Controversy and confusion

VICKI HOLDER sheds some light on the vendor bid.

The vendor has the right to bid on his or her behalf at auction.

The vendor bid has been around for thousands of years. Whether selling art, horses, cattle or real estate, most auctioneers have used the vendor bid as a normal legal part of the auction process without causing any concern.

However, recently it has been the subject of newspaper articles, creating controversy and comment in the real estate market and misconceptions among buyers. The code of ethics governing its practice is under review by the Real Estate Institute of New Zealand.

What is the vendor bid?

It's at the discretion of the vendor as to whether they exercise their right to bid. The vendor bid is a bid made on behalf of the vendor and can be exercised by the auctioneer or the vendor - but not both. In practice, most auctioneers prefer to make a bid on behalf of the vendor, because they have the skill and experience to do so legally. The vendor bid is the same as the counter offer the vendor is allowed in a sale by private treaty, but it happens much more quickly because of the speed of the auction.

Is it legal?

Yes. It's covered by the Property Law Act 1952 and the Sale of Goods Act 1908. A right to bid may be reserved by or on behalf of the seller, and the seller, or any one person on his or her behalf, may bid at auction. The "Particulars of the Property" and the "Conduct of the Auction" is read aloud by the auctioneer as an introduction to the sale of the property. Prior to the commencement of the bidding the auctioneer announces whether the vendor has set a reserve price (minimum selling price) and has reserved the right to bid at the auction.

Do most auctioneers use the vendor bid?

Yes, but there are some who specifically do not conduct vendor bidding. Barfoot & Thompson has adopted this policy since 1994. If there is not more than one bidder at a B & T auction, it's a matter of negotiating with vendors.

When is it used?

Most frequently it is used to open the bidding. Many purchasers hold back for one reason or another. They may have been ill-advised to wait to the last minute to make their bid. In these situations, when the auctioneer knows there are purchasers in the room, they will say, for example: "Ladies and Gentleman, on behalf of the vendor, I'll start the bidding at $700,000." Otherwise, the property would have to be passed in with no bids, which gives the perception the property has no value.

Is it used beyond the opening bid?

Yes. The vendor bid can be used up to the vendor's reserve as a counter offer. Many auctioneers declare a bid made on behalf of the vendor by stating "the bid is with me".

What if there are no genuine bidders?

There's no point in an auctioneer continuing with the auction if they know there's no competition, so the property will be set aside and the sales agent will work with all interested parties afterwards to conclude a sale on the vendor's behalf.

What is the biggest fear surrounding the vendor bid?

Some people are under the misconception that the vendor bid will be used to artificially inflate the price of a property, forcing purchasers to pay more than the property is worth.

Doesn't that happen?

No. You can't force people to pay any more than they are prepared to pay. Nobody buys real estate these days without doing their homework first. An auctioneer will not bid beyond the vendor's reserve - they don't want to be left owning the property! It's more likely to happen when selling through private treaty or tender, as purchasers haven't any idea where the rest of the market sees the value of the house. One of the strengths of properly conducted auctions is their transparency. You can see who you're bidding against and how much they're prepared to pay.

How do auctioneers avoid the situation where vendors have somebody else coming along to bid on their behalf at auction?

In discussions with the vendor prior to the auction, the auctioneer should clarify that only one party has the right to bid on behalf of the vendor and that person should be the auctioneer.

How well-informed are vendors and purchasers?

A real estate salesperson has a responsibility to look after people, primarily the vendor who they are acting for, but they should be fair to everybody. They should take time to educate prospective purchasers as to how the process works if they've never been to an auction before. Purchasers should get a copy of the Particulars and Conditions of the Auction contract at least two weeks prior to the auction. Prior to the auction, the auctioneer will announce the conditions of sale and clarify the provision of vendor bidding.

What if buyers are still nervous about the process?

It's recommended that purchasers go along to an auction to get a feel for what happens. If they're nervous about bidding, they can get somebody to do it for them. The whole process is designed so both vendors and purchasers are aware of what goes on.