IV: AUCTION DAY
4.1. The Auction Assistant
Non-auctioneer employees are allowed to help conduct auctions. As long as they are not acting as licensed auctioneers, these employees—commonly referred to as “ringmen” or “pitmen”–are not required to be licensed. To avoid the licensure requirement, ringmen cannot talk with prospective buyers about anything relating to the property or the terms and conditions of the sale. However, ringmen can serve two important functions: (a) assisting the auctioneer in locating bids made from the crowd and (b) convincing prospective buyers to continue bidding.
Practical Considerations: Licensed Auction Assistants
Licensed auctioneers are sometimes used as ringmen at an auction, especially if the auction is expected to produce a lot of interest so that they can answer questions from prospective buyers and better monitor the situation without violating licensure requirements.
4.2. Live vs. Internet Auctions
In the experience of auctioneers, if they have done their marketing job correctly, prospective buyers arrive at an auction eager to bid, which may drive up the price of the property.
Perhaps because auctioneers sense the eagerness increases when bidders are actually there in person–and that this affects the auction price, and also because auctioneers appear to continue to believe that purchasing real property is a hands-on experience and that buyers prefer being “live” at the auction to see and touch the property, the internet has not yet begun to displace live auctions of real estate, at least within Ohio. Nationally, a few companies are experimenting with real estate auctions over the internet, with success to be determined. At this point, the internet seems to be used most frequently in the real estate auction context as an informational and marketing resource. Effective May 6, 2005 Ohio law specifically exempts from the requirement to be an auctioneer, persons selling real or personal property via the internet.57
4.3. Contract Issues
(a) Terms and conditions of sale
Sellers have the right to set the terms and conditions of the sale and usually do so with advice from the auctioneer. These terms and conditions must be included within the purchase contract, which is made available to prospective bidders prior to the auction (usually within the bid package). Auctioneers have a duty to conduct the sale openly and fairly, by orally summarizing the terms, conditions, and warranties of contract before starting the bidding. As a general rule, bidders have a right to rely on the printed conditions and the auctioneer’s oral representations. Representations made on the day of sale supersede all others and bind the parties (even if, for example, the buyer does not hear or understand the auctioneer or the auctioneer misstates a condition that hurts the seller’s position).
The property is generally sold “as is”, i.e. the winning bidder gets what he or she sees. If a problem arises after the contract is signed, even if prior to the closing, the buyer bears the burden of loss and cannot void the contract. The seller is generally responsible for providing title insurance, gas warranty, termite inspection, etc., although he or she may require the buyer to do so as a condition of the contract.
The terms of sale generally provide for the highest bidder to deposit earnest money–a set percentage of the purchase price or a stated amount–and enter into a purchase contract immediately following the auction. The balance of the purchase price generally must be paid within thirty to sixty days, at the time of closing.
Practical Considerations: Recording the Auction
In order to protect against disputes that may arise over what has been represented on the day of sale, the seller’s agent might video- or audio-tape the auction proceedings.
(b) Contract Formation
A contract is formed when the auctioneer accepts a bid on behalf of the seller. This occurs with the “fall of the hammer,” or more often than not, with the auctioneer verbally announcing that the property has been sold. Bids themselves are only offers and, therefore, can be withdrawn at any time prior to the auctioneer’s final acceptance. If a bid is made right as the auctioneer is about to signal final acceptance of the prior bid, the auctioneer has discretion to either reopen the bidding or declare the property sold under the prior bid. The new bid, however, will only be accepted as a continuation of the open bidding and not as the final offer. Once the auctioneer has orally accepted the highest bid, the parties should immediately enter into a purchase agreement. Applicable law requires the contract to be in writing and signed by both parties. While the acceptance of the bid creates a contract to sell, it does not necessarily pass title, and title passes according to the general rules.
4.4. The Duty of Disclosure
All disclosures required for traditional real estate sales are required for an auction sale. Accordingly, the auctioneer must orally disclose to prospective buyers, prior to the auction, that he/she represents the seller and, once a successful bidder has been determined, the broker must provide an agency disclosure form to be signed by the buyer prior to the buyer’s signing of a purchase contract. In addition, the auctioneer must provide prospective bidders with a residential property disclosure form and lead-based paint disclosure form, if applicable, in accordance with applicable law. REALTORS experienced with auctions have noted a prevalence of the use of “as is” clauses in the sale of properties at auction.
4.5. “Bid Rigging” and Other Prohibited or Questionable Practices
Ohio law forbids bid rigging,58and imposes stiff penalties on violators including criminal penalties. Bid rigging is defined under Ohio law as a conspiracy not to bid against each other or otherwise to decrease or increase the amount or number of bids. Such an agreement operates as a fraud on the owner of the property. As one example, this statutory provision prohibits pools of bidders who conspire to hold down the price on the sale and later split up assets, although pools of bidders are less likely to be an issue in real property auctions than in personal property auctions because splitting up real estate (unless in the context of a multiple property sale) is more difficult to accomplish. As an example of prohibited practices on the seller’s side, the statute also prohibits “phantom bidding,” or the practice of auctioneers who want to drive up the price by pretending that bids have been made by competing bidders who do not actually exist. Additionally, sellers cannot attend an auction to bid up the price unless this fact is clearly disclosed to prospective buyers. Phone bidding is permitted by law and usually occurs when prospective buyers cannot attend the auction (or have an agent present but want to participate). Phone bidders must coordinate the details with the seller’s agent. Typically a phone bidder must pre-register and tender the earnest money prior to the auction. Then the auctioneer/broker assigns someone to staff the phone and bid as prompted by the phone bidder. Obviously, if the bidder does not succeed in making the highest offer, then the seller returns the earnest money.