Difference Between Min Bid and Reserve

[Aaron Almquist]

Does anyone know why the minimum bid allowed at an auction is not just the reserve price if they won't take anything less anyway? Seems like it just waste people's time or am I looking at this the wrong way

[Ron S.]

Sometimes, depending on the state and/or the investor/lender, the minimum bid or the opening bid is lower than the reserve because, absent third party interest during the sale, that opening (and final bid) is the amount used to calculate the gross deficiency on the loan. 

There is more to it but in laypersons terms, as an example; if the debtor owes $200,000, but the property is maybe only worth $150,000, the opening bid might $150,000. If someone bids, great. If no one bids, the property goes back to them as REO for $150,000. That's the basis they use for transferring the asset into REO. That might or might not be the number generated on the 1099 the borrower is going to get (Assuming a deficiency). That might or might not be the number that they write off to the accountants. That might or might not be the number they use in their deficiency lawsuit against the borrower down the road but it could be, and that minimum or opening bid is the start of all that. There are rules for what number you have to recognize for accounting and legal procedures, and what steps you have to take to get to that number.

Why not just set the opening bid as the reserve bid? Some states require that. Some states/investors/lenders required tiered bids up to a reserve amount or total debt.

When i do foreclosures, my reserve is my opening bid. I do primarily California foreclosures and rarely do i do any tiered bids. I've done it but only when i'm trying to squeeze more money out of a third party while at the same time, being comfortable with it coming back to me as REO (That usually implies there is a senior lien/junior lien relationship of some sort).

Some of it is art, some science, some smoke and mirror but its all in the effort to "true up" what you realistically expect to take as a loss when its all said and done, if you end up taking a loss.