A Guide To Auction Guide and Reserve Prices

If you’re buying or selling at auction you need a good understanding of what guides and reserves are – and especially so in the current property market. In all fairness, however, many people probably don’t fully understand what they are. So here we’ll give a clear explanation of what auction guide and reserve prices are and exactly how they work.

What is a reserve price?

The definition of an auction reserve price is simple: The reserve price is the minimum price at which the seller has authorised the auctioneer to sell the property at. The reserve price is not disclosed to potential buyers however.

If the bidding does not reach the reserve price the lot will be withdrawn and go unsold. (Although potential buyers can usually make a lower post-sale bid and sellers can accept it if they are minded to do so.)

Although the concept of reserve price is simple, the matter of setting a reserve price and its relationship to the guide price is not quite so simple though.

What is a guide price?

Guide prices are usually quoted when lots are listed in an auction catalogue. As the term suggests they serve to guide prospective buyers as to whether the lot is likely to be available within their budget.

A guide price may be a single figure amount or it may be a guide range, eg. £250,000-£280,000.

The guide price is not the reserve price. Nor is it necessarily the selling price, although it may sometimes turn out to be.

The great guide price conundrum

There is no strict legal definition of what a guide price is. A widely used definition, and also the one used by surveyors’ organisation RICS, is that it is a guide to the seller’s minimum expectation of the sale price.

However, back in 2014, a complaint was made to the advertising regulatory body ASA that one large auction house was using guide prices which were below reserve prices. The complainant claimed it was misleading bidders by suggesting that properties could be bought more cheaply than they actually could be.

The ASA subsequently issued a ruling clarifying that, and how, guide prices should be defined and this was then adopted as part of RICS professional standards and guidance to auctioneers. This recommends that ‘the guide price is an indication of the range within which or, in the case of single figure guide prices, within 10% of which, the minimum sale price will fall.’

Property buyers (and sellers for that matter) might therefore like to check how their auctioneer is defining guide price. However, while there is nothing in theory to stop an auctioneer using an unachievable guide price to help attract buyers normally this ‘within range or 10% of’ definition will apply. This will allow buyers to gain some idea of where the reserve price may be.

Who sets the reserve price and the guide price?

Ultimately it is the seller who decides what the reserve price and the guide price should be. However they should always be guided (pun intended) by their auctioneer.

Sellers may want to take the advice of several auctioneers on reserves and guide prices. They may also want to take advice from estate agents on the likely sale price achievable if advertising the property on the open market.

It’s worth noting that reserves and so guide prices can be changed right up to the auction date.

When less can mean more

Most auctioneers will tell you that sellers should set their reserve price as low as possible. A low reserve price will very often mean the property will sell at a higher price than if the reserve is set high.

This is because low reserve prices attract more interest from bidders – in the hope of securing a bargain. And, often, more competitive bidding at the auction which pushes the price up.

While reserve prices are, of course, not disclosed to bidders the reserve price sets the guide price which will directly attract (or dissuade) potential buyers.

Sellers should be aware that auctioning their property with a keen reserve price does involve a risk it will sell at that reserve price.

Buyers should be aware that low reserves may be used as a legitimate tactic to raise the eventual selling price.

Guides and reserves in the current market

It has always been important for auction sellers and buyers to understand what reserves and guides are, and to understand how they work. However, today it is perhaps more important than ever before.

Recent average annual property price rises of circa 10% may have lead some sellers to have high price expectations when entering their property into an auction. However, today’s flatter market could mean that setting an unrealistically ambitious reserve and hence guide price could mean their property goes unsold.

A recent report from Savills suggests that even in times of economic uncertainty there is still good demand at auction for well priced stock.

So, in current market conditions, setting of appropriate reserve and guide prices is absolutely paramount in ensuring that a property sells at the very best price available on the day.

In our recent article, read what professional auctioneers have to say about the importance of guides and reserves:  How To Get The Best Price At Auction In The Current Property Market