Different buyer’s premiums for different bidders?

By

Mike Brandly
5 April 2018 - 4:38pm

It happens all the time. Onsite (live) bidders 10% buyer’s premium (BP) and online bidders 18% BP, for example. Thus, one bidder is paying/participating on different terms than another bidder.

We have discussed this issue numerous times including most recently here: https://mikebrandlyauctioneer.wordpress.com/2018/02/08/is-that-next-bid-...

For the most part, we have written about this problem from the perspective of the auctioneer. Let’s look today from the perspective of the bidder and/or seller. What if one bidder is paying 10% BP and another is paying 18% …

Let’s assume a milling machine is up for auction, and the current high bidder is live at $26,500. That bid would be machine with a 10% BP would be $29,150. The online bidder bids $27,000 which with an 18% BP would be a total bid of $31,860. Then, the live bidder bids (and is permitted to bid) $27,500 which with a 10% BP would be a bid of $30,250.

Can a bidder on at $31,860 be outbid by a bid of $30,250? Can a bidder offering $30,250 outbid a current bidder at $31,860? The so-called hammer prices are higher, but the total offers inclusive of the disparate buyer premiums are not necessarily higher.

We have previously discussed bid calling contracts in detail, including that a bidder may be only outbid by a higher bid. That is, a higher offer in total and not the net-to-seller or other measure: https://mikebrandlyauctioneer.wordpress.com/2014/08/11/bid-calling-is-ju...

Let’s say that again — bidders can only be outbid by higher bids (offers) and not necessarily a higher net-to-seller figure. And who knows if the auctioneer is receiving all the buyer premiums or not, or if the auctioneer/seller have agreed to other terms? Here’s some people who don’t know this: the bidders.

This particular quandry is not just found in auctions. Say a traditional real property deal involves a seller who receives two offers: (1) $272,500 cash, close in 30 days and (2) $279,000 contingent on financing, close in 45 days. Which offer is higher? In traditional real estate, that’s not really the question as it’s which offer does the seller think is best.

Our somewhat rhetorical question is, should auctioneers sell to the highest offeror (bidder) for the highest offer (bid) or take the best offer (bid/terms) from the best offeror (bid/terms?)

Historically, auctions do not work the same way as traditional [real property] sales as auction terms and conditions are customarily set ahead of time in a consistent fashion, and then the auctioneer takes bids from bidders conforming to those terms; the highest numerical bid is both the highest offer and the best offer.

What’s important here for auctioneers is that our above $31,860 bidder may have a legitimate cause of action against the seller and/or auctioneer if he’s outbid by a $30,250 bidder, and especially in a without reserve auction where the property must be sold to the highest bidder.

Additionally, the seller may have a legitimate cause of action against the auctioneer (especially in a without reserve auction) if this property is sold for $30,250 instead of $31,860, even if the net-to-seller is the same or more if the highest bidder isn’t awarded title.

Interestingly, in our above example, we have a live bidder at $26,500 for a total bid of $29,150. If we consider the total bid price, then the next bidder online would only have to bid $29,151 (at $1.00 more) and therefore the hammer price (backing out the 18% BP) would only have to be $24,704. Here a hammer price of $24,704 at 18% BP would exceed a hammer price of $26,500 at 10% BP.

Here is a possible formula — if you insist on having different terms for different bidders — for software to manage this nonsensical process where lower bids can outbid higher bids. This “next bid” equation is:

  • n = next bid
  • c = current bid including buyer’s premium
  • bp = buyer’s premium for next bid
  • a = upset increment > 0
  • n = (c+a)/(1+bp)

 

This would keep the total bid price larger each subsequent bid subject to the upset increment, adjusting the hammer price accordingly, however ill-advised. For an absolute auction, possibly ‘a’ would have to be $0.01 or even $0.005.

I say again … different terms and conditions for different bidders is asking for problems from those bidders, sellers and their attorneys. What’s the answer? Maintain the same terms and conditions, including buyer’s premiums, for all bidders and sell to the highest bidder.

 

This article has been published with permission from the author.

The original image and article can be found here.
 

  • Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School, an Instructor at the National Auctioneers Association’s Designation Academy and Texas Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.