Does It Make Sense to Set Reserves?

Under certain conditions, auction consignors can set the minimum amount the auction house will accept as the winning bid on a lot. This is called a reserve, or a protective bid.

Auction houses typically charge consignors a fee for lots that fail to meet reserves. This should motivate consignors to carefully consider their reserves, and to keep them as low as possible.

One important point about reserves often gets lost in the fine print of an auction consignment agreement – reserves are usually expressed as the minimum hammer price acceptable by the consignor, not the hammer price less the seller’s fee. A clause in the auction contract should clarify this issue so that there are no misunderstandings about how the auction house will execute your reserves.

 Here’s an example. A consignor asks an auction house to put a $10,000 reserve on an item. The consignor has agreed to pay a 5% seller’s fee. The item opens at $9,000 and is bid up to $10,000 and sold at that price. After the sale the consignor gets his statement and sees that he will only receive $9,500. He gets quite upset and calls the auction director. The auction director explains that according to their contract the consignor’s $10,000 reserve refers only to the hammer price of the lot, not the hammer price less the buyer’s charge. Be sure you understand the terms in your contract that relating to reserves.

If you do decide to submit reserves, submit a clearly printed list of your reserves in order to avoid costly errors, and have someone at the auction house sign that they have received it.

 Auction directors love consignments without reserves because this almost guarantees that every item will sell. If that is in accordance with your wishes, by all means go ahead and consign without reserves; unreserved auctions often produce excellent results. Just be sure and tell the auction director you don’t require reserves, and do this before you negotiate the auction contract. It may help you negotiate a lower seller’s fee.

Many dealers and collectors put reserves on their lots because they think this will guarantee fair price realizations. They consider reserves to be insurance against any unusual circumstances that might interfere with the auction process. Inquire about what would happen if no reserves were set, and unforeseen circumstances beyond the control of the auction house occur. Most auction directors are fair and sensible. They use good judgment to protect their consignors and their bidders. If conditions turn out to be unsuitable for the auction they might postpone the sale. That is exactly what happened when the World Trade Center was attacked. Auctions scheduled on or about 9/11 were postponed. On the other hand, at least one auction house I know decided to go ahead and conduct an auction during a blizzard. (As it turned out, the auction did OK. Internet bidding proved to be quite active.)

What happens when there are no reserves set? Barring any unusual conditions, in the absence of reserves most numismatic auction houses start the bidding at a set percentage of the low end of the estimate range for any particular lot. 60%-65% of the lower estimate is typical. Check the terms of tale or the auction contract and see if this is mentioned. If it is mentioned in the terms of sale then every lot is, in effect, covered with a reserve. If it isn’t mentioned, asked the auction director what he will do in the absence of any bids.

If you insist on reserving your lots be reasonable. Submitting reasonable reserves requires some serious homework. Start off by determining how much each significant item in your collection is worth. Do the research yourself, or have a professional do it for you (see How Much Is Your Collection Worth?). Don’t forget to consider the buyer’s fees as well as the seller’s fees when trying to establish what you can expect to get for an auction lot.

Once you think you know what is a fair and reasonable reserve price, apply the algebraic formula below.

Here’s an example: A consignor wants to end up with $1,000 (“Expected Realization”) after the seller’s fee of 5% is applied. How much should his reserve be?

Reserve submitted to the auction house should be = Expected Amount / (1- Seller’s Fee)

Reserve submitted to the auction house should be = $1,000 / (1- .05)

Reserve submitted to the auction house should be = $1,000 / .95

Reserve submitted to the auction house should be = $1,052.63

Round this amount to the nearest bidder increment, $1050, and submit this as the reserve.

If the coin fetches a hammer price of $1,050 the consignor will then net $997.50 ($1,050 less the 5% seller’s fee).

Setting reasonable reserves is the key element in maximizing auction results. Set the reserves too high and you won’t sell all of your items. You will also end up paying reserve fees. Set your reserves too low and you may fail to maximize your results.

Here is another good reason to set a reasonable reserve;  “It only takes two bidders to sell an auction lot at a fair price.” I have heard these words throughout my career as an auction director, but they are not necessarily true. It only takes one bidder if you set a reasonable reserve on a lot.

Agree to reasonable reserves and you may be able to convince the auction director to waive the reserve fees entirely, or to give you a certain number of reserves at no charge. Many different reserve fee arrangements are possible. The usual arrangement is to charge the consignor 5% of the hammer price of any reserved lot that fails to sell.

For example, a consignor reserves a lot at $10,000. The lot is estimated at $10,000-$15,000. There are no bids on the auction book. The auction director opens the lot at $6,500. Someone on the auction floor bids $7,000. The auctioneer sees the consignor’s reserve in the auction book and bids $7,500. No one else bids. The lot goes “to the book” because it fails to meet its $10,000 reserve. The consignor is charged a reserve fee of $375 (5% of $7,500).

Reserves must be agreed to by both the consignor and the auction house before the auction. They cannot be unilaterally changed. Auction houses usually prohibit a consignor from bidding on their own lots during an auction. Auction contracts usually specify that a consignor has to submit his reserves at least 48 hours before a sale, and that he cannot bid on his own lots from the floor during the sale. Some consignors try to get around this by having someone else bid on their lots in an attempt to drive up prices beyond the consignor’s reserves. These consignors end up paying both the seller’s fee and the buyer’s fee when this tactic fails.

If you are going to submit reserves, be sure to do your homework. Determine the value of each significant item; take into consideration what an educated buyer would be willing to bid. Take both buyer’s fees and seller’s fees into consideration. Seek professional help if needed. Contact us.