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Auctioneers | Land Brokers | Real Estate

Setting an Auction Reserve

By Jason Smith, CAI Auctioneer | Land Broker | Published November 18, 2019

Can i set a reserve on my farm auction?

No pun intended, but absolutely! Setting a reserve takes careful consideration, but it all comes down to this: If you set a reserve too high or too close to market value, you can hurt your final price. If you set it too low, the farm could sell below the price you expected.

Can I set a Reserve on my Farm auction

What is a farm auction reserve?

First, and most important, it’s helpful to understand what a reserve is. A reserve is a minimum amount you authorize the farm to sell for. Some people call it a “minimum” or “bottom”. Reserves are not intended to be an asking price, but rather to be used as a protection point. The area between your reserve and your expected sale price is what we at DreamDirt call the “grey area”. It’s the area where sellers take a little risk in not achieving their hopeful asking price, but it’s also the most important part of the auction in terms of momentum and bidding activity.

With a reserved auction, momentum in bidding is the most valuable element for the sellers. We are always trying to create momentum in the auction. In order to achieve this, we have to work within the parameters the seller has set for each auction, and the biggest block to momentum is the reserve amount. Potential buyers who are very familiar with the auction process fully understand the auction really starts once it's announced that the reserve is lifted. Once that happens, it changes the dynamic in the room and buyers become more hopeful of success and more committed to the process. They know how to read when the auctioneer is struggling to achieve the reserve and the higher the number gets without the auctioneer announcing the reserve is met the more difficult and slow the auction becomes. It’s very possible bidding will stop short of the actual market value. Especially in auctions where the reserve is also the expected market value, or what we call a 100% reserve.

The auctions we’ve sold with the lowest reserves by far generate the most momentum and the highest prices for our clients. We generally ask a client to keep their reserve to 80% of expected market value, but we have had clients reserve properties even lower. Our most memorable auctions, and our highest results, have always come where reserve prices were in the 60% range. This takes the reserve off at a point in the auction where it builds the momentum earlier and helps a seller cross the finish line in shorter time, typically higher in price than expected.

When you set a reserve, the best practice is to consider your expected outcome, then keep backing up by $100 until you reach a point you can’t stomach selling at. For example, let’s imagine you believe the property is worth  $5,000 per acre. Can you live with a sale of $4,900 per acre? $4,800 per acre? $4,700 per acre? Keep doing this until you reach a point that you tell yourself no, you can’t live with that price, and that’s your reserve point. Does the auctioneer stop once the reserve is achieved? Some people believe this, and so they try to set the reserve as high as possible to avoid this happening. I often tell potential clients that we are only as good as our last sale meaning the public, and other sellers, judge us based on the results we achieve.

We fully believe that selling the property because we have achieved the reserve would be foolish on our part. You can trust that once the reserve is achieved, we will be performing at peak until we absolutely cannot get one more person to bid!

 

absolute vs. reserved farm auctions

Understand there are 2 kinds of auctions: Absolute Auctions and Reserved Auctions. An "Absolute Auction" is one that sells to the highest bidder regardless of price. On the other hand, a "Reserved Auction" is one where the seller reserves the property until a certain price is achieved. Many do not realize that auctions which are not advertised as "Absolute" are considered, by law, to be a Reserved Auction. Now, in a Reserved Auction, a seller can always reduce their expectations during the auction once they see the bidding activity, but we believe setting the reserve in an appropriate spot initially is more beneficial to a seller than eventually reducing it.

There is a dangerous practice in the land auction industry. Most live land auctions are conducted where one round of bidding is conducted and a break is taken. At the break, the auctioneers will ask the seller if they accept or deny the high bid prior to the start of second round of bidding . If the seller confirms the sale during the break, auctioneers will often return to the microphone and make a statement to the crowd to the effect of, “The seller has confirmed the sale, the auction is now ABSOLUTE”.Farm Auction Methods

The word absolute is very dangerous in the auction environment and because this situation is so common it bears mentioning. First, an auction cannot legally be referred to as absolute unless the listing agreement states that it is absolute. You cannot change an auction type, from reserve to absolute, once it is set. This practice allows for bidder collusion and puts the seller’s finances in great peril. Once the auctioneer states the auction is absolute, the high bidder still has the option to withdraw their bid which would effectively take the bidding back to $0. Auction law is clear that once a bidder withdraws their bid, it does not revive any previous bids. Two bidders working with each other could very easily manipulate an auction conducted in this fashion and cause serious financial harm for a seller. DreamDirt will never use the word absolute to describe your auction, unless directed by you to do so.
 

DreamDirt's Farm Auction reserve Practices

DreamDirt typically sells farms “Subject to the Sellers Confirmation”. This means you reserve the properties to a certain price, but you are not required to set a reserve price with us prior to auction day. In a Live Auction, the confirmation will happen during a break in the auction before bidding is complete. With a Timed Online Auction, you will have until the final few minutes of the auction to
make your decision to accept the high bid. We are confident our method of using “Subject to Sellers Confirmation” is the least stressful method for a seller and we believe it will bring you additional comfort in the process of selling your farmland.

taking the first steps

In order to even develop your reserve point, it's crucial to understand the value of your land. DreamDirt understands Midwestern farmland prices and can spot value quickly. The proper evaluation of your assets by an appraiser is the first step and often the foundation of your decision-making when selling farm land real estate. We have developed the tools leveraging the right data on Midwest farmland prices and machinery sales to produce accurate results. Thus, we are able to pinpoint selling prices so our sellers walk away with peace of mind. 

We would be happy to provide you with a FREE MARKET ANALYSIS to help you understand the value of your farm! Whether you’re ready to start the selling process, or even remotely curious, we will gladly provide this to you! Please fill out the form below and our team will get the process started!

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