History has shown us that a professionally conducted public auction is a type of “sale” that equates to the white heat of selling, fetching the highest possible fair market value for the assets offered on any given day or place. But what constitutes a “professionally conducted public auction?”
First of all, what is not an auction. At first the task is easy; a partial list would be tag sales, garage sales, yard sales, fire sales, one-day-only sales and discount/percentage-off sales. All major retailers have periodic sales: “no money down,” “no payments until…,” “no interest,” etc. However, the question becomes a little more difficult to answer when we look at words like “eBay,” “foreclosure,” “warehousemen’s lien,” and “sealed bid.” All of these terms have been associated with the word “Auction.” The question is, Are they sales or are they professionally conducted public auctions?
The answer would be revealed only after identifying and agreeing upon the elements of a professionally conducted public auction. Once that they have been established, we could test all of what we think are “auctions” against that criteria.
A professionally conducted public auction of any asset should include at least the following eight elements: 1) A viable market: If there is not a viable market of interested, qualified buyers, there is no chance of a professional Auction succeeding; 2) Auctioneer: A competent, trained person taking full responsibility for formulating and executing the overall plan; 3) marketing plan: A strong campaign with “target marketing” to the appropriate audience; 4) Good exposure to the proper market: Enough time prior to Auction Day for the buyers to find out about the Auction and do their due diligence regarding the assets for Auction; 5) A public preview: Ample opportunity for public viewing and inspection prior to bidding; 6) Published terms and conditions: Clear, concise, fair rules of the Auction that apply to all participants; 7) Full disclosure: Disclosure to all interested parties of the facts pertaining to the assets up for Auction; 8) Public Auction: On the advertised date and time, all qualified bidders or their proxies assemble and have the opportunity to bid competitively until there are no more bids remaining.
More questions
Based on the acceptance of the eight priciples, there are several questions to answer.
For instance, do the listings on eBay qualify as professionally conducted public auctions? eBay sales listings end with a clock and do not remain open “until there are no more bids remaining.” Sniper bidding programs allow participants to bid in the final seconds of the listing, but once the clock runs out on a listing, all interested buyers are locked out. eBay sales, would therefore not meet the eight point test.
eBay’s model most resembles the European 18th Century model of selling furs in a wholesale market. The 18thC model was called “Auctions by the Candle.” Bids were taken on lots until the flame went out. Experienced buyers learned to study the movement of the smoke on the flame, knowing when to submit their bid in order to snag the lot from competitors at the last second. Evidently, this bit of knowledge gave them an edge over the other competitors much as sniper programs and sites provide an edge to savvy eBay buyers. However, in a professionally conducted Public Auction, the bidding remains open until all qualified bidders have exhausted their bids in competition with each other.
Are all “foreclosure Auctions” actually auctions? Not necessarily. Depending on who is conducting the foreclosure, it may lack certain elements such as marketability, a marketing plan, good exposure to the proper market and a preview time. Depression era “foreclosure sales” referred to as “Auctions” are the number one reason why many people instinctively react negatively to the concept of selling their real estate at “Auction.” Due to this association, the public in general does not fully understand the benefits of a professionally conducted Public Auction of real estate.
What about a warehouseman’s lien sale? Can it be considered a professionally conducted public auction if the Auctioneer sells the entire contents of a self-storage unit where the contents were not listed and the potential buyers do not have the ability to personally inspect the contents? Again, I say no, because the event could lack a marketing plan and definitely lacks good exposure to the proper market and a preview.
“Sealed bid” sounds like an auction; however, in its purest form, it is merely the submission of simultaneous offers without the potential buyers having the ability to know what other offers are being made. The sealed bid sale, at the very least, lacks element #8, public auction. All participants are encouraged to submit offers, the offers are opened at a specified time, and the highest offer wins. Sometimes the sealed bids are not even opened in public to be witnessed by the potential buyers making the process even more suspicious. While certainly a valid form of sale, a sealed bid executed in the above manner does not meet our definition of a professionally conducted public auction.
There are other “sales” that have fallen under the umbrella of “auctions” which might also lack elements of a professional public auction, including sheriff sales of seized assets and court-ordered sales that utilize the word “auction.” Often these sales lack elements 2 through 5. Sometimes a small legal ad known as a “tombstone ad” is all the marketing the event will have, with little or no participation from the public.
History has shown us that there is a need and a use for all of these sales. However, history has also reflected that when these sales are presented as “auctions,” they have skewed the public’s perception of professionally conducted public auctions. Of course, I am not suggesting there is anything wrong with Auctioneers conducting whichever kind of sale they deem necessary for selling assets properly for their clients. They are each valid as selling methods and have clear advantages in certain situations.
The previos rant sumarizes some material I was studing in preparation for my text book on real estate law. Bob Doyle, current president of the National Auctioneers Association states, "I am simply suggesting that as practitioners of a relatively small profession, we should utilize the word 'auction' when it truly satisfies the definition, and we should use the word 'sale' when it does not.
For if we as auction professionals do not promote a clear definition of the word 'auction' and the auction method of marketing, who will?"
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