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Writer's pictureMike Brandly, Auctioneer

Appraisals, auctions, and seller bidding

Appraisers often [rightly] use auction values as evidence of value. Yet, we wonder today if an auction with reserve (or a forced sale) could be used as “market value?” With the seller bidding, is an auction price indicative of market value?

We aren’t sure it is. With the seller bidding — especially as the runner-up (backup) bidder — the transaction isn’t really arms-length. As such, with an interested (versus disinterested) bidder, it would seem the final bid price isn’t necessarily market value.

Let’s say a rather valuable item comes up for auction thought to be worth around $10 million. Yet, the seller bids along with an unknowledgeable bidder with the bidder winning this lot for $22 million. Is this lot worth $22 million? Yes, it sold for $22 million, but without the seller bidding, it would have likely demanded only $11 million or so.

We were retained in such a case and argued that auction values are not always indicative of market value — with the seller bidding, someone for the seller bidding, or the auctioneer taking bids that aren’t really bids. Indeed two disinterested bidders acting arms-length ending up being the highest and next-to-highest bidders is almost assuredly indicates market value.

Yet, there’s another issue … are these same highest and next-to-highest bidders “alpha” and “beta” in that there are [likely] no other two bidders who would have pushed the price higher? We’ve discussed alpha and beta several times: https://mikebrandlyauctioneer.wordpress.com/2021/12/03/auctions-and-the-chances-of-alpha-and-beta-etc-2/.

In the case of not having alpha nor beta, the auction value would be below the market value. In the case of having the seller bidding or fictitious bids, the auction value would — most likely — be higher than the market value. Auction values do indicate market value when we have a well-advertised and properly conducted auction without the seller or any other “interested” parties bidding.

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

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