MAKING DOLLARS AND SENSE IN SETTING RESERVE PRICES (PART II) BY ROBERT L. LOSEY

(Part I of this article can be found on the posting of August 2, 2012.)

Fasig-Tipton will be conducting its 2012 Saratoga Sales of select yearlings on August 6-7 and its sale of NY Bred yearlings on August 11-12. Whether you are a buyer, seller, or just an interested party, you are likely to find this thought-provoking two-part series on auction strategy and tactics intriguing and potentially useful.

(Robert L. Losey, Ph.D. is a financial consultant who taught finance at American University in Washington, DC and equine finance at the University of Louisville, Ky. Dr. Losey has bred and raced horses since 1972. His e-mail address is RLLosey@gmail.com)

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 Logistics and Tips in Setting Reserves

Using an Agent

You can choose to place your reserve through the auctioneers, bid yourself, or have an agent bid for you. When an owner bids openly on his own horse, some potential buyers may drop out of the bidding, feeling they are being “run up.” And, if your agent bids for you, the auctioneer may not know what your target price is and whether the agent represents you or is a potential buyer. Auctioneers argue that placing the reserve through them allows them to better manage the situation. If you do use an agent to bid, it is a good idea to discuss your target price with the auctioneer before the sale starts and to identify your agent to the auctioneer.

All-the-Way or Live-Money-Only Bids?

If you place a reserve through the auctioneer you can check either the all-the-way (ATW) or the live-money-only (LMO) box on the reserve form. If you select the ATW box, the auctioneer will bid the price up to your last bid, while if you check the LMO box, the auctioneer will advance the price to your last bid only if there is a live bidder to bid against. A disadvantage to the ATW method is that the seller will pay a commission on the full amount of the reserve, while the commission will be lower if the bidding stops at a lower price using LMO. However, if you buy back your horse, you’ll find that a potential buyer will start the negotiations from a price below the buyback price, thus a potential disadvantage of the LMO method.

Round-Number Bias

At Thoroughbred auctions, sales at $10,000, $20,000, $50,000, (and other “very round” numbers) occur much more frequently than nearby prices. Studies show that bidders at auctions tend to assign “very round” numbers to what they’re willing to bid. The lesson for sellers is that making your own last bid at prices below these “very round” numbers makes good sense.

Should You Reveal Your Reserve Price If Asked?

There are cogent arguments for either a yes or a no answer to this question. If potential buyers know your reserve and it is in their price range, they are more likely to show up when your horse goes through the ring. Then again, if a potential buyer is willing to pay X dollars and you say that your reserve is exactly that amount, she may look elsewhere on the theory that there is no chance she would end up with a bargain. And, if you do reveal your reserve, make sure you don’t confuse “my last bid” with “the reserve price.” If you tell someone your “reserve” is $50,000 and then you bid $50,000, you may shut out someone who understood that they could buy your horse for that price. Moreover, that potential buyer may spend his $50,000 on the next horse through the ring and not show up back at the barn.

Should You Raise Your Reserve If You Have Lots of Lookers?

Economics 101 would suggest that if you have lots of repeat lookers, which probably will translate into lots of bidders, thus suggesting a competitive market, the resulting price is likely to be a “fair market price.” Lots of bidders means that it is less likely that your bid will make a difference (unless you bid too high). Bid at your own risk in this situation.

Leaving Money on the Table

Has your consignor or partner ever advised you not “to leave money on the table,” the implication being that you should push the top bidder to his top dollar? If you or your consignor can read people’s minds, go for it. If you don’t have ESP, this is a formula for generating lots of (costly) buybacks.

Should You Be Less Willing to Buy Back Your Cheaper Horse?

Change the example used above from a $50,000 to a $5,000 horse and ask if the seller should try to push the price from $4,800 to $5,000. You’ll make $200 more if you’re successful, but a buyback could easily lose thousands due to commissions and other fixed costs in getting to the next sale. Moreover, the appreciation in a cheaper horse’s value is less likely to cover carrying costs. Typically, you should bid on the $5,000 horse only if you’re reasonably sure that there is better than a 90% chance your bid will result in a sale at a higher price. Not surprisingly, the market has figured this out: sellers buy back a lower percentage of cheaper horses.

Copyright © 2012 Horse Racing Business

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