The reserve price: how it works, and how to set yours

What a reserve price is

A reserve price is the lowest price the seller has agreed to accept for a lot. If bidding passes it, the highest bidder buys when the auctioneer closes the lot. If bidding stops below it, the lot does not sell on the day. The Consumer Protection Act calls it a "reserved or upset price". In the room, everyone just says the reserve.

It is measured against the hammer price, which is the winning bid. Where the conditions of sale make the purchaser liable for commission on top of the bid (see buyer's premium explained), that commission does not count towards your reserve. Where VAT applies to the sale, agree in writing whether your reserve includes it, so nobody argues later about which number was meant.

Four terms get confused with it:

How a reserve is set

The reserve is the seller's decision, made with the auctioneer's advice. The Consumer Protection Act regulations say an auctioneer may not set a minimum or reserve price without the seller's express written permission, so a reserve that was only discussed on the phone is not good enough.

With us it happens in this order:

1. Appraisal. We look at the asset and give you a price guide: what it should realistically achieve in a competitive room. See valuations and inspections if you need a written valuation for a bank, the Master or a board.
2. Costs. Before you sign, the regulations require the auctioneer to give you an estimate of the total cost of the auction. Your appraisal fee, listing fee and commission, and when each is payable, are set out in writing in your mandate before you sign.
3. Mandate and reserve. You sign the mandate and agree the reserve in writing. For property this is roughly three to four weeks before auction day.
4. Keep it under review. If you decide to change the reserve before the day, put the change in writing too.

The full process is on our selling page.

Is the reserve price disclosed to bidders?

That a reserve exists, yes. Its amount, generally no.

Section 45(4) of the Consumer Protection Act requires notice in advance that a sale by auction is subject to a reserved or upset price. The regulations carry that through: the advertising for an auction must state it where it applies, and the rules of auction for each sale have to say whether it is subject to a reserve and whether the owner or the auctioneer may bid. If that last point matters to you as a bidder, read that part of the rules before the day.

Neither the Act nor the regulations require the amount to be published. The auctioneer does have to record the details of any reserve in the vendor's roll for that auction, and the rules of auction must provide that the vendor's roll is available for inspection, free of charge, during normal hours. So the amount is not advertised or announced, but it does form part of the auction record. We do not publish or announce reserves, and there is a practical reason not to: a published reserve becomes the target. Bidders anchor on it, the bidding stalls just above it, and the competition that might have carried the price further never starts.

Some auctioneers announce when a lot passes its reserve ("it is on the market" or "selling"). That is a matter of practice in the room, not a legal requirement.

When bidding does not reach the reserve

Unless the conditions of sale say the top bid is held for confirmation (see the next section), the lot is simply not sold on the day. Your commission and the appraisal and listing fees, and when each is payable, are set out in your mandate, so you know them before the auction rather than after.

From there a seller usually has three routes:

• A post-auction offer. The highest bidder, or another registered bidder, may want to negotiate. We put any offer to you, and you are free to accept or decline it. For property, a private sale after the auction has no force or effect until it is in writing and signed by the purchaser and the seller (or their agents acting on written authority). The regulations also stop the auctioneer charging commission on immovable property before that point.
• Relist. Offer the asset again at a later auction, often with a revised reserve. The auction calendar shows what is coming.
• Sell privately. Some assets do better by private treaty. For property, our real estate desk can list it on the open market instead.

The bidding itself is useful even when the lot does not sell. A room full of registered buyers who stopped at a particular number is better market evidence than any desktop valuation, and it is worth a frank conversation before you decide which route to take.

Sales "subject to confirmation"

Some South African auctions handle a shortfall differently. Instead of passing the lot in, the auctioneer takes the highest bid "subject to confirmation" by the seller. The seller then has a set period to accept or decline that bid. If the seller confirms, the sale goes ahead at that price. If the seller declines, or the period runs out, there is no sale.

The regulations themselves make the highest bidder the purchaser at the fall of the hammer "subject to any reserved price and acceptance of the highest bid by the seller".

