Chandelier Bidding Defined

(And How to Spot It)

             

Chandelier bidding is the placing of bogus bids in an effort to drive up the price at an auction. It can occur at any kind of auction, including online auctions. The "justification" for this kind of bidding is that the bids are below the reserve price, and if no one is willing to pay the reserve, no harm is done because no sale takes place. However, with auction prices, realized and unrealized, being used by value guides and appraisers etc. harm can be done.

While it may be difficult, if not impossible to spot this kind of bidding during the auction, it is easy to spot after the "no sale".

Here's How:

In a recent automobile auction the prices were strong, and over 85% of the cars sold. However, of the 10 "no sales", 9 would have resulted in a profit for the auction company if the high bid had been accepted. Here's an example: A car has an estimate of $100,000 to $120,000. While we don't know the reserve, we can assume the car will sell if it reaches the estimate. Therefore the reserve is $100,000 or less. Assume a 10% bidder fee and a 10% seller fee. (Adjust the calculation if the percentages are different.)

In this case, if the high bid is $90,000 the buyer will pay $99,000 to the auction company. The seller is due only $90,000 (Reserve $100,000 less 10%). This leaves a $9,000 profit for the auction company.

Now there are exceptions to every rule, and maybe a repeat seller or buyer doesn't pay the 10%.

But if they do, that's an example of Chandelier Bidding.