In simple terms, no-reserve is the phrase used to describe an auction with no minimum sales price. This model can be scary for some sellers, especially those new to online auctions. We visited with Aaron McKee, founder and CEO of Purple Wave Auction, about no-reserve, what it means for a community of sellers, and why Purple Wave has chosen this model for our auctions.
In the ideal world of no-reserve auctions, the asset gets a fair price with better recoveries every time you sell that type of asset. Getting this best-case scenario requires a buying community that understands no-reserve auctions. It also requires having some checks in place to aid in lowering the no-reserve risk. For an internet auction, we have an item online for at least three weeks, and we have a five-minute auto extension so everyone gets a fair chance to bid. There's more time for bidders to make decisions than in a live auction, and as a result the items more consistently sell for fair prices.
With a no-reserve auction, exposure to all the other costs is limited and negative impacts between the time of the listing and the day of the sale. Theoretically, with no reserve, there is a risk of a lower-than-expected price. Still, if there is a lot of exposure to the market — when enough people understand what the asset is — then the price received should be the fair market value for the asset.
When considering the risks of no-reserve auctions, one should also compare the risks of the traditional, fixed-price transaction model. "Somebody immediately thinks of the risk of a downside in a no-reserve auction, but there are other risks that don't exist in a no-reserve auction that exist in a fixed price sale," says Aaron.
The risks of the fixed-priced sale
1. Holding Costs
Owning an asset costs money. Parts can deteriorate, batteries can fail and tires can lose air. Insurance is expensive, as is the interest and opportunity cost of having capital tied up in an unused asset.
“All of these things equate to 25-35% a year — gone. If the seller has it overpriced for six months, then 15% is gone, and the new net recovery is 15% less,” says Aaron.
2. Fixed Pricing
When an item is assigned an arbitrary sales price, it's very likely that value is too high or too low for the market.
“If something is worth $100,000 and you don’t know that, but you priced it for $85,000 and sold it the next day, you’ll never get $100,000. You’re trying to hit that price, and if you’re too high, it sits there and depreciates, and all these things go on, and you continue to have to catch a falling knife. If you’re too low it sells tomorrow, and you’ll never get the upside. With an auction, whenever we get $85,000, we’re going to ask for $86,000,” says Aaron.
With rapidly changing markets, the fair market value can be well beyond the seller's initial expectations. Auctions have an unbound upside potential, allowing the market to realize that fair value for a transaction that would have been priced artificially low otherwise. The fixed pricing risk and holding costs go away with a no-reserve auction, and we get better engagement from buyers, so Purple Wave selected the method of sale that eliminates those challenges associated with the fixed price transactions. If the no-reserve process isn’t right for a seller, there are always other options, like the fixed-price model, to fall back on.
“Each model has its own set of risks; the risk of no-reserve is pretty well combated by looking at what assets brought,” says Aaron.
Purple Wave has built a system that minimizes the perceived risk of no-reserve, including our existing buying community, a set of marketing tools that identify what assets need to be in front of what buyers, and a direct sales channel for promotion of assets through our sales team to potential buyers when we feel there is a need for more exposure.
“Our model is different, and it removes the two risks - costs of holding and fixed pricing. The safeties we have in place lower that risk. We have a large buying community that understands we are no-reserve, the marketing that we do on an event and asset basis, and the direct sales efforts we put in place on anything we identify that we don’t think is getting enough attention,” says Aaron.