Confirmation periods differ between auction houses and between asset types, and the auction regulations do not set one. Whether a particular auction works this way, how long the period is and who confirms are set out in that auction's conditions of sale. Read them before you bid or before you sign a mandate.

For sellers, the lesson is the same either way. A confirmation period is not extra time to wait for a better offer. Decide before the auction what you would accept. If the confirmation period lapses without your confirmation there is no sale, and the bidder is free to buy elsewhere.

How to decide on your number

Set the reserve at your walk-away number, not your hope number. The reserve is the price below which you would genuinely rather keep the asset. Everything above it is for the bidders to decide.

Work it out backwards, from what you need to have in your hand after the sale:

Then weigh the cost of not selling. Rates, levies, bond interest, insurance and security carry on every month the asset sits unsold, and so does the risk that it deteriorates or the market moves.

Too high, too low

• Too high: the lot passes in, you have spent the marketing on it, and the next campaign starts with buyers who remember it did not sell.
• Too low: you lose the protection the reserve is there to give, and if the room is thin on the day the asset can sell for less than it was worth to you.
• About right: close to the realistic value in the appraisal, at or above what you need to clear, and realistic enough that the bidding on the day can pass it.

If the property is bonded and the likely price will not settle the bond, speak to the bank and your conveyancer before you set the reserve, not after the auction.

Selling for someone else: estates, trusts and companies

When the seller is not one private owner, the reserve needs the right sign-off behind it.

• Deceased estates. Unless the will says otherwise, an executor sells in the manner and on the conditions the heirs with an interest approve in writing. Where an heir is a minor, absent or under curatorship, or the heirs cannot agree, the Master approves them instead. The reserve is part of the terms of the sale, so make sure that approval covers it. Our deceased estate guide goes further.
• Insolvent estates. Generally, a trustee sells in the manner and on the conditions the creditors direct. Where creditors give no directions, the sale is by public auction or public tender, on conditions the Master directs. See estate auctions and the insolvency and liquidation guide.
• Companies and trusts. For a company, a board resolution usually authorises the sale. But if the asset is all or the greater part of the company's assets or undertaking, the Companies Act generally also requires the shareholders to approve the disposal by special resolution, and how that approval should be framed for an auction is a question for your attorney. For a trust, the trustees resolve to sell, acting as the trust deed requires. Make sure the authority covers the reserve too, or names who may agree it, so nobody has to be tracked down for a signature on auction day.

The paperwork differs for each, and the right person to confirm it is your attorney or the estate's conveyancer.

Auctions without reserve

An auction "without reserve" sells to the highest bidder whatever the price. The regulations define it strictly. Among other things, there is no minimum bid, and once the auction has opened and bids are being called for, the seller cannot withdraw the goods.

An auctioneer may not advertise an auction as "without reserve" or "absolute", or sell goods without reserve, unless all of these hold:

• the goods carry no liens or encumbrances in favour of anyone other than the seller (apart from property tax obligations, easements and restrictions on record), unless every holder has agreed in writing to accept the highest bid unconditionally, whatever its amount and whoever the bidder, or a financially responsible person has guaranteed absolutely, in writing, that they will be discharged in full immediately after the sale or at closing, whatever the highest bid;
• the seller genuinely intends, at the time of advertising and on the day, to transfer to the highest bidder regardless of the amount; and
• the rules of auction contain a binding requirement that the auction be conducted without reserve.

So a bonded property cannot go under the hammer without reserve unless the bank agrees in writing to accept the highest bid unconditionally, or a financially responsible person guarantees absolutely, in writing, that the bond will be settled in full immediately after the sale or on transfer, whatever the highest bid; and the other two conditions must hold as well. Some sellers choose it because it draws bidders who might not turn up for a lot they suspect is overpriced. It only works if you can live with the lowest realistic outcome. For most private sellers, a well-judged reserve is the safer tool. If you are weighing auction against a conventional sale, our auction versus estate agent guide sets the two side by side.