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What is a Buyer’s Premium and why do Auction Houses charge them?

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A lot of people don’t understand what a buyer’s premium is or why auction houses even charge them. Not every auction house will charge a buyer’s premium, however more and more auction houses are choosing to charge a premium.

 

So what exactly IS a buyer’s premium? Simply put, a buyer’s premium is a additional charge, usually a straight percentage, that a buyer is charged based on the hammer price. This becomes the actual price that the buyer is charged for the item when checking out. For example, if Bob is the winning bidder on a table and chair set that he bid $100 on, and the buyer’s premium is 10% for that particular auction, Bob will actually pay $110 for the item plus any other fees charged by the auction house such as sales tax. Remember, the buyer’s premium is an additional charge, not an additional tax.

 

While auction houses are pretty quiet about the commissions they charge to seller, they do advertise what the buyer’s premiums are going to be. Not every auction house calls it a buyer’s premium. Some auction houses try to get creative and call it things like a “Service Fee”, or a “commission”. Whatever the auction house decides to call it, it still serves the same purpose. Regardless of what they name they give it, U.S. taxing authorities call the buyer’s premium part of an item’s sale price. This is because it’s rolled into the hammer price and the total amount becomes taxable.

 

Buyer’s premiums are not a new idea and have actually been used on and off throughout history. The buyer’s premium was a feature in Roman auctions during the reign of Augustus, when buyers were required to pay a one percent tax on purchases. The modern times the buyer’s premium was introduced by Christie’s and Sotheby’s in London in September 1975 and in the United States is 1977.  While major auction houses (like Sotheby’s) will even charge up to 25% on items, most smaller auction houses charge anywhere between 1%-15%. The amount of the buyer’s premium will normally be clearly stated in the auction house terms and conditions. Some Auction Houses like Hueckman Auction only charge a buyer’s premium at their auction house, but do not charge them at the auctions that are on location.
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The buyer’s premium is considered to be a necessary contribution to the costs of the administrative process for the auction house. Yet many members of the auction community consider it an unreasonable extra charge by the auction house because they do not fully understand why they are charged. Buyers often think this is just another way to get more money out of them. Auction houses sometimes market themselves as “not charging a premium” to gain favor with customers. Regardless, buyer premiums are now becoming a commonplace at auctions and they will continue to grow. In fact, about 80% of all auction now charge some sort of buyer’s premium.

 

But why charge a buyer’s premium anyway? There are several reasons an auction house may choose to charge a buyer’s premium. For most auction houses, especially smaller ones, the buyer’s premium helps to cover the costs of running the auction house and its ongoing auctions. There are many costs that go into an auction house that people don’t consider or even know about. These costs include building rental, heating & air conditioning so customers stay comfortable during the auction, auction software (to keep track of items for both the seller and the buyer), advertising & marketing, staff wages, auction house set-up, time spent taking pictures and creating on-line catalogs for the auction, and general upkeep of electronic equipment.

 

Hopefully this blog gave you a bit more of an understanding about buyer’s premiums and why auction houses choose to implement them. Happy auctioning!

How Does an Auction Work?

If you are new to auctions you may have many questions about them. One of these questions might be “How does an auction work?”. The answer to this question can vary depending on the type of auction that it is.

 

Let’s start by explaining what an auction is. An auction is where property is sold at a specific time and place to the highest bidder. Most auctions require a person to get a bidder number or other identifying item prior to bidding. When an item you want goes up for bid it will usually start low. The auctioneer will raise the bid amount every time someone bids until there are no more bids on that item. Then they will sell the item for the highest bid. Typically, the items in an auction are sold over the course of several hours. You don’t necessarily have to stay for the entire auction if there’s only one or two items you’re interested in.

 

There are many types of auctions. Some of the most common are charity, estate, liquidation, consignment, automobile, antiques, coins, storage units, foreclosures, and real estate. All of these can be done as either a live auction, and on-line only auction or a combination of the two.

 

The Auction Process – Auctions typically have a preview period. This can be on a day before the auction. It may even be only a few hours before the auction starts. The preview gives people a chance to see what is going to be auctioned. It also gives them a chance to look at the item’s condition and make notes.

 

When buyers arrive at the auction, they have to register in order to bid. If you are a new bidder to one of our auctions, you will need to have an address, phone number and driver’s license number handy. Once you are registered, you will receive a bid number. Once the auction starts, the bidders sit or stand in view of the auctioneer as items are brought up one by one to be sold.

