What Really Goes on Up There at the Auction Podium?

What Really Goes On Up There at the Auction Podium?

 

When a live auction begins, it often looks as if the auctioneer is the central figure in a mystery movie with a pre-determined plot. As each lot comes up for sale, the auctioneer and his assistants seem to be following a script; they know where each lot begins; they seem to know what the next bid will be, and they often seem to know where each lot will end. To add to the mysterious atmosphere, auctioneers have a vocabulary that is never heard outside of an auction room, and they sometimes chant the words in a mesmerizing sing-song manner, almost like an itinerant preacher. While a professional coin dealer in the audience may understand the meaning of just about everything that goes on in the auction room, a novice might sit there scratching his head, thoroughly mystified.

 

What is really going on up there? How are the “openers” for each lot determined? Where do bids come from when it often seems as if no one in the audience is bidding? Is the system fair to both bidders and consigners?

 

Determining “Openers”

 

The level that each lot starts at is known as the “opener.” Some auction houses prepare “openers” and print them out for the auctioneer. Other auction houses have their openers entered into a data base that is monitored by one of the auctioneer’s assistants.

 

How are the opening levels determined? All of the bids mailed in by absentee bidders are entered into a data base. Any reserves that were placed by the consignors are entered into the data base as well. In the absence of any absentee bids or reserves, the auctioneer or his assistant will take into consideration the estimates placed on the lots.

 

Preparing the openers is a complex task, and how well it is accomplished will have a significant effect on the outcome of the auction. To see how it is done, examine the following examples.

 

Three Absentee Bids Determine the Opener

 

An auction lot has no reserves. Bids of $100, $150, and $180 have been placed on this lot by three separate absentee bidders. The auction company’s estimate for the lot was $100-$150. Since this auction company has a policy of opening all lots at two-thirds of the low end of the estimate range, or more, any one of the three absentee bids is acceptable.

 

Our auctioneer correctly opens the lot at $160, and asks if anyone is willing to bid $170. If someone in the audience bids $170, the auctioneer will see the $180 bid in his printout or on his computer screen, and he will let the room know he has $180 “at the table” or “on the book.” A bidder in the audience might bid $190 and win the lot, or there may be further competition from the floor, phone or Internet.

 

The Consignor’s Reserve Determines the Opener

 

Sometimes the consignor’s reserve determines the opening number. If a consignor submits a reserve and there are no other bids on a lot, it may be opened at, or near, the reserve.

 

The Auction House Estimate Determines the Opener

 

In a case where there are no absentee bids placed on a lot, and no reserve has been submitted by the consignor, the auction estimates come into play. Some auction houses publish estimates in their catalogs and on line, some do not, but the estimates usually appear in the auctioneer’s book, and help him determine an opening bid.

 

How does that work? Read the terms of sale. The auction Terms of Sale may state that in the absence of any bids or reserves, lots will be opened at a fixed percentage (typically two-thirds) of the lower end of the estimate range. For example, a lot with no bids, estimated at $1,000-$1,500, will usually be opened at $650. Note that the opener was rounded up from $633 (two-thirds of $1,000). Auctioneers try to keep the openers at numbers that reflect the suggested bidding intervals published in the auction catalog.

 

If the auction house is well-known for establishing accurate estimates, consignors often have enough confidence to skip the process of setting reserves on their lots.

 

Reasonable openers are important. If there are few absentee bids, and the openers are set way below the true value of lots, the auction will take forever (unless the bidders in the audience or on the phone are willing to “jump” their bids to price levels nearer to the actual market values). An opener set above the actual value of a lot will result in a “No sale.”

 

The Auctioneer Walks a Tightrope

 

What happens when the auction house receives only one bid, and it is well above the consignor’s reserve? An auction director trying to come up with a proper opener in this example may feel like he or she is walking a tightrope. He has to try to be fair to the bidder, the consignor, and to the auction house as well.

 

Suppose a bidder calls an auction house and says “I want to buy Lot 1005 and money is no object. Just bid whatever it takes.” No sensible auction house will accept this kind of bid. The sensible auction director tells this bidder that he must come up with the maximum price he is willing to pay, or find an agent to bid for him. Our eager bidder submits a $25,000 bid on the lot, despite the fact that it has been estimated at $5,000-$10,000. The auctioneer sees that the auction house has already received a bid of $5,500 in the book. There is no reserve on the lot. He opens the lot at $6,000, clearing the $5,500 bid, and potentially saving the $25,000 bidder a great deal of money.

