoverability of online auctions allowing participation across geographies – thereby aggregating larger bidder interest and value. Participation in live events is often geographically limited by physical attendance constraints.
What are the different types of auctions?
- While many auction formats exist, some of the most prominent are:
- Absolute Auction: No minimum reserve price by seller. Highest bid wins item.
- Minimum Bid Auction: Auctioneer sets a low starting bid or reserve price that bidding must exceed.
- Sealed Bid Auction: Bidders confidentially submit written bids without knowledge of other bids. Highest bid wins.
- Silent Auction: Written bids submitted, highest bid wins item when auction closes. Popular for charity fundraisers.
- Reserve Auction: Seller reserves the right to accept or reject final bid based on undisclosed minimum reserve price known only to the auctioneer.
- Two-Stage / Combination: Hybrid model involving initial sealed bidding, followed by open live auction among top initial bidders.
What does “reserve price not met” mean?
This occurs when the item fails to receive any bid higher than the minimum selling price pre-determined by the seller and not disclosed to bidders. This minimum price is referred to as “reserve price”.
If bidding does not cross the reserve price, the auctioneer declares “reserve not met” and no winning bidder is assigned. The seller may then negotiate with the highest bidder from auction. However they are not obligated to sell to anyone post auction close unless the reserve was originally met.
How are assets priced and promoted prior to auctions?
- To generate adequate bidder interest, auctioneers or sellers invest efforts prior to the sale event to:
- Carefully research asset types that have previously sold successfully at auctions along with achieved price ranges.
- Assess overall demand outlook, economic trends and market conditions impacting the specific asset category.
- Obtain official appraisals from reputable third-party evaluators.
- Price items competitively based on conservative estimates of market value – allowing upside potential through bidding momentum versus overpricing assets.
- Promote items effectively online and offline via ads, email campaigns, social media and PR campaigns. Highlight unique details of assets to convey value.
- Offer preview sessions allowing qualified prospects to physically view items prior to auction.
What is bid rigging and shill bidding?
- Bid rigging refers to illegal practice among bidders to suppress competition through agreements not to bid against each other – thereby manipulating and potentially lowering winning bid price.
- Shill bidding is unethical practice where the auctioneer or seller, directly or through an agent/associate, artificially inflates bidding through fake bids with no intention to win the item. This artificially raises the bidding momentum and often the closing price achieved.
Increasing Auction Success
How can I increase my chances of success at auctions?
Tips to improve probability of success include:
- Attend previews to examine items/property details closely including any defects. Verify authenticity of art, collectibles etc. This allows bidding with full information.
- Thoroughly research asset fair market value and ownership history for factual assessment rather than relying purely on auction promotions.
- Set auction budgets beforehand aligning with conservative item valuation and stick to predetermined caps during bidding heat to avoid overpayment.
- Review auction contract terms to clearly understand all fees, commissions, conditions, required deposits and settlement timeframes before placing bids.
- For high value items secure financing pre-approvals even if cash payment is planned as a back-up funding source.
What mistakes should be avoided in auctions from a buyer perspective?
Some key mistakes that buyers should steer clear of:
- Getting swayed by emotions or ego and engaging in irrational bidding not aligned with item valuation. Results in overpayment.
- Bidding without careful inspection of item condition. There is limited seller liability post-purchase in case of unnoticed defects.
- Underestimating total costs beyond winning bid price – such as buyers premium charges and other fees. Results in cost escalation.
- Failure to arrange financing on short notice if cash payment cannot be made within auction mandated timelines. May result in losing deposit money.
- Not reviewing removal/shipment timelines and coordination procedures prior to bidding. Delays can result in additional storage fees.
What can I do to avoid the most common mistakes for sellers at auctions?
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Some frequent seller mistakes to avoid:
- Setting reserve price unrealistically high without adequately testing buyer demand through pre-auction outreach. Results in no bids meeting reserve.
- Inadequate promotion of auction items to generate ample interest among qualified prospects. Affects participation and number of bids.
- Choosing wrong auction format – A sealed bid format may garner limited excitement and bids compared to open outcry English auctions for example.
- Failure to offer preview opportunities for bidders to inspect items limits access to tangible item details.
- Inflexible payment terms without secure deposit collection. Creates collection issues if winning bidder unwilling or unable to close post-auction. Understanding Auction Outcomes
If I am the highest bidder in a live auction, what next steps do I need to complete to secure the purchase?
Typical next steps for highest auction bidder are:
- Sign Purchase Contract: Legal document that confirms the highest bidder’s agreement to pay the tendered amount and complete the buying process. Defines other terms like timeframe, deposits etc.
- Submit Earnest Money Deposit: Either 10-20% of winning bid or amount defined in Purchase Contract to demonstrate serious buying commitment. Held in escrow temporarily. Applied to final payment.
- Make Final Payment & Complete Acquisition: Complete balance payment within time specified in auction terms to receive ownership rights and title transfer for items bought.
- Coordinate Pick-Up Logistics: For tangible goods, arrange qualified movers, shipping or personal pick-up coordination as outlined in auction delivery rules.
What determines if an auction is successful from the seller’s perspective?
Key outcomes determining seller success:
- Asset(s) change ownership by the end for the auction. Items remaining unsold are considered unfavorable.
- Final selling price meets or exceeds minimum reserve price expectation set by seller pre-auction.
- Post-auction sales proceeds collected timely from winning bidder(s) based on auction payment timelines. Any collection delays or defaults make the outcome less desirable for sellers.
What happens in the case of a dispute related to item condition or representation?
Auctions are largely considered “as is, where is” events with limited seller representations or warranties concerning item condition or history.
Bidders participating acknowledge through signed terms and conditions that they had the opportunity to conduct satisfied due diligence prior to offer submission.
This limits legal recourse options for bidders post-auction. Alternative dispute resolution options favor sellers over bidders in case surprises or defects appear after purchase completion. Seller liability is minimal concerning quality or information accuracy.
Who pays the auctioneers commission and other fees in an auction transaction?
- Commissions are typically paid by both the buyer and seller in an auction transaction:
- Seller Commission / Consignment Fee: Paid by asset seller to auctioneer for facilitating sales events, marketing assets to mobilize buyers and closing transactions. Ranges from 10% to 30% of selling price depending on asset type and value. Certain fee components may be fixed vs percentage based.
- Buyer’s Premium: Paid by winning bidder over and above the amount tendered to acquire the item. Compensates auctioneer for bidder engagement, administering transparent sale, follow-up and documentation. Typically 10-20% of closed purchase price.
Additionally the seller pays marketing, promotion, staging, cataloging expenses incurred pre-auction by facilitators. Buyers may incur shipping, storage, insurance, refurbishment, restoration expenses post-auction.