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Lessons in bidding

Conditions are prime for bidding on a late-model combine or tractor. But there are risks and rules to getting a good deal. Here's what you need to know.

Your best buy on equipment this year may be at an auction. Some auction observers say that, unless corn and grain prices rebound soon, there could be a rush of farm auctions in coming months.

"There's a good chance there will be a bottleneck of sales in March through the first week of April," says Greg Peterson, publisher of F.A.C.T.'s Report, an independent business that tracks farm machinery sales at auctions throughout the Midwest. "It's a great situation if you are looking to buy."

He says farmers will be meeting with their bankers around that time to see how year-end taxes reconcile their financial position. "For those who decide to hang it up, all their sales will be hitting at the same time," he says. As a result, you could see as many as five sales in a 60-mile radius.

"It's looking to be a little above average for spring for farm sales," agrees John Baker, a farm auctioneer in southwestern Minnesota.

More auctions will bring an oversupply of used machinery to the market and will dilute the number of buyers at any given sale. Auction values could be 15% less than what you would normally pay, according to Peterson.

A similar situation happened last fall when dealers were unloading rollover combines and prices dropped due to oversupply. "Last August and September are when combines really took a dive," observes Indiana farmer Steve Webb, a frequent auction-goer.

In anticipation of a softening demand, dealers started auctioning off excess inventories as early as last July. And these dealer and consignment auctions continue to be strong across the Midwest.

All these auctions present opportunities for you as a buyer to get a good deal on a used tractor or combine. But before you run to get your bid number, there are a few basic auction-buying principles worth reviewing. These are the same rules professional buyers apply every day to buy goods at the lowest price.

Know your risks. At auctions, items are sold through competitive bidding. "Some people have a different way," says Kent Nigh, an auctioneer in central Indiana. "Some don't mind being seen. Some give a wink. Some hold up a finger. But a bid is a bid; it's just their own style."

Everyone bidding has the same goal in mind: to get an item that is in good condition at a cheap price. There will be other buyers who want the same item you do and will raise your bid to get it.

As a result, you may end up overspending.

"I've seen several times where people have paid more than they could buy it for new," Webb says.

Another risk is that the item you buy could break down the moment you take it off the lot. "When you buy at farm auctions, there's something wrong with most of it," says Walter Piehl, a used machinery dealer who has been buying and selling machinery for more than 50 years. "And it's not cheap to fix things nowadays."

As a result, you need to check out a piece of equipment thoroughly before you buy it. If you're suspicious, auction experts recommend you ask for a ride and drive before taking the machine home and the right to refuse the machine if it dies during your test. Ask about the terms and conditions of sale and find out your right of refusal if an item is not represented as claimed.

If you find a problem after you take it home, generally speaking you will be responsible for making the repairs. Most items at farm auctions are sold on an as-is basis, which means there are no guarantees as to its condition and no warranties unless otherwise stated.

You may find exceptions to that at some dealer or consignment auctions. If an item is guaranteed, it is usually announced before the sale or stated on the auction bill. Piehl advises that if there is a guarantee, make sure you get it in writing on your sales bill.

One last point: Don't rely on the auctioneers to point out the problems for you. True, in the course of due diligence they are required to disclose any major problems that the seller makes them aware of. But they may not be told the problems. And, remember, their job is to sell.

"We're not the culprit. And we're not trying to pull anything over your eyes," Baker says. "But the idea is you have to have your eyes open."

Do your homework. To keep yourself from overspending, you will need to do some work before the sale. Your first assignment: Find out the wholesale or book value of the item you want. In other words, what is the price a dealer would pay?

There are source books and appraisal guides that can help. Dealers and bankers have access to them. Ask them for the book price of the model you want. They may quote the "trade-in" or "appraised" value, which will also work, and they may even quote the prices of equipment according to whether it is in "good" or "excellent" condition.

That book price will be your guide to how much you can spend on a particular machine before it would make more sense to buy it from your dealer at a slight markup but with a guarantee of its condition and a warranty to back it up.

You may have to pay at least the book price to get the item you want because dealers and jockeys - people who buy and sell used machinery - may also be at the sale. They will want to keep you from purchasing it below book price to ensure a secondary market.The trick is in knowing how much to spend over that book value. That will be your ceiling price - the highest amount you can bid and still get it cheaper than if you had bought it from a dealer. "You have to keep the ceiling price in mind when you start bidding," Piehl states.

