Tuesday, October 26, 2010

Auction Shills, Buy Backs & Reserves

This subject has to rank right at the top, when it comes to misunderstandings and myths about auctions.

I often hear comments, which imply that auctioneers just "run up the bid". Of course, this often implies that the auctioneer is "shilling" or similar illegal activities and in some cases, it may be true. However, it also depends on one very important point, referred to as Disclosure.

So, first we must understand why the auctioneer would bid against the bidders, in the first place. This is usually due to a "reserve" or minimum price that must be met, which was set by the seller.

The Texas Business and Commerce Code, Section 2.328, was adopted and it is also designed to protect the seller, in case there isn't a reasonable interest for their goods, at a particular auction. Therefore, it states that ALL auctions are considered to be With Reserves, unless otherwise announced to be Absolute (without reserves). This gives the auctioneer the authority to protect the seller from a "bad day" at the auction.

So, if there is only one bidder with any interest and bidding starts below the reserve, the auctioneer only has two options:
1.)Pass the item, in which the bidder may get upset because they would have bid higher and the item may have met the reserve, or
2.)Bid on behalf of the seller's reserve, until the item reaches the minimum or the bidder stops bidding. Of course, if the reserve is not met, the auctioneer may sell it to a "seller's bidder number" or "Pass" the item. (I'll explain this more, shortly.)

HOWEVER, there are laws that determine IF and WHEN an auctioneer or seller can bid!

If the auctioneer does not DISCLOSE that they will bid on behalf of any items with reserves, then it is called "shilling" (capping, puffing or other similar terms), which would be illegal.

Of course, laws are written mostly by lawyers, so you often have to read carefully to understand the meaning and what it does or doesn't allow. So, as we keep this in mind, we look at another part of Section 2.328, which states, "If the auctioneer knowingly receives a bid on the seller's behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved...".

You should note the words, "and notice has not been given that liberty for such bidding is reserved". This is the part that gives the auctioneer the authority to bid on behalf of the Seller, ONLY if "such bidding has been DISCLOSED" (notice has been given) by the auctioneer, prior to doing so.

So, to simplify this:
1.) This means, if it is DISCLOSED that the Seller (or the seller's agent) has the right to bid, then it is completely legal for the Seller to bid on their own items.
2.) If the auctioneer DISCLOSES that he/she reserves the right to bid on behalf of the Seller (as the seller's agent) and/or any reserved minimums, then it is also legal. In such cases, usually the auctioneer (or their staff) will bid on behalf of the reserves, as needed. This is the more common method, as it keeps Sellers from second guessing the bidders and running the bid higher than they may have originally sold it for, had they just set an agreed minimum with the auctioneer.

If the item does not meet the reserve price, then the auctioneer has two options.
1.) The auctioneer may "Pass" the item.
2.) The auctioneer may use a use a "Seller's Bidder Number" or "House Number" and "sell" the item back to the Seller. This is typically referred to as a "Buy-Back" and there are several reasons that the auctioneer may use this method. I'll explain more about this, later.

Note: The auctioneer does not have to disclose if a particular item has a reserved minimum. In fact, it is not in the Seller's best interest to disclose items with reserves or the minimum price, as it tends to stifle the bidding.

Keep in mind, "Disclosure" does not mean that the auctioneer must make the statement each time, for each item. Neither does the auctioneer have to make a verbal statement regarding such disclosure, if it is clearly stated in a written Terms & Conditions made available for everyone to read.

Buy Backs: Why do some Auctioneers use a "House Number" or "Seller's Bidder Number"?
One of the reasons is that the auctioneer may charge the seller for reserved minimums, if the item doesn't sell. This may be a flat fee or a percentage of the minimum reserved price or possibly the highest bid received, etc. In some cases, the seller may be required to actually pay for the item and then get paid for the "sale" of the item, minus the auctioneer's commission.

Sellers should keep in mind, since the auctioneer works on commission and for each item that does not sell, the auctioneer would otherwise only be losing money after expending the same effort to advertise and attempts to sell your item, as other items without reserves. So, one might consider why the auctioneer would waste their time and effort, when they may have been able to sell something else and earn a commission on that sale. Keep in mind, even a Doctor still charges you when he/she tells you that you only have a cold and you just end up going to the pharmacy to buy cough syrup off the shelf. The same is true for all Professionals, as they are paid for their time, knowledge and effort expended.

Now, some bidders still may not think it's fair for an Auctioneer to allow a reserve on the items, although the law states that ALL auctions are considered With Reserve, unless specifically stated that they are "Absolute". You rarely find any auctioneer advertising an Absolute Auction, even if everything has no reserves. This still allows the auctioneer to use their judgment and pass any item that may not have a reasonable offer, based on their responsibility to the the Seller, which is who the auctioneer is actually working for, not the bidders. This is also covered by law and is referred to as "fiduciary duty".

Should the Auctioneer just say "Pass"?
I rarely use "seller's bid numbers" or "house numbers," although I will admit that I have done so on some occasions. In some cases, if I can't get the bidding started at the reserve, I may sometimes just "Pass" the item. If I do accept a bid below the reserve, then I may bid on behalf of the reserve and if it doesn't meet the minimum, I may only "Pass" the item or... "Sorry folks, we didn't quite make it on that one. Next item!".

Now, I've also had people ask why I don't sell as much as other auctioneers do, as it appears that everything sells at other auctions and a few have also complained that I "pass" too many items. This is another reason that many other auctioneers prefer to use "seller/house numbers", as it seems to make it appear more interesting to the buyers, as they hear "sold"... after all, that's what they expect at an auction. So, I may not please everyone with my methods, either. But, I just like to be a bit more open about the way auctions are conducted and the bidders get to see what is really selling and which items were "passed". To me, it beats explaining why the item that Sold, showed up again at a later auction.

In summary, let's revisit Section 2-328 of the Texas Business and Commerce Code:
Part (4) is where it states, "if the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved..."
So, if it is "announced" either verbally or within the Terms & Conditions, then "Notice HAS been given" and it is legal.

While I do know that there are some auctioneers that do not legally comply with this law, be sure that you have read all Terms & Conditions and have also listened closely to any opening announcements, as the Disclosure does not have to be provided in both forms of communication. Therefore, some auctioneers may have the disclosure written in their Terms & Conditions, but they may not verbally announce it and leave it to the bidder's own due diligence (and perception). Keep in mind, the law makes it the bidder's responsibility to know what the term and conditions are, prior to bidding. Just because you weren't there during the opening statements, you are still legally bound to those terms when you bid... even if you don't know what was stated. So, find out, BEFORE you bid.

You can read the laws that govern auctions & auctioneers on the Texas Dept of Licensing & Regulations (TDLR) website at:
You can also download the "Greenbook" at the TDLR web site, which is a compilation of ALL laws that an auctioneer must be aware of, from auction laws to business requirements, trade laws, lien requirements, auto, real estate, wildlife and many, many more. You can find the "Greenbook" here: (this is a PDF, so you will need the free Adobe Acrobat Reader)

Keep in mind, if you come to one of our auctions, you will often hear me state that I reserve the right to bid on behalf of any reserves and other similar statements. However, should I forget to make a particular announcement, I ALWAYS have a written Terms & Conditions posted at my auctions and I strongly encourage everyone to carefully read it, as it would take too much time to try to cover every detail when we're trying to get the auction underway. Of course, a few people may think I spend too much time on the opening statements, but I do try to make sure that everyone understands what is going on at OUR auctions.

Texas-National Auctioneers