Several so-called license states have indicated that for an absolute auction, the deposit required (earnest money, good faith “deposit”) must be a percentage and not a fixed amount. In other words, if I need $100,000 day-of-auction funds (or to register) that constitutes a minimum bid.
For those unfamiliar with terms such as “good faith deposit,” “earnest money,” and the like, here’s an overview: https://mikebrandlyauctioneer.wordpress.com/2022/02/01/deposit-down-payment-earnest-money-buyers-premiums-etc/.
We wrote about this in 2015 after discussing it at the Accredited Auctioneer Real Estate class in Addison, Texas. If the property requires $100,000 to bid or buy, that’s no different than a minimum bid, of $100,000. https://mikebrandlyauctioneer.wordpress.com/2015/07/20/an-absolute-auction-with-a-minimum-qualifying-deposit/.
Here’s the best strategy with required earnest money (good faith) deposits:
If the auction is without reserve (absolute,) charge a percentage.
If the auction is with reserve, charge a percentage or a fixed amount.
Let’s say you’re selling a $1,000,000 property. You want the buyer to tender (about) $100,000 the day of the auction. In this example, if absolute, charge 10%, and if with reserve charge 10% or $100,000, whichever.
I know, I know, you’re not following these guidelines. Well, let’s say your auction has a minimum bid of $100,000 — is that “with reserve?” Let’s say you require the bidder/buyer to tender $100,000 in order to bid or buy — is that “with reserve?” How is that any different?
The difference isn’t that if the property sells for $90,000 you can refund the $10,000. The bidder still needs a minimum amount ($100,000) to participate, no different than a minimum bid. At least $100,000 is at least $100,000.
McDonald’s is selling french fries for a special $2.00 price today. However, McDonald’s requires you to pay with a $100 bill. You see, if I have only $2.00 I can’t buy them even though the fries are only $2.00. But I’ll give you $98 in change? Sure, but I still don’t have a $100 bill.
Most importantly here, if you are charging a fixed amount, you are conducting a “with reserve” auction, and not an absolute (without reserve) auction. This is important as if you’re advertising absolute with a fixed amount, you’re not actually having an absolute auction.
Said another way, if a certain amount is required to register (participate in the auction) then the auction needs to be a “with reserve” event. If absolute, a percentage is -0- as the price is currently -0-, which is why absolute auctions can’t have fixed (>0) earnest money or good faith deposits.
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, Brandly Real Estate & Auction, and formerly at 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 Auction Association’s Designation Academy and Western College of Auctioneering. He has served as 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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