Classic car auction participants must learn to limit risk

Last week we touched a bit on what the environment was like at a classic car auction (http://bit.ly/19haQcp). This week we’ll explore some of the things you’ll need to know before buying at auction.

Know your limit and stick with it. The most important thing to know is that you will know very little. You will not have an opportunity to test-drive the car. You will not have an opportunity to perform a thorough inspection on a lift. You will have very little time to verify condition, originality, maintenance, and provenance. This is not an ideal way to buy a classic car, but that does not mean that you should not buy at an auction. It means that you have to do everything possible to minimize your risks, including adjusting the price that you are willing to pay in order to compensate for these risks. A more experienced collector who has learned how to manage these risks might be willing to spend more than someone attending their first auction. Don’t forget to take into account the “buyers premium” which is usually between 5% and 10% of the sale price, as well as transportation. 

Be prepared. If you are the successful bidder, you now own the car. You will have to pay for it immediately. The auction company will not accept post dated-third-party-out of-state checks. They will accept cash, bank checks, letters of credit, and in most cases, credit cards. I’ve found that it’s easiest to bring bank checks in increments of $5,000. Any change that is due will be paid right on the spot by the auction company. You will also have to remove the car, but it won’t be registered or insured, so you can’t drive it. Unless you have a trailer, or a friend with a dealer plate, you will have to pay to have the car transported. Most auctions have transporters on stand-by, but check first.

You’ll need to know some important terms. A “reserve” is a pre-determined minimum amount that is set by the seller. If the bidding does not reach the “reserve,” the seller does not have to sell the car. Likewise, the high bidder does not have to buy the car. You will not know what the “reserve” is set at, until (and if), the bidding reaches the “reserve,” but once it does, the high bidder and the seller are obligated to complete the transaction, no matter how high the bidding may go. “No reserve” means that the car will sell to the highest bidder, no matter how low that bid might be. Some sellers believe that selling a car at “no reserve” will create somewhat of a frenzy, thus driving the bidding to a high level. Sometimes it works, and sometimes the buyer gets the deal of a lifetime.

“Chandelier bids” are make-believe bids that auctioneers call out in order to create the impression that there are bids at a certain price when there really are not, thus driving up the price of the car. Hard as it may be to believe, this is legal in almost every state. However, the auctioneers are not allowed to meet or exceed the “reserve price” with “chandelier bids.” The reason is that being that below the “reserve price” the car cannot be sold, so technically they are not creating a contract. Once the “reserve” has been met, the high bidder owns the car, and of course a non-existent “chandelier bidder” cannot purchase a car.

Even if you are not the high bidder, there is still a good chance that you can buy the car in an “Off The Block Sale.” The fact is that many cars don’t sell when they are up on the auction block. Either nobody bids on them (do they know something that you don’t know?), or they fail to meet the sellers’ “reserve” price. In either case, the unsold cars are usually driven from the auction block into some type of “holding area.” Here you may find the owner, and you can talk further about the car. Be forewarned, however. If you decide to buy the car from the owner, this is called an “off the block sale.” The auction company will be more than happy to facilitate this transaction, but you are still responsible to pay the auction company their “buyers premium.” All auction companies will take possession of the title and/or registration papers at the time that the seller consigns the car to the auction, and some will not return them to the seller (consigner) until 30 days after the auction ends, effectively preventing transfer of ownership for that time period.

Remember, buying at an auction is all about minimizing risk. The better you become at minimizing this risk, the more likely you are to be satisfied, if not downright pleased with the results. If there’s one piece of advice I could offer, it’s this; Do not buy a classic car at an auction if you are not able to meet and speak with the owner before bidding. A picture may be worth a thousand words, but a conversation with the owner is priceless.