by Mike Gulett –
A no reserve auction means that there is not a minimum bid required for the car to be hammered sold. I understand why the auction company wants a no reserve auction because it guarantees that the car will sell (assuming there is at least one bid). For the auction company the motivation to sell is stronger that the motivation for the highest price.
But the seller must agree to the no reserve auction and the motivation for the seller should be to achieve the highest price, right? There may be some cases where the seller just wants the car sold at almost any price, like if the car is a junk heap or a stalled project taking up space and the seller just wants it gone. I get that. No reserve makes sense.
We all see many cars for auction at no reserve that are valuable, desirable cars – yet the seller is willing to take the risk and let it go at any hammer price. The conventional wisdom is that a no reserve auction generates more interest and gets the bidders so excited that they bid up the price beyond what the seller was expecting. How often does this really happen? Not just the auction hype but really how often? Every auction TV commentator that I see says this strategy works. What data do we have that proves this is a good selling strategy?
Gooding & Co Pebble Beach Auction 2017 Foto Jensen Sutta Courtesy Gooding & Co
It seems to me that no reserve auctions attract bargain hunters, which is not consistent with achieving the highest price. The no reserve auction creating a higher price may be just a myth created and perpetuated by auction companies.
The auction companies are so motivated for a no reserve that they will, at times, share some of their fees with the seller to help entice a no reserve listing or in the case of a live auction they work on the seller during the auction to get them to remove the reserve.
I have watched many auctions on TV, such as the Mecum Auctions, and most of the time, in my memory, when the reserve is lifted during the auction the car hammers for the current bid, which means there was no bidding frenzy that drove up the price after the reserve was lifted. Many times on TV the camera and microphone pick up Frank Mecum trying to persuade the seller to remove the reserve at the current bid. He will at times promise a minimum price to the seller which may include a reduction or elimination of the seller’s fee and maybe a kick back of some of the fee from the buyer.
Let’s look at the economics of an auction for say a $200,000 car. For the in-person auctions here in the US the auction commissions are typically 5% for the seller and 10% for the buyer (they can be higher in Europe and may be higher in the US for some auction companies). A $200,000 hammer price generates $30,000 in commissions to the auction company under normal circumstances and nets the seller $190,000 (after the $10,000 seller fee) with the buyer paying $20,000 in commissions.
Bizzarrini GT 5300 at auction in 2008 at Russo and Steele in Monterey
An Example
The auction company can use the total commission, or a portion, to motivate the seller to sell at no reserve or to remove the reserve during an auction. If the minimum wanted by the seller is $200,000 the reserve would be set above that to cover the seller’s fee. But a hammer price of $190,000 (below the reserve) could still result in the seller netting $200,000 (after his $9,500 fee is forgiven and he receives $10,000 of the buyer’s fee). The seller would have to agree to lift the reserve. The auction company would still receive $9,000. This may be the best deal if $190,000 is the maximum bid achievable that day. After all the car is at the auction, all the work has been done by the auction company and a smaller fee is better than no fee. But a no reserve, or lower reserve, would have resulted in the full fee to the auction company and a lower net price to the seller.
The economics of the on-line auction site, Bring a Trailer, are quite different. The seller’s commission is near zero at $99 and the buyer’s commission is 5%, a minimum of $250, and capped at $7,500. This commission amount does not seem like enough to compensate the seller for taking the risk of a no reserve auction and the auction company is not likely to give all of the commission to the seller anyway. Yet there are many no reserve car auctions on Bring a Trailer.
Why do some sellers put up their desirable, and sometimes very valuable, collector car for auction at no reserve?
One question bidders should think about is – are there fake bidders bidding on behalf of the seller to get the auction price higher?
Let us know what you think in the Comments.
Ferrari 250 GTO At The Bonhams Auction In Monterey – August 2014 – Photo by Mike Gulett
I once asked a yacht broker why anyone who could afford a Mega Yacht would go the Fort Lauderdale boat show, with all the carnival like atmosphere, to purchase a 50 million dollar yacht. Answer; No where in the world can someone come to one location and see 50-100 Mega Yachts in one place so your wife can pick out the one she likes best. Same with car auctions, the high end auctions draw car people with money to spend and don’t want to travel all over the country to inspect prospects. The no reserve cars help pack the house and most of the time the cars bring more than they would have through private sales. You can’t go by the pre auction estimate as to the value of that particular car as that number is often puffed up to make a buyer more at ease paying more than he should. Also many car owners want to sell cars anonymously for good and bad reasons or they are estate sales where the kids just want to turn dad’s cars into cash quickly. I have good and bad experiences with reserve and no reserve auctions, it is just a gamble.
If you can count on the auction companies to do what you have paid for in placing the car in the first place there is a chance you may do ok, but my experience has been that the famous auction company moved my car 2 hours earlier in the stream and people who were interested in purchasing my car were not there waiting till closer to the advertised time to bid on the car… as it was no reserve, my car wound up selling for $25K and I had over 90K invested in it not to mention the cost of listing the car in the auction and transportation cost to get it there… Sellers Be Wary of auction houses, the larger they are the easier it is for them to get away with this sort of thing. I suspect that the auction house wanted to give someone a bargain at my expense.
That stinks.
And an on-line auction would not be able to do that as they last for several days.
Exactly, but they often times don’t seem as well attended
I sold some of my canvas prints of my classic car paintings at No Reserve at Mecum Monterey because I knew the auction company needed lower cost items to sell between cars or before the first car of the day would come up. i felt that the expensive cars there would draw in well heeled buyers who might consider art for the first time. The bad part is if they sold for too little considering I had to come to Monterey on Wed. of Car Week to enter them. Even the No-Tell motel was $130 a night. I feel No Reserve sales are a psychological stimulator on the crowd–since they absolutely WILL sell, the auction company then has the magic word SOLD….SOLD” to repeat endlessly and people outside the tent might come in just to see what’s selling so well. When I entered two 20″ x 30″s, I sold one for $1400 and the other for $900, my best day ever…
Mike.
What about the sneaky thing that Jerry Seinfeld did at Mecum Kissimmee? He put the iconic Steve McQueen Porsche 917 at auction there with an UNDISCLOSED RESERVE!!! There was a big publicity lead-up for this car at the auction, but it was never disclosed to the public that there was a reserve . The high bid that he declined was $25 million. Who knows what the reserve was except for Seinfeld and Mecum? That whole episode was shady. I have never heard of such thing as an “undisclosed reserve”. As you told me on a previous occasion, perhaps it was all a facade for a real sale later on in the year at Pebble Beach.
Glenn in Brooklyn, New York