Inside the Auction House: A 'ring' partnership

Inside the Auction House: A 'ring' partnership



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Answers from the Rostrum

Benjamin Tobin, Chartered surveyor and director of Strettons, has been selling properties by auction since 1979. Each month he corrects common auction misconceptions, giving us the real answers from the Rostrum...

Over the past few years there have been a stream of television programmes on the subject of buying properties at auction. Frequently these have followed a similar format; the camera follows a buyer or buyers around the property market, inspecting buildings, most frequently houses or flats (but occasionally small business premises) with the suspense provided by filing the auction process and watching either the joy or the disappointment of the successful or unsuccessful bidder at the auction.

I have featured on numerous such programmes and I am still questioned by clients who see me on daytime satellite TV selling a property that went through our auction sometimes several years earlier. One lady tells me that her trips to the gym would not be the same without me selling (or occasionally not selling) a property.

But why the fascination with part of the property market that the vast majority of buyers never get to engage in?  My guess is that it is the element of the unknown where the roulette of whether the buyer, the seller or sometimes both, are overjoyed, disappointed or merely satisfied with the price.

Bridging lenders, however, frequently use auction and yet sometimes without a detailed understanding of how it works.  The rationale seems to be “it does work, so don’t get involved”.

In any event, there is never any shortage of questions when people (whether or not they are from a property background) find out that I am a property auctioneer.

With that in mind I have gathered some of the most frequent questions and answers.

 

Questions

What is a ring?

Since I am writing this on Valentine’s Day, this seemed an appropriate question to cover although in the auction world at least, there aren’t many hearts, roses, champagne or chocolates involved in this topic.

Basically a ring involves one person rewarding another for not bidding at auction, in the hope of depressing the price. This may be for a number of reasons; the most basic is where two investors want to buy and rather than bidding against each other they may form a partnership and buy it jointly.

Neither is giving any direct incentive and thus it may seem innocuous, but if the price that the seller receives is reduced, they are effectively stealing from him and the law treats this very severely - in 1927 the penalty was a fine of £100 (almost £4,700 in today’s money) or six months imprisonment.

There are ways around this for genuine partners but even they need to take care. Section 1 of the Auctions (Bidding Agreements) Act 1927 states that giving (or even offering) any gift or consideration to any other person as an inducement for abstaining or bidding at an auction is an offense. This applies whether the incentive is for one particular lot, or in general, and the incentive may not be a payment – it could be an offer to sell another property, or to pay legal expenses, or pretty much anything.

And if the people are aware of the risk of an offence and don’t make any specific offer before the auction but then go to the other bidder afterwards and give them say, a case of wine as a thank you, that is also covered. In 1969 the Auctions (Bidding Agreements) Act 1969 repealed the 1927 Act and made a number of changes, including making the recipient of the incentive liable as well as the giver.

Furthermore, the court can order that any such person is barred from participating in auctions and if the offence can be proved, the seller can void the contract. The fine now stands at £400 but the six month prison sentence remains.

So do rings exist today?

Very occasionally I see signs that dealers are co-operating with each other, and I have been present at auctions attended by a very small number of bidders where I am sure that it must go on. In our sales where there can be hundreds of bidders, I think that it is much harder for one, or a small group of dealers, to influence price.

Logically this is only going to be an issue with a popular and sensibly priced lot and whenever I have suspected that something is going on, the dealers are always outbid in any event. I have, however, seen an activity which is not meant for profit but which I am sure would fall foul of the Act.

Where a borrower who is part of a family or some communal or religious group falls into difficulty and their property is then sold by a mortgagee or receiver, I have sometimes seen community leaders suggesting that other members of that community should not bid, probably to give the borrower, or someone assisting him, the chance to buy, or possibly just to thwart the lender.

This might be where there is a specialised local market or demand for that particular type of property where members of that community might otherwise be expected to bid. This must count as an inducement for abstaining, or from bidding.

These are the sorts of questions that are raised at our “Behind the Scenes Auction tours” – for details just email me.

Copyright Benjamin Tobin 2012.

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