An auction conducted “with reserve” is a common mechanism used by sellers to mitigate financial risk when offering property, art, or commodities to the public. This format ensures the seller has control over the final sale price of the item being offered. It allows the seller to retain the right to refuse the highest bid if that bid does not reach a predetermined minimum value.
Defining the “With Reserve” Auction
The phrase “with reserve” establishes that the auction is an invitation for offers rather than a firm offer to sell to the highest bidder. This structure means the sale is contingent upon reaching a specific, undisclosed minimum price set by the seller before the event begins. This predetermined, confidential figure, known as the reserve price, acts as a safety net for the seller. Until the bidding reaches this minimum threshold, the seller is not legally obligated to complete the transaction.
In a reserve auction, the highest bid simply becomes the highest offer that the seller may choose to accept or decline. The seller’s acceptance is conditional and only becomes binding once the bidding meets or surpasses the reserve amount. Because the auction is only an invitation for bids, the seller maintains the right to withdraw the item from the sale at any point if the reserve is not met.
Setting the Reserve Price and Auctioneer Disclosure
The process begins when the seller establishes the reserve price in consultation with the auction house before the event. This figure reflects the lowest amount the seller is willing to accept for the item and is kept confidential from all potential buyers. Maintaining secrecy around the exact reserve price encourages competitive bidding, as participants are unaware of the precise threshold they need to cross.
Transparency rules require the auctioneer to announce clearly that the auction is being conducted “with reserve.” This public disclosure informs bidders that the seller retains the right of refusal. However, the auctioneer is under no obligation to reveal the specific monetary value of the reserve price itself.
Confusion sometimes arises between a reserve price and a publicly stated minimum bid. A minimum bid is an amount explicitly announced at the start, signaling the lowest acceptable opening bid. Conversely, the reserve price is the private, hidden value that dictates whether a sale will occur, even if bidding has started successfully.
Comparing With Reserve and Absolute Auctions
The structure of a “with reserve” auction is best understood when contrasted with an “absolute auction,” often referred to as a “without reserve” sale. In an absolute auction, the seller enters into a binding contract with the highest bidder immediately upon the fall of the hammer, regardless of the final price achieved. This format guarantees that the item will sell, and the seller irrevocably accepts the outcome of the bidding process.
The difference between the two formats lies in how risk is distributed. In a reserve auction, the seller maintains control and limits the risk of the asset selling for a low amount, but bears the risk of the item not selling at all. Conversely, in an absolute auction, the seller assumes the risk that the item may transact below its market value.
This risk assumption in absolute auctions is often balanced by attracting a larger pool of bidders incentivized by the guaranteed sale. Buyers in absolute auctions face the risk that the price may be driven up by intense competition without the safety net of a reserve price.
What Happens When the Reserve Is Not Met
If the highest bid fails to meet the seller’s confidential reserve price, no legally binding contract of sale is formed. The auctioneer will announce that the reserve has not been met, often by stating the item has been “passed” or “withdrawn.” The seller then exercises their right to reclaim the property without any obligation to the highest bidder.
The highest bidder holds no claim to the item because the condition precedent—reaching the reserve—was not satisfied. However, the failed auction does not prevent the seller from immediately attempting private negotiations with the highest bidder. This negotiation centers on whether the seller will lower the reserve or if the bidder will raise their final offer.
The seller may also choose to re-list the item in a subsequent auction or pursue a private sale entirely. This flexibility ensures the seller has multiple avenues to liquidate the asset while protecting their minimum financial expectations.