"Reserve" Auction

Have you ever attended an auction and the auctioneer announces that the property you've come to bid on is being offered "with reserve"? Did the auctioneer also announce a stated reserve price or was the property offered with an unstated reserve?

Reserve offerings are common place in the world of auctions. The intentions of the auctioneer are to protect the integrity of the property along with the sellers financial interest (mortgage). When an auctioneer offers a property with unstated reserve he will explain to the bidders that the seller has the right to accept or reject the high bid at the fall of the gavel. Also, during the bidding the seller can authorize the auctioneer to make an announcement that the reserve has been met and at the fall of the gavel the property will be sold without reserve (absolute). By using this method the auctioneer sends a message to the bidders that they will own the property at the end of the bidding. You can expect the bidding that had typically stalled to increase noticeably. A fury will in sue by bidders wanting to own a property without further negotiations.

When a property is offered with a stated reserve the seller has placed a value or number that gives a bidder a ball park estimate of price that a seller would be willing to entertain. Usually an auctioneer would discourage a seller from this strategy. The idea of putting a value or price on a property divulges the sellers hand (what he's willing to accept). Selling at auction is a way to offer property without capping the value, in other words the sky's the limit.

Because you offer a property using a reserve you are basically hiding the sellers threshold of pain. How low a price will the seller accept and how much pain can he take when it comes to an acceptable offer.

As you can see there is a lot more to structuring an auction than meets the eye. The methodology of the auction process is best left to the pros that know their trade.