At times, being at the epicenter of a collector car weekend is like sitting in a command bunker. In Scottsdale, SCM's boots-on-the-ground team included nearly 20 market analysts, staff, and support crew. During the weekend, they fanned out to all the events, notebooks and cameras in hand, and began submitting their reports back to HQ. Each sale or no-sale immediately became part of the emerging new market reality. They also engaged in numerous conversations with buyers and sellers, getting a feel for the mood of the market. A pattern quickly emerged, which we detail in the Market Reports this month beginning on page 64. In short, well-documented cars did well-sometimes very well-and cars with stories struggled. But the real battle this weekend wasn't between muscle and sports cars, or even between large-scale and boutique auction companies. It was between two auction philosophies. One offers sellers the option of a reserve, the other will only accept consignments on a no-reserve basis.

The economics of the sale

On the surface, the difference between a reserve and a no-reserve auction is simple. When a car is entered with a reserve, the owner sets the bottom price he will take for a car. If the bidding doesn't reach that price, he has the choice of either lowering his reserve and selling the car, or taking the car home with him. If he sells the car, the auction company makes its buyer's and seller's commissions. If the car doesn't sell, the auction company makes nothing other than a modest consignment fee. At a no-reserve auction, the seller agrees to take whatever the highest bid might be-no matter how high or low-and the auction company collects all resulting commissions. The all-no-reserve format offers an obvious advantage to the auction company, as they are assured of full commissions on every car that crosses the block.

Running the numbers

Let's consider these two hypothetical sales. Suppose a seller has a 1966 Shelby GT350 he thinks is worth $200,000, and he consigns it to a sale that offers the option of a reserve. He sets his minimum at that number. Assume this auction company charges buyer's and seller's fees of 10% each, and the local sales tax is 8%. If the GT350 meets the reserve and sells for a high bid of $200,000, the auction company pockets $40,000, the buyer pays $220,000 with premium and the seller gets $180,000 net. The buyer pays an additional 8% sales tax, for a grand total of $237,600. If the bidding falls short of the $200,000 reserve and the seller elects not to lower his reserve and take the highest bid, the auction company makes nothing from this non-sale. That's a far cry from $40,000. Now let's look at the same Shelby at an all-no-reserve auction, at the same commission structure. If the bidding gets to $200,000, all of the numbers are the same as with the reserve sale. But what happens if the bidding stalls at $125,000, far short of what the owner was expecting? If he doesn't want to let it go at that price, he doesn't have any good options. He can play by the rules and sell it for much less than he wanted, or he can cheat. If he sells the car for $125,000, he nets $112,500 after the 10% seller's commission. Based on where the seller hoped to be at $180,000 ($200,000 less commission), that's a perceived loss of $67,500- a bitter pill to swallow. Or, the seller can break the rules. He can try to find a way to buy the car himself, or have a friend (called an "agent" in legal terms) buy it for him. Either way, it's called an "owner buy-back." Every auction company condemns this practice, and in most instances an owner buy-back would be illegal. But in reality, a "no owner buy-back" policy is essentially impossible to enforce. The auction company may recognize a consignor if he tries to bid on his own car and refuse his bid, but there is no practical way at any auction to stop a "friend of a friend of a friend" from bidding on a seller's car for him. But even if he succeeds in buying his own car back, the result is still very expensive for the consignor. On this GT350, if his friend's buy-back bid was $130,000, the seller's "buy-back penalty" would be at least $26,000. (Remember, he is now paying both the buyer's and the seller's premium.) Plus, in most locales he will incur sales tax, especially if he has someone else buy his car back, as the local taxing authorities would view this as an actual sale. The $143,000 sale ($130,000 hammer price plus buyer's premium), plus 8% sales tax of $11,440, brings the owner's buy-back cost, which is the amount of the check he would have to write, to a whopping $37,440. And that doesn't include consignment fees, transportation to and from the auction, or any other expenses. That's a pricey trip across the block for a car that is going back to its original home, although a smaller loss than the $67,500 the consignor felt he would have lost out on by letting the car go at $125,000. Neither choice is a winner.

Sellers control their cars

These are uncertain economic times, with business sections of newspapers printing headlines daily about plummeting real estate prices, failing mortgage companies, rising oil prices, and fears of an impending recession. Throughout the Scottsdale weekend, sellers with high-quality cars told me as well as the SCM analysts that in today's market, they simply would not consign their cars without having the option of putting a reserve on them. Consequently, we are observing that thoughtful sellers have started to resist the all-no-reserve auction format. It's a question, pure and simple, of the seller having final control of the transaction as a car crosses the block. We believe the all-no-reserve policy has had its moment in the Arizona sun, and its time has passed.

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