What is the difference between an absolute auction and a reserve auction?
There are two basic types of auctions: Reserve Auction and Absolute Auction. These have been defined in law and there are several distinct differences between the two.
A reserve auction is one where the seller sets a minimum or reserve price that must be reached in order to sell. Should the bidding not reach the reserve amount the seller has no obligation to sell, it is totally up to the seller in this case. Sellers can also have the sale subject to seller confirmation and either accept or reject the final bid at their discretion. In reserve sales, where it is disclosed, the seller can actually bid or they can designate someone to bid on there behalf. All auctions not advertised as absolute are presumed to be reserve auctions
Absolute auctions are those in which the real or personal property is sold to the highest bidder regardless of price. Once an auctioneer has asked for bids and received one, that item or lot can not be withdrawn. The seller nor anyone acting on his behalf is allowed to bid with very few lawful exceptions. The seller can bid if this is to settle the martial assets in a case of divorce; if it involves the dissolution of a business, corporation, partnership, trust or limited liability company.
Be advised the information above will tend to vary slightly from state to state that we conduct auctions in. We will be glad to cover those differences based upon where the auction will take place in the consultation.
As an example, the following is from the Kentucky Board of Auctioneers website:
Types of Auctions
All auctions are presumed to be with reserve unless they are explicitly absolute or without reserve.
Auction With Reserve
The auctioneer may withdraw the goods at any time until he/she announces completion of the sale. The goods may be put up subject to the seller's confirmation or subject to a certain reserve price. At an auction with reserve the seller has the right to reject or confirm a bid. This does not automatically give the seller, or anyone acting on the seller's behalf, the right to bid. It is not required to announce the reserve price when it is met.
Auction With Reserve and the Seller Reserving the Right to Bid
The auctioneer may withdraw the goods at any time until he/she announces completion of the sale. The goods may be put up subject to the seller's confirmation or subject to a certain reserve price. The seller, or someone acting on the seller's behalf, may bid, provided that full disclosure has been made that liberty for such bidding is retained. A licensee shall not knowingly receive such a bid without this full disclosure.
It is the auctioneer's and the auction house operator's responsibility to make sure that the seller fully understands the law regarding absolute auctions. After the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless a bid is not made in a reasonable time. An auction without reserve means an absolute auction.
An auction cannot be advertised absolute or with similar meaning unless (a), (b), and (c) are met.
(a) There cannot be any liens or encumbrances, except current taxes; or All lien holders sign the absolute auction contract or a binding commitment agreeing to sell to the highest bidder; or a financially responsible person, firm or corporation signs the absolute auction contract or a binding commitment to guarantee that the liens will be paid regardless of the high bid.
(b) There must be a bona fide intent to transfer ownership at the time of advertising and at the time of the auction regardless of the bid or bidder.
(c) The listing contract must state that the auction is absolute or without reserve and that in no way shall the seller, or anyone on the seller's behalf, bid.
The above does not prohibit:
(a) A secured party from bidding as long as this does not establish a reserve.
(b) An individual involved in dissolution of marriage, partnership, trust, limited liability company, or corporation from bidding following that dissolution.
(c) The non-misleading advertising, with equal emphasis, of absolute and reserve items in the same auction.
Except as noted above, the seller may not bid at an absolute auction, nor may anyone bid upon his behalf. A licensee shall not knowingly receive such a bid by or on behalf of the seller