Since Christie’s and Sotheby’s introduced the buyer’s premium in 1975 in England, and soon after (1977) in the United States, the buyer’s premium has been part of the auctioneering landscape in the United States.
We wrote about the buyer’s premium some time ago. We also wrote about the net effect of the buyer’s premium discussing how buyers consider (or don’t consider) the buyer’s premium, and how that effects the seller’s and auctioneer’s position.
Our topic today addresses a common misconception that the “buyer’s premium doesn’t matter …” In other words, bidders and buyers ignore it, and bid without regard to it.
We begin with a premise: If it doesn’t matter, then why aren’t auctioneers charging a 30% buyer’s premium? 40%? 50%? Why not charge a 2,000% buyer’s premium?
Christie’s and Sotheby’s both recently increased their buyer’s premium to 25% on the first $75,000 (and $100,000) sale prices. Why didn’t they raise it to 35%? Why not 45%? The answers to these questions — essentially “Why not higher buyer’s premiums?” — is that it apparently does matter.
Maybe the right answer regards what bidders “are mindful of” versus what they “aren’t mindful of” … if bidders would bid without thinking that there is a 10% up-charge on their purchase (a 10% buyer’s premium) then the auctioneer is wise to charge it. If bidders would bid without thinking that there is a 20% … in other words, it’s wise to charge the most buyer’s premium that bidders would not be mindful of?
Around my home region in the spring people run around in shorts and short sleeve shirts when it gets up to 55° and have a jacket and sweater on the fall when it gets down to 55°. Depends on what you’re used to I suppose? Is a 10% buyer’s premium a non-issue if you’re expecting (or are used to) a 15% buyer’s premium?
The other issue is the magnitude of the total hammer price. Countless real estate auctioneers have been selling such with a 10% buyer’s premium and see people with calculators in hand while bidding — figuring their total contract price. A 10% buyer’s premium doesn’t matter on a $150,000 purchase? On a $1,500,000 purchase? More than likely it does …
Lastly, how do we know otherwise that bidders are disregarding the buyer’s premium — in other words, it “doesn’t matter?” Many auctioneers say that their bidders are bidding just the same that they did prior to implementing the buyer’s premium, but how do they know that? Would that bidder have bid more without the buyer’s premium in place? Maybe not … but where’s the proof?
In my experiences in talking to 1,000’s of auctioneers across the country, I hear some say that buyers seem surprised by their total purchase price (suggesting they were not mindful of the buyer’s premium) and I hear some say that buyers stop bidding sooner, or acknowledge the buyer’s premium (suggesting they are mindful of the buyer’s premium.)
If you are an auctioneer who says, “bidders never figure in the buyer’s premium — it’s a non-issue,” then we propose you to raise your percentage — why not?
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.
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