A Reserve Auction
What is a reserve auction? A reserve auction gives the seller the ability to sell if the price is to his or her liking. The seller can accept or reject the highest bid in the auction. Let's say the seller puts a condo up for auction at a price of $1,000,000 or basically, this is what the condo was priced originally. The seller and the auction house will decide on a suggested opening bid. Let's say that amount is $200,000. The bidding begins and immediately we'll see if there is interest.
After several bids going back and forth the final two people are left going at it. At the end, the last bid ends up at $650,000. The person is whisked away to the back of the room to fill out the contract and turn over his earnest money. The people all clap and everything looks like the guy bought the condo. But did he? This is a reserve auction, which means the seller has the right to reject or accept this bid. If the seller says that it's just not enough of money, the buyer will not be able to go through with it.
There are consequences to the seller is some reserve auctions if they do not go through with the highest bid. Just imagine the amount of effort to put an auction on, have people staff open houses, rent a banquet style room at a hotel, pay for all the people to run it and find out the seller will not accept the highest bid! There are auction houses that will have in their contracts with the seller that if the seller does not go through with the highest offer, they will have to pay a certain percentage to the buyer and the auction house, typically 3% of the deal. With this clause in effect, it stops people putting in their properties into an auction just to see what price the property might bring without consequences. It's almost as if the seller was able to get a free appraisal on the property.
Most auction have to have a reserve as part of the auction because sellers really never know how much the bid actually is going to come in at and they may have a mortgage attached to the property. If this is the case, they have to make sure the bid is higher than their mortgage amount.
