What is it?
Reserve price is the minimum price at which a person can auction his property or an item. The property could be a residential apartment or a plot.
A reserve price is fixed for a property that commands a high value in the market. The property could be personal or government-held, but usually it is announced for government-held properties. For example, if the Delhi Development Authority wants to sell its hotel plots, it would publish advertisements in major dailies, announcing the reserve price for bidders.
Often, the bidding process escalates the value of the property manifold due to competition among bidders.
Controversy around it
Often, auctioning authorities keep the reserve price higher than prevailing market rates for similar properties. The reserve price has always been a controversial issue. Local authorities in various cities have been selling commercial plots for developing hotels and office complexes by inviting bids. If the reserve price is higher than the paying capacity of most of the bidders present at the auction, the land or the property remains unsold. The authority may decide to lower the reserve price in the future.
How is it calculated?
The owner or the auctioning agency usually arrives at a price that is higher than its prevailing market value. To calculate the reserve price of the property, recent transactions that may have happened in the neighbourhood are considered. Based on the appreciation potential, the reserve price is fixed for the auction. In case of an authority auction, the government body factors in the acquisition cost of land and other developmental costs.
What happens in case of payment default
In case of an authority auction, if the highest bidder is unable to pay the amount within the stipulated tenor, he can surrender the property. The government would reclaim the property and return the part of the amount that the bidder may have paid till then. However, it would deduct a percentage, usually 8-10%, as penalty charge. Once the payment is settled, a new auction is announced.