What do buyers need to know about reserves?
What is a Reserve Auction?
A reserve auction is an auction in which the seller, trustee, or their agent reserves the right to accept or decline any and all bids. At the conclusion of the auction, the high bid will be placed into the reserve, subject to the seller’s confirmation.
Wait a minute – a property might not be sold to the highest bidder?
Not always. With a reserve auction, the seller has the right to refuse the high bid if their reserve, the minimum acceptable price, is not met.
Will you tell me the seller’s reserve price before the auction?
Due to the nature and conditions surrounding the auction, it is not usually possible for a seller to provide us with a specific dollar amount that they will be able to sell the property for. For that reason, our office has a policy where we do not disclose reserve prices. To help explain why, take a look at the following sample scenario:
An auctioneer was hired to sell a commercial office condominium. At the time the auctioneer was hired, the business’ owner estimated that the mortgage balance on the property was $125,000.
The seller requested a payoff statement from their lender, but the request had to be processed. To prevent a delay in the sale, an estimated reserve price was set at $125,000. Five days before the auction, the lender delivered the payoff statement to the seller. The seller discovered that, due to a clerical error, the mortgage servicer miscalculated the amount due based off a higher interest rate. As a result, the statements the seller was provided over the years were inaccurate. The actual payoff amount was only $95,000.
How many buyers may have balked at the $125,000 price tag, skipping the auction? Would those buyers have jumped at the opportunity to buy it for $95,000? To prevent these types of situations from occurring, we do not disclose reserve prices.
When do I find out if a reserve has been met?
At an on-site auction, the seller, trustee, or their agent is typically on the premises as the auction is occurring, and they are usually able to confer with the auctioneer to confirm their reserve. If the reserve is met, the auctioneer will typically indicate such, at which point the auction converts from a Reserve Auction to an Absolute Auction (read more about Absolute Auctions in Reserve Auctions versus Absolute Auctions).
What if the auction isn’t on-site or the seller is unavailable to confirm acceptance?
If the seller or trustee is unavailable to confirm the high bid, the auction will typically conclude with the property being sold subject to seller confirmation. The terms of every sale may vary, but in most cases, bids are legally binding for 24 hours. At which point, the high bid will be placed into reserve pending the seller’s confirmation.
