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What is an Auction and How Does It Works?

Webster's defines an auction as simply "A sale of property to the highest bidder. "The word stems from the Latin verb "auctio" which means "to increase."


 Auctions are used to sell many things in addition to antiques and art. All around the world there are auctions of commodities such as tobacco, fish, cattle, racehorses, and just about anything else where there's a market of multiple people interested in buying the same thing. That's the key to an auction - a bunch of people who are interested in buying the same object, and taking turns offering bids on the object. The right to buy that object will go to the highest bidder.

This is not the way many goods are bought and sold. If you go into the store to buy a soda, you're the only customer at the moment and there's a set price, a list price if you will. Shopping for a piece of jewelry? Chances are you're the only person interested in a given item in the jeweler's case, and while you may be able to bargain a bit, it's just you and the jeweler.

 Now imagine you're at an auction and there's a great oak Mission-style rocker that you actually think was made by one of the masters. Somebody else in the audience thinks it's a pretty rocker that would look good in their living room, but they don't know anything about Mission furniture and its history. There's also a dealer in the crowd who knows the same thing about the chair that you do, and a collector of Mission furniture who's determined to add this rocker to her collection.

You are all willing buyers. There's only one chair. Who gets it? The highest bidder. What is the chair worth? Well that's up to you potential buyers to work out among yourselves, with the help of an auctioneer. You will determine the value, or "market value" of that rocker at this auction, in this part of the country at this time.

Now, I have an amateur's interest in real estate, and in that field you frequently run up against the term "fair market value. "Well, what is fair market value? The most common legal definition is that fair market value is the "price at which an item is exchanged between a willing seller and a willing buyer in an arms-length transaction when neither party is under duress to sell or to buy."

What better way to determine fair market value than an auction with an object offered by a willing seller and a bunch of willing buyers?

Now, people who are cynical about auctions will suggest that sometimes a buyer pays more than fair market value because the auctioneer is in cahoots with people who appear to be buyers but who are actually working for the auctioneer to push prices up above what they should be.

Is this possible? Sure it is. Can you avoid this trap? Yes you can. We'll discuss how you can protect yourself in the second installment. First we must cover some basics.

How Auctions Work.
Where does the stuff come from?

 For weeks or more before an auction, the auction house assembles merchandise, that is, items that will be sold at the next auction. These items, sometimes called "merch," come from a variety of sources.

Some items may have been purchased outright by the auctioneer, with the intent to resell them at auction. It is common in some parts of the country for an auctioneer to buy "a house. "This usually happens when the inhabitants of a home have died, and the surviving family and heirs select a few cherished items for each to keep. Then they seek to reduce the rest of the furniture, furnishing and possessions into cash to put into the estate of the deceased.

The auctioneer inspects the home, makes a few mental calculations based on what he/she thinks is the value of the major furniture items, and then offers one flat price for the entire contents. If a deal is struck (willing buyer/willing seller) the auction house clears out everything and takes it to the auction house or to some storage facility.

From there, the material may be sold "as is." Or items may be cleaned, polished, and repaired. Lesser items, such as old magazines, inexpensive glass and china ware, may just sit in boxes. Sometimes these boxes are sold as a single item, not surprisingly called a "box lot."

Other items that will go into the auction find their way to the auction house via a variety of routes. Sometimes collectors put specific pieces up for auction. Often the auction house will sell these "on consignment," meaning that the owner agrees to allow the auction house to sell one or more items with an agreement that the auction house will keep a percentage of the sale price of each item. Sometimes consigners will set a minimum "reserve" price. If the bidding does not reach that minimum price, the lot will not be sold.

 As items come into the auction house, there's a lot of work to be done. Items must be assigned numbers, called "lot numbers. " Lists, and perhaps a catalog, must be prepared recording the items that will be sold, giving brief descriptions of each item (hopefully these descriptions are accurate) by lot number. Generally this list will also indicate the order in which the lots will be sold.

In very informal "country" auctions, there may be no list whatsoever. Instead the auctioneer will just point to an item or hold it in his hand and auction it on the spot.

As merchandise is prepared for the auction, it is often put into an area near the stage or podium from which it will actually be sold when auction time rolls around. Most auction houses have viewing times before the actual start of the auction. This is when you can inspect the items that will be sold. It is very important that you do this.

In fact, inspecting items that are offered for sale is the first step in protecting yourself against bidding too much for an item. 



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