 

Placing bids on items – The auctioneer will briefly describe the item that’s about to to be sold and starts the bidding at a price he or she thinks is a reasonable opening bid. If nobody there are no takers on the item, then the auctioneer will often try a lower opening bid.

 

Here is an example of this:

 

Up for bid is this antique crock. Who will give me $50 for the crock? Do I hear $50?  No? Who will give me $25 dollars for the crock?… Ten dollars?… Who will give me $5.00 for the crock?

 

At this point multiple people might be thinking that this is a really good deal and more than 1 person raises their bid card. The auctioneer will choose one of them and then say: “I have $5 over here. Do I hear ten?” Each auctioneer will usually have preset bidding increments (each next bid jumps up $2.50 or $5, etc.), and not all auctioneers have the same ones. The bidding picks up and continues to go higher and higher.

 

At this point the auctioneer starts speaking at a rapid-fire pace, this is a tradition known as the “Auction Chant”: “Forty, now fifty, now fifty, now fifty, do I hear fifty?” Translated he is saying “I have a bid of $40.00. Does anyone want to offer $50?”. He will repeat this a couple of times. Another hand goes up across the room. The auctioneer doesn’t always see the hand go up straight away, but one of the assistants, known as a “ringer”, might spot it and shouts “YES!”, pointing toward the bidder. This will draw the auctioneer’s attention to the new bidder. As bidders reach their max bid, they drop out until there is only one bidder left.

 

If nobody else bids, then the auctioneer will close the bidding and announce that bidder as the winner. Then the next item will be auctioned. The above process happens in less than 2 minutes and the process is repeated until everything is sold.

 

When bidding, there are a couple of important things to keep in mind:

 

1) The auctioneer’s call is final. That means if you were not paying attention and try to place your bid after the auctioneer says “SOLD”, or in rare cases where the auctioneer & ringers don’t catch your bid – Sorry, you are out of luck! This situation can easily be avoided by making sure to pay close attention when your item comes up and holding your bidder card up clearly so the auctioneer can see it. You can make a loud noise if you don’t think the auctioneer has your bid to make sure that you get noticed.

 

2) If you win the bid, you become the legal owner of the item and ownership transfers to you immediately. An invoice is generated and you will need to pay for any items you’ve won before leaving for the night. If items are handed to you,then you are responsible for keeping an eye on your item to ensure it doesn’t get damaged and no one else walks away with it. If it’s a small to medium sized item, it’s a good idea to collect it and bring it back to your seat. Larger items are usually moved to the loading area or left in place on the auction floor. All items are sold as is and you can not change your mind about buying the item once the auctioneer says “Sold”.

 

“Lots”, “Your Choice” and “Times the Money”- There are a couple of variations on the standard bidding procedure outlined above that you need to be aware of. Occasionally items will come up where you are bidding on a “lot” of items. A “Lot” simply means “more than one”. One term you’ll see often in auction listings is “tray lots” or “box lots.” To help keep things more organized, small items from the same seller are often grouped together on plastic trays or in boxes. One example is a tray carrying 9 necklaces, all coming from the same seller, is considered a “lot”. This is so the auction company can keep track of the seller’s items so he or she can be properly paid for their items.

 

Before the auctioneer starts the bidding for a “lot”, he or she will decide on how the lot is going to be sold and explain what exactly your bid will get you. It’s important to listen carefully at this point!

 

Your bid might buy you the entire lot, in which case the auctioneer might say something like, “You’re buying all 9 necklaces for one money” or “On the pair of vases, let’s start the bidding at $10”. In this case, the amount you bid is the total amount you pay for all 9 of those necklaces (or for both of those vases).

 

Another way lots can be sold is on a “choice” basis. Let’s use the necklace example again. The auctioneer starts with “Now bidding on your choice of the necklaces…” Bidding continues as normal. Let’s say you win the bid at $10. This means that you have bid $10 on one necklace on the tray. A helper will bring the tray lot up to you and you decide that you want 2 of the necklaces. The helper shouts to the auctioneer “Bidder number 17 takes 2!”. When you leave you’ll pay $20 ($10 each) for the 2 necklaces. Now there are 7 necklaces left on the tray. Other bidders can decide if they want any for $10 otherwise they go up for bid again. You can even bid again if you want. Since you took the best necklaces already, the remaining ones might sell at a lower price. There might be one more round of “your choice” followed by selling all of the remaining necklaces for “one money”.

