Updated July 14, 2020:

Auction contracts are agreements between a seller and a buyer, in which the seller agrees to sell an item or property for the highest bid and the buyer agrees to pay it. They also take place between the bidder and the auctioneer. Auctions consist of one seller and a number of potential buyers, so the property is sold to the highest bidder.

The final sale in the auction process results from bid competition, though it is important to note that if only one bid is received, that single bidder may purchase the item. Auctions have their roots in bargaining, which historically was the method by which sales were conducted. This usually did not involve competition between prospective buyers.

How Auctions Work

Every sale has a seller and a buyer. In an auction, however, there will be more than one potential buyers, and they are called bidders. The one who is willing to pay the highest price, or makes the highest bid, will be the one who ultimately buys the item.

The seller may have a minimum price they are willing to accept for the property. After the sale is begun, the bidders offer competing amounts, called bids, and the seller accepts the highest bid. The sale may be conducted by the seller or through an agent, who is called an auctioneer.

Not all auctions are the same. In one type of auction, the bidders and their offers may be kept confidential. However, usually the bidders are physically present during an auction. Depending on the auctioneer, bids may also be placed by telephone or online. The auctioneer receives a commission after the sale is completed.

When the auction takes place in person, the auctioneer gives a signal by voice or gesture that signifies the acceptance of each bid. Eventually, no higher bids are offered, and the auction ends for that item. When the auction completes, the seller may not refuse to sell the item for the highest bid amount. The buyer can also not refuse to pay the price.

When the bid is accepted, the auction is complete, and a binding contract is created.

A seller is often able to set a reserve price in advance of the auction. If the highest bid offered is lower than that reserve price, the sale does not take place. The goal of an auctioneer is to get the highest price for an item for the seller by means of a free and fair bidding competition among potential buyers.

Absolute Auctions vs. Reserve Auctions

There are two basic types of auction — reserve auctions and absolute auctions. Absolute auctions have no reserve, and the item is sold to the highest bidder, no matter how low that may be.

This is the basic process of a reserve auction:

  • The seller retains the right to refuse sale of the property.
  • When an item is brought up for bid in an auction, it's an invitation, not an offer to create a contract to purchase.
  • The seller is able to cancel the sale of their property at any time before the highest bid is accepted, before the gavel drops, which represents the auction's end.
  • If the bidding is below the reserve prices, the auctioneer does not have to sell the item or property.

Another type of auction is called a Dutch auction. Here is how a Dutch auction works:

  • A property is offered for sale at a price that is over its value.
  • The price of the item is lowered by increments until someone agrees to pay that price for the item.

The English auction, which is the process beginning with a low price and ascending to the highest bid, is the most common type of auction used and is used most often for selling antiques, art, and real estate.

Auctioneer Responsibilities

An auctioneer is a person who conducts a sale, who is employed by the seller. Usually, this is a professional whose primary business is to run auctions. The auctioneer is paid by a commission. His job is to make offers to sell property to the highest bidder.

Not just anyone can be an auctioneer; there are regulations auctioneers must follow in order to prevent fraud. These regulations depend on the state in which the auctioneer operates. Auctioneers are agents and must act in the best interest of the seller, and follow his instructions. Another responsibility of an auctioneer is to make sure the asset being sold is the legal property of the seller.

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