Finding an auction company that meets your needs is one of the first crucial steps

"Legal Files” recently wrote about the 1935 Mercedes-Benz 500K Roadster that German authorities seized on a claim that it had been stolen from Hans Friedrich Prym in 1945 (June 2012, p. 30).

The current owners, who bought the car at the 2011 RM Monterey auction, were very confident that the claims would be summarily dismissed. Surprisingly, the German court recently ruled that the Prym family had presented a claim that was complete enough to earn them a full trial and the opportunity to establish that the Mercedes was actually stolen from Prym.

The ruling doesn’t establish who gets the car — that won’t happen until the conclusion of a lengthy and expensive legal process. While the auction buyers have not indicated their strategy, one would expect that they might look to RM and the seller to solve the mess.

By everyone’s accounts, the auction seller was an innocent party who paid good consideration for the Mercedes when it was acquired some years ago. Now, he faces the prospect of having to unwind the sale and finance expensive litigation in Germany.

How can other car owners who are thinking about selling at auction avoid legal snarls — and help assure that the car gets — and stays — sold?

Pick the right company

There are a lot of auction companies, and they hold a lot of auctions each year. You have to carefully match your car with the auction company and auction site to stand any chance of coming out ahead.

For example, your 1983 Porsche 911SC might do just fine at the September Silver Auction in Portland, OR. It would probably sell for more at any of the January Scottsdale auctions, but the higher transaction and transportation costs might eat your profits. Conversely, you’re not likely to find a qualified bidder on your 1959 Ferrari Testa Rossa at that same Silver auction.

Many auction companies will help you pick a good time and place to sell your car — after all, they want the car to sell as well. It’s a good idea to talk to several companies before you make any decisions.

Read the consignment agreement — really!

Once you have selected an auction, read the consignment agreement carefully to understand what the auction company will and won’t do — and what your responsibilities and costs will be.

Some of the key points are schedule placement — when your car will cross the block — advance publicity, catalog presentation, effort on- and post-block, entry fees, transportation costs and commissions.

Every detail is theoretically negotiable.

I’ve seen all sorts of deals, including free transport, reduced or waived seller’s commissions, specified catalog placement and advance publicity. I’ve even seen deals that guaranteed minimum sales prices or else the auction company buys the car. Of course, you are not very likely to be able to negotiate any deals when consigning the aforementioned Porsche. You have to be offering a car that the auction company really wants to have this kind of leverage.

Reserve or not?

Publisher Martin and “Legal Files” have both written about the perils of a “no-reserve” approach. Its proponents believe it adds positive excitement and higher bids, but I don’t really buy that. If you just want to move the car no matter what — or you really believe that the auction bidders will truly represent the market — go for it. Otherwise, it’s usually better to set a reasonable reserve and protect yourself from the disappointment of selling too cheaply.

Having said that, it is important to set a reasonable reserve. A failed sale because you were unrealistically high is very expensive — you not only spent all the money it took to get the car into the auction, but now you have to get it back home. And, at least in my opinion, dropping the reserve when the bidding stalls seems likely to depress the ultimate sales price. Whenever I see that happen, I think that the seller has realized that he should just take the most he can get for the POS on the block, which makes bidders wonder whether they should bid more.

Titling issues

If you have a title problem with your car, get it fixed before the auction. You have to have a clean title that can be signed over to the buyer with no questions asked. A lost title or an open title, signed off by the registered owner from several decades ago and never re-titled, isn’t going to cut it.

If the title is lost, fix that using one of the title services in Alabama or Maine. If you don’t want to pay the taxes associated with titling the car, form a Montana LLC and title it there. Both approaches are inexpensive, and both give you a good certificate of title that can be assigned to the buyer with no questions asked.

Describe your car accurately

Bear in mind that the auction company will use any information you provide about your car in its catalog and on the block. Make sure it is accurate. Don’t say it ran at Le Mans unless you actually have the proof. Under the law, all statements about the identity and characteristics of the car create warranties, and you can be sued if your statements are inaccurate. All auction company bidder agreements disclaim liability for any such thing, but don’t assume that will ultimately protect you. Even if it does, the legal fees in your successful defense will turn it into a loser deal.

Inspect and repair the car

Before sending the car to the auction, take it in for a service and a thorough “pre-purchase” inspection. That creates some expense but may well save money in the long run. Whatever problems there may be with the car, the buyer is sure to find them sooner or later. Auction sales are always “as-is,” but that doesn’t stop unhappy buyers from suing you on claims of fraud or misrepresentation. You can win the battle (the lawsuit), but still lose the war (the legal bill).

Make sure you get paid

Unfortunately, there have been cases of auction sellers not getting paid when the car sells.

This can happen if an unethical auction company gets paid — but doesn’t pay the seller. The most notable recent example of that was Indiana-based Kruse International, which got shut down for not giving sellers their money.

The unfortunate legal truth is that when the buyer pays for the car, he becomes the owner whether the seller gets paid or not. Do your research, and learn all you can about the auction company to be comfortable. If in doubt, and the car is valuable enough to warrant it, ask for security. I’ve seen auction companies, in the right situations (usually when trying to consign very valuable and desirable cars), secure letters of credit to protect the seller from nonpayment.

Fortunately, most auction companies pay their clients on time. A much more common situation is when the winning bidder simply fails to pay for the car. I’ve represented disappointed sellers who blamed the auction company because they were supposed to “screen” the bidders and have the funds for payment confirmed ahead of time. But there is really only so much the auction company can do. Letters of credit are expensive, and few bidders can actually provide them. A bank check guarantee doesn’t help if the buyer just refuses to write a check.

Some auction companies will register bidders with a deposit against their bid limit. Bidders will forfeit their deposit if they flake out on the sale, but that might not help the seller so much. Say, for example, the bidder deposit is 10% of the bid, the buyer’s premium is 10% of the bid price — and the consignment agreement provides that any forfeited deposits go to the auction company to the extent of their commissions — and then to the seller. Once the auction company has most or all of its money, it has less financial incentive to try and collect more money for the seller. Talk to your auction company about that ahead of time.

To take that thought a bit further, I’ve seen failed sales in which the auction company didn’t want to alienate the buyer, who had been a good customer of theirs. Or, they just didn’t want to spend the money to chase after the buyer because they thought it was uneconomical. Check the auction company’s bidder contract ahead of time — and make sure it is transferable to and enforceable by you. And while you’re at it, it wouldn’t be a bad idea to see that your collection costs reduce the sales price for purposes of calculating the auction company’s commissions.

Plan for taxes ahead of time

You are selling your car in a very public forum, and you will probably receive a 1099 from the auction company at the end of the year. This is not the transaction that you want to fail to report on your income tax returns.

As “Legal Files” has explained before, it isn’t free from doubt, but your gain on the sale of your collector car should qualify for the 15% long-term capital gains rate. If you have a substantial gain, it would be a good idea to get a formal tax opinion to that effect to protect yourself from penalties if the IRS claims the rate should be higher.

You can also defer the tax if you do a Section 1031 like-kind exchange for one or more other collector cars. If you want to take advantage of a like-kind exchange, you have to “sell” the car to an accommodator who then sells the car at auction and uses the proceeds to buy your replacement car(s). That has to be arranged ahead of time. Once the hammer falls, you are taxable on the gain, and there is no way that you can then convert it to an exchange.

Finally, recognize that you are entering into a complicated legal arrangement. This is a very good time to get advice ahead of time from an attorney who understands collector cars, auctions and tax planning.

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