11 Apr The ‘no reserve’ action that wasn’t!
In Brisbane recently a no reserve auction caused an enormous amount of interest when it didn’t sell despite some solid bidding. Surely a no reserve auction means that the property must be sold even if the highest bid is $1. So what happened and what are the pros and cons of a no reserve auction.
Kevin: Well, here’s a horror story for you. You may or may not have heard about the no-reserve auction in Chelmer, which wasn’t quite a no-reserve auction. Let’s find out about the intricacies of this. I’m going to talk now to Justin Nickerson. Justin is a director of Apollo Auctions.
Justin, thanks for your time. By the way, too, happy Easter.
Justin: Thank you very much, Kevin. Much appreciated. Likewise.
Kevin: First of all, tell me, a no-reserve auction, is it exactly what it says or it sounds like, and that is the house is going to be sold with absolutely no reserve?
Justin: Well, generally, yes is the short answer. Usually if it’s been advertised as no reserve the owners are prepared to take a punt, so whatever the highest bid is on the day, that’s the person who will end up owning the property.
Kevin: Have you ever done a no-reserve auction?
Justin: I’ve done two, Kevin. As a full-time auctioneer, I’ve probably called a few thousand auctions in my lifetime and I’ve only done two, and I haven’t done any for a couple of years. It’s very uncommon. Most sellers don’t want to roll the dice and take that chance, but they do happen from time to time.
Kevin: The two that you’ve done, tell me about them. Were they successful? In other words, what sort of price did they achieve?
Justin: One of them actually achieved what I’d consider to be a premium in the market, really. One thing about no-reserve auctions generally is that they do attract a whole heap of buyers, and what we generally find with an auction – be it a no-reserve auction or a regular auction – the best auctions always have momentum.
What you tend to find at no-reserve auctions is that they do get a bit of momentum of their own and they take off, and sometimes they do go past what most people would deem as being a fair market value or a reasonable market value. One of the no-reserve auctions I did certainly did that, and it probably sold at a premium. The other one probably sold, I guess, at figure that’s roughly around that market-value figure.
Kevin: I guess that’s the proof of what an auction is all about, and that is creating that competition. When you create the competition, you put people in an environment where they may spend more than they ordinarily would just to compete.
Justin: Yes, exactly. We always say there are two things, two ingredients, you need from a seller’s point of view to get the best price that’s out in the market. One is you need an emotional buye – someone who loves the property – and the second one is you need to place them in a competitive environment. That’s what auctions are built around. It’s built around “I want this home and I can look across the yard or across the living room and see someone else is trying to take this home from me,” and that’s when you generally get the best results and the most competitive behavior.
Kevin: You said you’ve done two. One you mentioned that sold at what you thought might have been a premium. What about the other one?
Justin: It probably sold roughly around market value, maybe slightly on the lighter side. It didn’t have the same amount of registered bidders, and it certainly didn’t have the same amount of people there on the day. It still had that very, very, good number, but the other one was a bit of a frenzy, whereas this one was probably a little bit more reserved. But it did get to a point where it’s probably equitable to market value, anyway.
Kevin: Not a bad result, is it? Two auctions, one getting a premium price and the other one selling at fair market value. You’d have to say the reason there probably aren’t more no-reserve auctions is because, as you hinted at the start, sellers are just not willing to roll the dice.
Justin: Yes. It’s a huge risk. I think every seller wants to get the best possible price, but they also want to mitigate as much risk as they can. Putting your property out there at the mercy of the buyers on the day without a safety net – which is your reserve price in essence – is probably not a feeling that sits well with most owners. I think that’s the reason we don’t do more of them. They’re great fun for us as auctioneers. The marketing agents generally have a pretty good time, as well. But from the seller’s point of view, it can be an incredibly stressful environment for them.
Kevin: The Office of Fair Trading are looking into that auction that I mentioned at the start, the one in Chelmer. Despite the bidding reaching $640,000 the property was passed in. From what you’re telling me and from what I know, that shouldn’t have happened. The property should have been knocked down for $640,000, shouldn’t it?
Justin: The short answer is yes. The long answer is… Look, obviously, the Office of Fair Trading do their enquiries, and I wasn’t at the auction. I only know whatever everyone else knows, which is what the articles that have appeared there have said.
One of the key terms and conditions in the Conditions of Auction here in Queensland is that the property is offered subject to a reserve price and the seller’s approval. That plays a really significant role in this case here, where if you read that to the essence of the law, it’s offered subject to a reserve price – which is not in play – but it’s also offered subject to the seller’s approval.
Now, if the seller hasn’t granted approval to sell the property at $640,000, by the absolute wording of the legislation, you can’t sell the property. I understand the agent, the auctioneer, the principal, and the seller were all the same person, which blurs the lines, as well. But in that case there, that’s the protection I guess you’ve got under the terms and conditions of auction.
What we see, I guess, on most weekends and anyone who’d been to an auction will know there’s always someone in the crowd who yells out “Are we on the market?” question. As an auctioneer, it’s actually not a question you can answer because of the fact that even if you are past that reserve price, without seeking the seller’s approval, legally by the absolute lettering of those terms and conditions, you can’t put the property on the market without that permission, anyway.
Kevin: I’ve quite often seen properties knocked down where they owner hasn’t been referred to because the reserve has been met and exceeded. Are you saying that that could even be challenged once the auctioneer knocks it down?
Justin: I’m saying best practice, Kevin, under the terms and conditions of auction is that they should always confer with the seller for their instructions, because again, the wording is very, very, clear. It’s offered subject to reserve price and the seller’s approval. It’s not “or the seller’s approval”; it’s “and the seller’s approval,” meaning if you don’t have both of those things prior to selling a property, if the seller did get upset for whatever reason or they felt they were pressured or whatever it may be on the day, potentially you open yourself up and you could be challenged there.
Kevin: Not wanting to split hairs here, but if we go back to those terms and conditions subject to a reserve, surely if it’s a no-reserve auction wouldn’t the reserve be $0?
Justin: Yes, that’s correct. There is a difference between not having a reserve and having a reserve that’s basically $0. In essence, if w don’t have a signed reserve form, we can’t start the auction, because the seller hasn’t set a reserve. If it is a no-reserve auction, then generally that reserve should be written as $0.
But again, I don’t think that takes away the fact that the second part of that is pretty clear in that you need to seek the seller’s approval prior to selling the property. But again, like a no-reserve auction, that line becomes incredibly blurred and you get a scenario like happened on the weekend where it’s left up to greater legal minds than mine and everyone else’s is to decide what is appropriate and what should have happened in that case.
Kevin: Still on that auction in Chelmer, a number of people are concerned and expressing some concern about the fact that they didn’t know that the principal of the office who actually also was the auctioneer was the owner of the property, and that wasn’t disclosed until later. Does the selling agent have to disclose that they are also the owner of the property. Is there a requirement for them to do that?
Justin: There’s not a legal requirement, no. Again, a lot of this stuff, Kevin, as you know is a legal requirement and then a moral requirement. I always think it’s in your best interests to disclose it. If you’re as transparent as you can be with the buyer throughout this process, I think it ends up having a better result and a better relationship at the end. They don’t need to disclose that. If they’re buying the property, there certainly needs to be disclosure made there, but on the selleing side, that doesn’t have to legally take place. But again, if you come back to what is the best thing to do, I think the best thing to do in most cases is definitely to declare it.
Kevin: Justin Nickerson, a director of Apollo Auctions, a professional auctioneer does it all the time, and he knows what he’s talking about.
Justin, thanks for your time.
Justin: My pleasure. Thank you, Kevin.