How do you determine your ceiling price? Ask yourself these questions:What would the same item retail for at a dealership? As a rule, your ceiling should be under the retail price because a dealer may be able to offer a guarantee or limited warranty. How available is the item? If it is a one-of-a-kind, you may have to pay whatever the market bears.

What is its condition? Is it average or excellent? "Better-quality equipment will still bring top dollar," offers Nigh. To determine condition, look at the machine, study the sales brochure or bidder packet and visit with the owner.

What is its history? Maybe you know more about an item than face value would indicate. That information will make your value estimate more accurate than that of other bidders who must make some assumptions. Nigh suggests you call the seller before the sale and ask what repairs have been made. Sales are usually announced two weeks in advance, and you can find the seller's name on the posting.

Where is the item located? Buying machinery close to home is worth something, too. Factor in the dollars it would cost to transport the item.

Principle to practice. Steve Webb has successfully put these basic buying principles to work at auctions he has attended. Before he buys, he finds out the book value, determines his ceiling price, checks the condition of the equipment and decides how much it is worth to have a warranty. If he is not familiar with the model being sold, he takes a mechanic along with him who has worked on it. "Unless you have done the maintenance, you won't see the problems," Webb says. Before he gives the closing bid, he asks for a ride and drive and finds out whether he has the right of refusal if the machine is not represented as claimed.

Webb says that it is especially important to be careful at a jockey auction because jockeys sell equipment that they have purchased from all over the country. "You have no idea of the condition or the history of the equipment," Webb explains.

He says that if he makes a large purchase at a jockey auction, he asks his local sheriff to make sure it hasn't been stolen before he removes the machine from the lot. He says, "If it shows up on the hot list, I'm not taking it home."

Using these principles, Webb has been able to acquire three tractors for 50% to 60% less than what he would have paid for the same models in the same condition at a dealership. Two of the tractors - a 7060 and 7080 Allis Chalmers - turned out to be sound tractors and he uses them everyday. The third tractor - a 4000 Ford - he bought strictly for parts.

Recently, he used the same principles to decide not to buy his latest tractor from an auction and to buy it instead from the dealership for 17% more. His reasoning? "The condition was better. I knew the history on it. There was only one owner, so I knew what was wrong with it. And the dealer offered to back it with a limited warranty," Webb says.

To make a wise purchase at an auction, you must be observant, Webb states. He gives an example. Last December he spotted a combine whose clock read that it had 280 hrs. on it. A note was attached saying the clock had been replaced at 950 hrs., which would indicate that the actual hours were 1,230.

Webb talked to the owner, who said the clock was out when he bought it from the original owner. That sent a red flag to Webb. He then lifted the side panels and found the feeder house chain had recently been replaced, even though it should have been good for at least 1,200 hrs. The drive chains were cupping, and the tires were shot. "All of these things showed me this had more than 1,230 hours on it," he says. "The bottom line is you have to know what is being sold. You have to know the merchandise."

Traps to avoid. Even if you've done everything right up to this point, there will be traps at auctions designed to trip you up. By being aware of them, you will be able to identify when you are becoming a victim.

The first trap is the auctioneer's song. One, now one, now who will give me two? It can be hypnotic. A good auctioneer has that effect.

Buyers have been known to get caught up in it, to lose sight of the ceiling price they so carefully established. Don't you lose sight.

If you do, you could lose track of who gave the last bid and inadvertently raise your own bid. "It's hard to stop bidding at an auction sale," Piehl says. "Most of them pay too much and don't realize what it is worth when they get started bidding."

Professional buyers will tell you that, to save yourself from getting lost in the song, you need to keep in the auctioneer's cadence. One way to do that is to give the opening bid so you know where your bid falls in the calling.

Open with a bid that is realistic, Baker advises, to prevent what he calls active bidding. That's when bids are shot off in machine-gun-like succession until the market price is reached. By opening with a realistic price, you not only slow the bidding to a more manageable level but you improve the chance of your getting the item at a fair price, Baker says.

"I've seen some guys give a single bid, a fair one to start with, and end up with it on one bid," he says. "Often times, that may have saved them money."

Greed can be another trap at auctions. "What I see is that one guy doesn't want the other guy to get it," Piehl says. "Don't get carried away and pay more than you figured you would."

A final trap to avoid is following someone else's bidding. The temptation arises when you are unsure of yourself or the value of an item. "They'll think, Well, if the other guy thinks it is worth that much, then I'll keep on bidding," Piehl explains. "Well, there are lots of lessons there."

"You have to keep your wits and know where you want to go," agrees Webb. "There will always be another one next week."

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