Absolute vs. Reserve
By Jerome J. Manning, CAI, AARE
As seen in The Auctioneer
I conducted my first auction of used restaurant equipment in the middle of February 1976, in an unheated warehouse on Cape Cod. Ninety percent of Cape restaurants were closed. Anyone with two dimes to rub together was enjoying the winter in warmer climates. I was a dealer in used restaurant equipment, broke and in desperate need of cash. A fall auction conducted at my warehouse by a large area auction firm had been less than successful and had rung up substantial expenses.
So I thought I had nothing to lose in conducting this February restaurant equipment auction myself. Hoping to attract as many bidders as possible, I used bullets like "everything goes" and "no bid too low" in the advertising. Telephone inquirers were told there would be no minimum. The auction produced one of the best turnouts for restaurant equipment I had seen on Cape Cod, with prices substantially higher than I expected.
Jerome J. Manning &Co., Auctioneers/Liquidators was born at this auction, launching a career that has been productive and rewarding beyond my expectations and those of Terry, my wife and partner.
Approximately one month later in conversation with a highly respected New England auctioneer, I learned that what I had done was known in the profession as an absolute auction, which was, according to this auctioneer, the very best way to sell.
Although I was selling my own property and had the option to place reserves on the more valuable pieces, need convinced me that turning the equipment into cash was much more important than protecting the price.
So in a sense, I did the right thing for the right reasons without fully understanding the concept. Thankfully, the lesson learned has stayed with me my entire career.
In the early 1980s, after making the decision to specialize in real estate auctions, we learned quickly that absolute auctions were almost impossible to contract with New England owners or bankers. Although we were unable to convince many, the option for an absolute sale was offered and explained to every potential client. As the years passed and our reputation grew, we were able to convince the occasional seller to go absolute always successfully and often with spectacular results.
Today, most of the auctions our firm conducts of REO and privately owned real estate are absolute. Sellers are coming around after watching the positive results of absolute auctions in recent years. And buyers love the opportunities. Still, it's a tough sell to prospects who are unfamiliar with the process.
We recently were asked by an attorney if we could quickly auction a home for a couple with serious health problems (both have advanced cases of emphysema). I agreed to contact the clients and set up an appointment. The attorney asked if she could attend the presentation. She had unsuccessfully attempted to sell her home for four years. The two homes are located in adjoining towns on Cape Cod, a 13-town peninsula south of Boston. Although one home is a Cape style and the other a ranch style, both have comparable values and had been listed at close to identical prices by different real estate offices. The attorney told me she would not sell absolute because she did not need to sell. "If they won't pay what it's worth they can't buy it," she said.
I told her the current listing price was too high and we needed an appraisal before determining the reserve amount. She dismissed this idea and told me brokers had already told her what the home was worth.
After failing to convince her of an absolute auction's advantages, we agreed to offer the property with a published reserve of $200,000, 60 percent of the current listed price. Confirmation sales or unpublished reserves have a long history of failure in our marketplace, and the client wanted to be sure potential buyers understood the property wouldn't be sold for less. So we published the reserve price, even though it was unattractive.
I met the couple with health problems and they told me our firm came highly recommended. However, they said they needed guarantees the property would bring enough money to pay all their debts and provide a new home. I said there could be no guarantees but that the auction method was necessary to get the job done quickly, and an absolute auction was the best way to maximize dollars.
All the couple's professional advisors, such as their doctor, attorney and psychiatrist, had counseled them to remove the burden of this large home. The property had been continuously listed for more than two years with a cousin who was a local broker. An interview with the cousin/broker verified our opinion that the home was desirable but overpriced. Two more meetings resulted in an absolute auction contract with the cousin/broker retained as showing broker.
The attorney/client, when apprised of the absolute aspect of the other auction, immediately advised the couple to switch to a reserve auction. Because of the seriousness of the clients' physical ailments and the potential effect of anxiety on their breathing capacities, I drove the 90 miles to their home as soon as they called and expressed renewed concerns. I was able to calm them and the contract was not changed.
A True Test
Both auctions were scheduled for a Saturday about eight weeks later. As the homes were only a few miles and 15 minutes apart, the auctions were set for 11 a.m. and 1 p.m. Both open houses were scheduled for the same four-hour period on the prior Sunday. The terms of each sale called for a $5,000, non-refundable earnest money deposit and a 10-percent buyer's premium. Market rate financing was offered on both properties by the same local bank. Brokers in the five surrounding towns were notified by fax and mail of a "broker-only" showing, and both auctions offered the same broker incentive. These two similar properties were marketed in exactly the same fashion. The only real difference was the method of auction - Absolute vs. Reserve.
The first sign of a problem came at the "brokers-only" showing. No brokers came to the reserve property. Five showed up at the absolute property. We informed the reserve client of this and asked her to reconsider absolute auction of the property. She called the brokers "low-ballers" and said she wasn't surprised at the lack of attendance because the brokers knew the property and hadn't been able to sell it in four years.
The following week, after the advertising broke in all scheduled newspapers and 7,000 brochures were mailed, calls came in at a 5 to 1 ratio in favor of the absolute property. All inquirers about both properties were sent bidder information packages for both. Broker registrations began to arrive, culminating 48 hours before the auction. We had 12 for the absolute auction, two for the reserve auction and three for both sales.
At the open houses, 183 prospects viewed the absolute property and 57 viewed the reseller. Of these, 31 viewed both. We met the following day to assess buyer interest at the open houses. The consensus was that there was little interest in the reserve property at $200,000, and that the absolute property would bring $175,000 to $225,000. Cousin/ broker thought the absolute sale would bring $175,000, maximum. This was based on two-plus years of experience with the property, as well as her open house poll.
We made phone calls over the next three days to all inquirers and open house attendees. Eighteen probable bidders were identified for the absolute property and the projected sale price remained unchanged. Two probable were identified for the reserve property, but both of them were skeptical about the price. We encouraged all prospects for the reserve auction to show up and bid their price, regardless of the published reserve. We assured them that whatever the high bid, their bid would be presented to the seller.
Auction day arrived sunny and in the 80s. Registration for the 11 a.m. absolute auction began at 10 a.m. Twenty-three bidders registered. Bidding opened at $50,000 and proceeded quickly, with little prodding by the auctioneer. The final sale price was $190,300. We reminded the attendees immediately of the 1 p.m. reserve auction and encouraged them to attend and bid their price. One bidder registered for the auction and was unwilling to bid the $200,000. He offered $150,000 and after some discussion offered $175,000 as his last and best. The reserve client immediately refused the offer and said she would list the home locally as soon as the post-auction exclusive expired.
Although these properties were similar in value and appeal, and although we took great care to target market them equally, public response to the auctions was dramatically different. We were prepared for some contrast because we had seen the difference in ballroom auctions of multiple properties when some are offered absolute and some with reserve.
But this result, because of the tightly controlled conditions of the two auctions, was striking to us. The wonderfully enthusiastic response to the absolute property was countered by the depressingly indifferent response to the reserve. The reserve property was every bit as desirable as the absolute property and should have been offered in the same manner. We are convinced the reserve property would have brought similar, if not better, results than the absolute property had it been offered absolute.
The absolute clients achieved their expected results. The reserve client believes she saved her most valuable property from the dreaded "bottom fish."
We are more convinced than ever of the benefits of absolute auction, and will continue to promote its use whenever possible.