In Defence of Vendor Bidding

By Rohan Millar

This site carried an article entitled “Fraud and free markets”, which effectively condemned the practice of vendor bidding at auctions.

The fundamental point missed by those taking issue with vendor bidding is that (at least in the context of the real estate market) the auction is conducted by an agent acting for the vendor. It is, in all respects, a vendor's auction, advertised, conducted and paid for by the vendor. The object of the exercise is to realise the best price that the market will yield for the vendor. The purpose is not to allow bargains to be snapped up by prospective purchasers, although this may well be the result of a poor market with a vendor keen to sell. The vendor does not invest in conducting the auction to provide a public service or free entertainment, its purpose is to maximise the vendor's return. It is entirely legitimate for an auctioneer to try to achieve the best result for his or her client.

The situation may be different where both vendors and purchasers have bought into the market to ensure it is conducted without advantage to either party, such as markets requiring the purchase of a seat to participate (for example, the way stock markets were formerly conducted). However in the context of standard Saturday morning real property auction, it is the vendor who is offering the property for sale, and at whose invitation the prospective bidders attend.

The rules of the auction, which may be read out by the auctioneer or otherwise are available for inspection on site, almost invariably preserve the vendor's right to bid. This is the basis on which the auction is conducted, and on which prospective purchasers choose to bid. As well as the specific notice being given, the practice is widely known – it is hard to imagine any bidder at an auction being unaware of the vendor's right to bid. A bidder not content to participate in such a market has an easy solution – do not bid. No one is compelled to bid at an auction. Sale by private treaty remains an option taken by many people not wishing to take their chances in an auction. The solution is not for the freely participating bidder to cry foul, with allegations of fraud, when the vendor exercises the specifically preserved right to lodge a bid.

Viewed in this way the bidders have little standing to complain about the rules under which the auction is conducted. But is there really any evil being done to justify such a complaint? Moreover, can it constitute a fraud in the manner suggested by the article?

Vendor bidding is used to ascertain whether the market will produce a price that will be of interest to a vendor. An agent should never use vendor bidding once the reserve price has been reached: to do so would run an unjustifiable risk that the property will be knocked down and “sold” on a vendor's bid. As a matter of practice the REIV guidelines prevent vendor bidding above the reserve. The use of vendor bidding simply prevents the bidding stalling with the property being passed in well below reserve when bidders are prepared to offer more.

The effect of this is that no-one pays more than would otherwise be the case for a property because of the practice. It is not that a vendor bid prevents a purchaser buying a property at a lesser price: the property would not have been sold at the lesser price. If there is to be a “meeting of minds” on the price then the vendor bid helps to establish whether the prospective purchasers are prepared to offer a price approaching a level on which a sale could take place.

But quite apart from the practical point that vendor bidding is not used when the property is “on the market”, it is hard to see how the practice could be fraudulent. A suggestion that vendor bidding constitutes fraud overlooks the fact that the rules of the auction invariably allow vendor bids to be taken. Can a free participant in a market, which specifically reserves the right to vendor bidding, claim to be defrauded when that right is exercised?

Moreover, what the bidder claiming fraud is really saying, is that they hoped to purchase a property for less money, yet the vendor's actions encouraged them to spend more. The point remains that just as no person is compelled to attend an auction, no person is compelled to pay more than they are willing to spend. Bidding is purely voluntary. If the price is more than the bidder wishes to pay, the remedy is simple – bid no further. If the bidding, even if influenced by vendor bidding, still sees the property sold to the bidder at a price they are prepared to pay, the auction has done its job.

Any representation as to what others think a property is worth (unless that other person is a valuer or other expert) is not fraudulent as it is of no relevance to the bidder's own decision on how much they are prepared to pay. If a bidder believes other people are prepared to pay more for the property than they are, the answer is to go no higher with the bidding. Whether the bid is from the vendor or other prospective purchasers is of no relevance to that decision. On the basis that no person pays more than they are willing to pay because of vendor bidding, it is hard to see how it could constitute fraud. Instead of relying on the law of fraud, opponents of the practice would require action from either the legislature or the market.

The issue of state intervention to help ensure the free operation of a market is a vexed one. For free market purists, any interference by government introduces inefficiencies into the market which cannot be justified. It is worthy of note that in auctions for some types of goods legislative action has already been taken in the form of section 64(e) of the Goods Act 1958 (Vic). This permits a vendor to bid where that right has been expressly reserved. Other than perhaps extending this provision to apply to real estate, it is difficult to see why any more strident legislative action should be taken.

In looking to the market for action, perhaps those people, and particularly estate agents, who protest about the use of vendor bidding, should consider conducting auctions at which no vendor bidding is permitted. They could be promoted as such, and if the market truly wishes to see vendor bidding eliminated, such auctions should prosper. No doubt such auctions would be attractive to purchasers hoping to buy properties at lower prices. One can however speculate that vendors would have a markedly lesser degree of enthusiasm to list their properties at auctions which have that objective. In the best tradition of the “invisible hand”, an auction which will not encourage the best price from the market will hold little attraction for a vendor.

Like shareholders who eschew “unethical investments” in companies conducting certain forms of business, the vendor listing with an agent not allowing vendor bidding would be putting a commitment to a set of principles ahead of maximising profits. It would be a rare vendor indeed who shows that level of commitment to eradicating the supposed evil of vendor bidding.

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