Are you thinking about selling treasured artwork or a classic car at auction or picking up some equipment for your business? The lure of an auction — apart from the excitement of the fast-talking auctioneer — is the possibility of getting a bargain or selling your items for more than you would likely get by posting a specified sales price.

Before you head for the auction or rev up your computer for an online auction, there are two terms you should know: "reserve" and "no reserve". Auctions are typically promoted as one or the other or the seller may choose, and knowing the difference could have a huge impact on your bank account.

Tip

In a no-reserve auction, there is no minimum price that must be reached for the seller to accept the sale of an item.

Understanding the Meaning of "Reserve"

When an auction or one of the items up for bid at an auction is designated with a reserve, that means the seller will only accept a sale if it is at or above the reserve price. For example, if a sculpture is up for bidding and has a reserve of $1,000, the seller will not accept anything less. Someone can start the bidding at $300, but it isn't likely to be accepted as the final price. Usually, others will place higher bids until the highest bid is at or over $1,000.

When several people really want an item, the bidding can go much higher. Bids will continue to climb until one by one, bidders decide they don't want to pay more for it, and they drop out. When one bidder remains and the bid is equal to or more than the reserve with no one else wanting to bid higher, the auctioneer yells "sold!" and the highest bidder gets it.

If all bids fall short of the reserve, the seller can either accept the highest bid or decide not to sell at that price. So, the seller of the sculpture with a $1,000 reserve, which has a high bid of $750, can sell it for that price or say "no" and remove it from sale.

Defining "No Reserve"

Other times, items up for bidding at an auction are designated as no reserve or absolute. This means there is no minimum price that must be reached for the seller to accept the sale, and the seller will accept the highest overall bid regardless of the bid amount. In theory, it could be just $1, and in fact, true no-reserve auctions do start the bids at $1. Usually, the bids climb quickly because interest is generated by no-reserve items that are known to be worth much more and because buyers know the item is definitely going to sell.

You may wonder why anyone would sell something with no reserve because of the risk involved. There is, after all, the chance that the item will end up selling for a paltry price. Auctioneers and auction houses have many examples of happy sellers who made thousands of dollars more for items by listing them with no reserve. People were eager to bid, bids flew and ultimately, the seller made double what he expected.

Breaking a No-Reserve Commitment

There are times when a seller who has committed to sell with no reserve but is disappointed in the highest bid backs out and refuses to sell. Most reputable auction houses don't allow this to happen, so check the reputation of any auction before bidding.

It tends to occur more often online on websites that aren't great about enforcing their rules, but a quick look at the comments on the site will tell you which ones you can trust and those to avoid. If you're a seller, backing out can quickly give you a bad reputation.