 

The consignor later overhears the $25,000 bidder telling a friend “What a wonderful auction house this is. They saved me thousands and thousands of dollars. I was willing to pay up to $25,000 and got the lot at $6,000.” The consignor complains that by opening the lot at $6,000 the auction house cost him thousands of dollars.

 

Another auction director handles the same situation differently. He opens the lot at $9,000; just above the price that the specialists working for the auction house would be willing to pay. The bidder in this scenario pays $3,000 more than he would have in the example above.

 

Is the auction house acting properly in the second case? The answer may be found in the auction contract or in the Terms of Sale. There will almost always be a statement that informs all concerned that the auction house retains the right to buy lots for their own account, and to sell lots that belong to the auction house. While some people consider this to be a conflict of interest, others see that the actions of the auction house help maintain fair market realizations.

 

Why Is One Auction House Better Than Another?

 

Why is it that some auction houses consistently manage to sell almost every lot they offer for sale, while others have many lots that don’t sell? Good auction houses know the market value of what they are selling; inferior auction houses do not. As a consignor, maximize your auction results by consigning to an auction company that knows the value of what you are selling. The same advice holds true for potential bidders. If an auction house knows the value of what it is selling, any reserves will be realistic, and reasonable bids will win the lots.

 

When openers are carefully set, almost every lot will sell quickly. There will be few “ties” between the floor bidders and the book bidders. The sale will end at a reasonable hour and everyone goes home happy.

 

Is the Bidding Rigged? It Sometimes Feels That Way.

 

The actions of an auctioneer may sometimes appear to be suspicious to bidders. When a bidder fails to win a lot, or when the auctioneer constantly bids against a bidder it sometimes feel as if that bidder is being singled out or cheated. IT may feel that way, but it probably isn’t true.

 

A bidder in the audience sees a lot opened at a reasonably low level. He raises his hand and places a bid, but the auctioneer immediately tops each he makes. This happens over and over again. The bidder feels that he is being forced into paying the maximum amount he is willing to bid, every time. Is the auctioneer really taking bids “from the chandelier,” (making bids up in order to get the floor bidder to bid more), or is the auctioneer simply acting on behalf of bidders who simply submitted their bids earlier, and are depending on the auctioneer to act as their agent?

 

Most successful auction houses get to be that way because they are scrupulously honest. Their reputations are a great deal more important to them than the few extra dollars they might earn by trying to force bidders to go one increment more. In all likelihood, the auctioneer is opening the lot a few intervals below the highest bid he has on the book. This is done in compliance with a statement you might see in the Terms of Sale, or it may be the unwritten policy of the auction house to simply open a lot one bidding increment above the second highest bid received.

 

If the auctioneer has two bids on the book, $500 and $1,000, he will open the lot at $600.

The floor bidder will bid $650, the auctioneer responds with $700, the floor bidder bids $750, the auctioneer responds with $800, the floor bidder bids $850, the auctioneer responds with $900, the floor bids $950, and the auctioneer bids $1,000.

 

Why did the auctioneer open the lot at $600 instead of $550? He did it to avoid a potential tie at $1,000. Ties lead to arguments, and they waste time. The auctioneer started the lot with an opener that could not lead to a tie with the $1000 book bid.

 

Are Consignors Being Cheated?

 

Consignors sometime leave the auction room thinking they were cheated when they were not. A consignor sees the auctioneer open a lot at $1,700, $100 above the consignor’s reserve of $1,600. There is a $2,500 bid entered into the book. Bidders from the floor and phone compete with bids from the auctioneer, who finally wins the lot at $2,500 and announces that it sold to a mail bidder.

 

The consignor complains “If the auctioneer had a bid of $2,500 or more on the book, then why did he take the chance of only opening the lot at only $1,700? What if there were no more bids from the floor or telephone bidders? The lot might have closed at $1,700, and I would have lost a potential $800.” That same consignor may be thinking “What if the bid on the book was $10,000? I may have been cheated out of an additional $7,500!”

 

Before you consign or bid in a sale, be sure to read the Terms of Sale, look at an auction contract, and learn as much as you can about the reputation of the auction house you patronize. Find a customer familiar with the auction house and its policies, or contact us to get professional advice.