House to House: Absolute Auction 

By Gary Isom, Executive Director of the Arkansas Real Estate Commission

 

The Arkansas Real Estate Commission began working with the Arkansas Auctioneers Association in 2011 to address some problematic issues involving real estate auctions. The Association’s members noticed that auctions were all too often being advertised as “absolute auctions” only to be converted on the day of the auction to “auctions with reserve,” sometimes referred to as “reserve auctions” or “auctions subject to confirmation.”

In the auction world, the term “absolute” has a very specific and legal meaning when used in reference to the auction of real estate. Arkansas Real Estate Commission regulations define an absolute auction as “an auction where the real estate is sold to the highest qualified bidder with no minimum bid or limiting conditions.” Think of it this way: an absolute auction means that even if there’s only one bid, the property will absolutely sell that day.  Absolute auctions are also referred to as “auctions without reserve.”

Conversely, an “auction with reserve” refers to an auction where the seller may set a minimum bid, accept or reject any and all bids and withdraw the real estate at any time prior to the completion of the sale by the auctioneer. In other words, in an auction with reserve, the seller reserves the right to establish the conditions of the sale, including whether or not he will sell the property at all.

One can easily see how advertising a valuable piece of real property as going up for sale in an absolute auction would be enticing to a consumer. Simply put, a buyer is far more likely to “get a steal” at an absolute auction than he is an auction with reserve. However, when advertising an upcoming auction to include real estate in Arkansas, the term “absolute” should not be used as a ploy to draw a crowd.

Some confusion has arisen regarding Commission Regulation 15.2(a), which states, in part: “In an ‘absolute’ auction or auction ‘without reserve,’ after the auctioneer calls for bids on real estate, that real estate cannot be withdrawn unless no bid is made within a reasonable time.”  It appears that some auctioneers have interpreted this regulation to mean that the auctioneer can routinely convert the auction previously advertised as absolute to a reserve auction at any time before the auctioneer calls for bids. This was central to what licensed Arkansas auctioneers considered a major abuse of the term “absolute” within their profession.

While the regulations for auctioning real estate in Arkansas might arguably permit an auctioneer to cancel an absolute auction or convert an absolute auction to reserve, that should not be any auctioneer’s modus operandi. For an auction to be converted from absolute to reserve or cancelled entirely, the auctioneer should be able to identify some extenuating circumstances that developed and could not have been foreseen when the seller agreed to sell his property as absolute. An outstanding mortgage would likely not be acceptable as an extenuating circumstance because the property owner and auctioneer would have known of the outstanding mortgage when the auction was advertised as absolute. If it appears that an auctioneer casually and frequently advertises auctions as absolute in an effort to draw a larger crowd only to convert to an auction with reserve or cancel the auction altogether, that auctioneer may very well find himself appearing before the Arkansas Real Estate Commission in a formal hearing.

Working together in 2012, the AREC, Arkansas Auctioneers Association and Arkansas Realtors Association developed regulations that establish the following as prohibited acts by licensed auctioneers:

Establishing a pattern of practice of advertising auctions that include real estate as “absolute” when the auctioneer knew or should have known that a minimum bid or limiting conditions existed for the properties to be sold.

Establishing a pattern of practice of advertising auctions that include real estate as “absolute” then subsequently cancelling the auctions or converting the auctions to an Auction with Reserve type auction.

In addition to these changes, Commission regulations now require brokers and auctioneers to obtain a seller’s signature on a disclosure statement when absolute auction is chosen as the method of sale. In this statement, the seller acknowledges that the property will be sold to the highest bidder at the auction, regardless of price. The statement also advises the seller to consult a licensed Arkansas attorney regarding the difference between an absolute auction and an auction with reserve and to visit with any lienholder or other sellers pursuant to any installment land sale (or similar) contract regarding the nature of the auction agreement.

This language was added to attorney-approved forms jointly developed by the Arkansas Realtors® Association and the Arkansas Auctioneers Association that are used by real estate brokers and auctioneers in auctioning real estate.

Arkansas consumers who feel they have been the victim of being coaxed to attend an absolute auction only to have the auction canceled or converted to a reserve auction may file a complaint with the Arkansas Real Estate Commission. Complaint forms are available at www.arec.arkansas.gov.

 

House to House is distributed weekly by the Arkansas REALTORS® Association.  For more information on homeownership in Arkansas, readers may visit www.ArkansasRealtors.com.