The 2023 auction season kicked off with big January sales in Florida and Arizona. We counted a total of 5,394 collector cars sold by Barrett-Jackson, Bonhams, MAG Auctions, Mecum Auctions and RM Sotheby’s. (We’ll have full results and analysis in next month’s issue.) What struck me as we watched all those cars cross the block — think about it — that’s 5,394 potential “Legal Files”! So, here are a few tips about how to keep your collector-car auction experience from getting featured in an upcoming column.
Pre-auction prep
Start by carefully reading your consignment agreement or bidder’s agreement. It will be educational, and you might find some surprises in there. It’s best to be forewarned.
Next, investigate the market. If you are a seller, you need to know what the market value of your car might be so you can set a reasonable reserve (more on that below). Understand that condition is critical. How does your car stand up to the comparable sales you are using to gauge the market? Be realistic about this. Consider having a friend or expert look at your car critically to point out the imperfections you have lived with for so long that they now go unnoticed.
Once you are clear about the real condition of your car, make sure the auction catalog description is accurate. There are many cases where buyers successfully unwind a transaction because the condition or character of the car was misrepresented.
If you are a buyer, carefully read the auction catalog to decide which cars interest you. Then, evaluate the market for each of them, consulting with experts as needed, so you have a good idea of how much you might be willing to pay for each car that draws your interest.
Again, keep in mind that condition is paramount. Call the auction company, talk to a specialist about the car and get the most candid description possible. But don’t just take their word for it. All auctions have previews. Go early and look at the car yourself. Arrange for a pre-auction test drive. Bring a mechanic or other expert to look at the car for you — whatever that costs, it will be money well spent.
Public Image Limited
Even though the auction companies do their best to create the public image that they are offering the best cars, you can’t just assume that every car included in an auction is perfect. The auction companies can’t, and don’t, inspect every car they consign. They are able to give the car a cursory look, but that doesn’t happen until they receive it, and they receive all their auction cars within a short window. By the nature of the situation, the auction companies have to rely on their sellers to give honest descriptions of the cars, and sellers have great incentive to overlook things or cast them in the best possible light. You should view any evaluation that comes from the auction company as gravy, not as a substitute for your own inspection and evaluation.
The point here is that buying a car at auction is not really all that different than buying one off a dealer’s lot. The biggest difference is that time is compressed by the auction schedule. That doesn’t change anything — it just means that you have to be smart, prepared and quick.
Bidding peculiarities
Bidding usually comes fast and furious, so you have to be attentive and know where the bids are. It’s easy to get confused and bid against yourself. When that happens, the auction staff nicely tells you, but it’s still embarrassing.
Bidding styles are across the board. Some bidders bid first, quick and loud, hoping to intimidate others. Some bid slowly and think about every little step. Others wait until bidding stalls, and then jump in with a fresh bid, hoping to demoralize the last bidder who was already daydreaming about seeing the car parked in his own garage.
In my experience, the room is usually full of people who can afford to buy the car and will not be afraid of anything you might do. Even when they think they are unlikely to outbid you in the end because you’re a fool, they are still willing to try. Who knows? You might unexpectedly run out of money.
We all know that loose lips can sink ships. But here’s something else to think about: I went to an auction with a friend who had his eye on a car. I was sitting next to him, and noticed the auction specialist was in the aisle nearby. Bidding was spirited, and my friend ended up winning the car. It was only then that I learned that the seller was sitting on my other side. What are the odds? The point is to be circumspect about not only what you say but who you say it to and who else might be nearby, because you never know what anyone else is up to during the auction.
Chandelier bids
If you pay attention, you might notice that the auctioneer accepted a bid that seemed to come from nowhere. It happens, gaining the moniker “chandelier bid,” as in the auctioneer accepted a bid from the chandelier hanging from the ceiling. It may surprise you that this is not necessarily illegal.
The general legal rule is that so long as the bids are below the reserve, phony bids, also referred to as “advancing the bid,” are legally acceptable. Bids made by the seller are treated the same. The theory is that so long as the bids are under the reserve, there is no sale anyway, so the bidders are not harmed. Following that theory, chandelier bids and seller bids are illegal once the reserve has been met, because then the bidder is damaged. Similarly, they are always illegal in a no-reserve auction, as a sale will be made with the first bid.
There is one major exception to these rules: Chandelier and seller bids are always fine if the bidders are told in advance that the practice is allowed. Check your bidder contract. I’ve seen provisions included that address the issue and inform bidders that the practice is allowed.
Reserves
We have a never-ending debate about whether you are better off setting a reserve or going no-reserve. The reservists argue that reserves protect against unexpected failures. The no-reservists argue that no-reserve creates excitement and yields superior results because the bidders know the car is going to sell.
From experience, I can say that you typically see a flurry of bidding activity after the auctioneer announces that the reserve has been met or lifted. Sometimes it’s a big flurry, but other times it’s minor. While people differ on this, I have never seen any empirical evidence one way or the other on the effect of no-reserve auctions. If you have, please share it.
Personally, I don’t think it really changes the outcome much. The auction companies are great at assembling rooms full of qualified bidders, so it’s unlikely that many cars are going to go too cheaply. The ones that do generally fall into two groups. The first are cars that are offered at the wrong auction — say, a niche car at a mid-tier venue. The second are sellers with unreasonably high reserves.
If your car is in the first group, then a reserve can really save you. But that raises the question of why you were there in the first place. If you’re in the second group, then you have a much bigger problem. If you’re at the right auction, and the car is presented properly, the high bid is likely to reflect the real market value of the car. If your opinion of value is inflated, you’re just wasting your time and money to begin with, because no one else is going to agree with your valuation.
Perhaps that is really why auction companies love no-reserve auctions — they make their money from commissions on successful sales, and no reserve solves the problem of the unreasonably high reserve killing the sale.
Be prepared to win
Once you win the bid, you not only have to pay for the car, but you also have to decide what to do with it. If you get in and drive it off, you are going to be paying sales tax to the state where the auction was held. The usual exception is that you avoid that tax by shipping the car out of state by a licensed common carrier.
Most auction companies have a transport company available on-site, which will be happy to haul your prize to wherever you want. But if that is not the transport company you want to use, it’s best to have another one lined up ahead of time. Obviously, the longer you wait to line up transport, the less flexibility you have on pricing.
Which brings us back to step one: Do your homework and be prepared. Even if you’re just headed to an auction “for fun,” if you (or a friend) are registered to bid, anything can happen, especially once the red mist descends. ♦
John Draneas is an attorney in Oregon and has been SCM’s “Legal Files” columnist since 2003. His recently published book The Best of Legal Files can be purchased on our website. John can be contacted at john@draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.