 

Sometimes when a lot is sold, the auctioneer will specify that all of the items in the lot will be sold for your bid amount multiplied by the number of items in the lot. Using the necklaces example again, the auctioneer might say “On the necklaces, 9 times the money”. Let’s say you win the bid at $10. You are now the proud owner of 9 necklaces for a total of $90. This is commonly done with items such as dining room chairs, where you are bidding on one item but your bid gets multiplied by the number of items.

 

The Buyer’s Premium – Many auction companies will charge the buyer a 10-20% “buyer’s premium” to purchase at the auction. This charge is pretty historic and allows the company to offer a reasonable commission rate to the seller. This premium also helps to ensure good quality merchandise for offer to the buyer.

 

Since many auction companies operate on a shoestring budget, often times the costs of credit card transactions are passed along to the buyer as well. So the buyer’s premium may be (for an example), 13.5% for credit/debit card purchases, and 10% for cash or check payments. On-line auctions with Internet bidding often charge a higher buyer’s premium as well, as there are many more costs that are involved. On-line auctions will often include a per item fee (usually around $1 per item) for each item that you win on-line.  The bottom line is to always pay by cash or check when possible to pay the minimum buyer’s premium available. At the auction, when bidding, keep in mind the additional cost of the buyer’s premium, as well as sales tax.

 

I hope that this has helped you understand how auctions work a little better so that you will be better prepared for your next auction!

What Is The Difference Between An Online Auction & Online Absentee Bidding?

In the world of auctions and estate sales, it is sometimes confusing as to how things work with technology becoming more and more a part of our lives. We hope to be able to help you get a deeper understanding of these things by answering common questions to the best of our knowledge. One question that we get asked a lot is “What is the difference between an online auction and online absentee bidding?”.

 

Online Auction: An online only auction is automated and takes place solely online. The bidding for each lot is opened at the price set by the auctioneer. It usually starts at a set time, stays open over an extended period of hours or days, and closes at a set time. During this period of open bidding one will be able to see the current high bid on each lot. You will not be able to see what the other bidders’ max amounts are. You may place a higher bid at a defined bidding increment you choose. The bidders are sent an email if they are the high bidder, or if they have been outbid by another competing bidder. At the end of the bidding period, if the highest bid offered meets the minimum price designated by the seller as acceptable, the lot is sold. Bidding on all lots in a online only auction begin to close at a specified time. They usually have lots closing at regular intervals until the auction has ended. Some timed auctions allow extended bidding. This is often referred to as soft closing. This happens if a bid is placed on a lot within a specified time before closing; the bidding then may automatically be extended for a set period of time. Length of extended bidding is set by the Auctioneer before the opening of the auction.

 

Online Absentee Bidding: Say you find a lot (item) that you really like but you can’t make it to the live auction…You don’t have to! Instead you can place an “absentee” bid.

 

The process works as follows:

 

When you find a lot on which you want to bid, register to take part in the corresponding auction. Once you’re approved, go back to the lot page and input the maximum amount you are willing to pay for the particular lot in question. This amount is your absentee bid (left bid).

 

Approved bidders can place absentee bids up to one hour before the start of the live event. Once the auction starts, we then “process” all the absentee bids and calculate the winning absentee bid. This is the second highest bid plus one bid increment. This winning absentee bid value will then be communicated to the auctioneer.

 

Here is an example of how that would work:

 

• Corrie places an absentee bid of $1,000 for Lot #123
• Bob places an absentee bid of $1,500 for Lot #123
• Frank places an absentee bid of $2,000 for Lot #123
• Once we clear all the absentee bids, Frank will emerge as the winning bidder. The winning absentee bid amount for $1,600 ($1,500 plus one bid increment of $100).

 

When the live auction starts, we tell the auctioneer about the Internet absentee bid for $1,600. If no higher bids are received during the auction, Frank will be the winner. If a floor bidder places a bid above $1,600, the computer software (or the person bidding on the absentee bidders behalf) will then bid on Frank’s behalf up to his maximum of $2,000. We will never bid higher than Frank’s maximum amount.

 

Sometimes bids will be caught in the middle or what is also sometimes referred to as footing.

 

Here is an example of that:

 

• Bill places an absentee bid of $1,300
• Brenda is on the floor bidding live
• The auctioneer opens the bidding at $1,000, which goes to Bill
• The next increment is $1,100, which Brenda raises her paddle for and wins
• The computer (or person) proxy bids to $1,200 for Bill
• Brenda places the next bid and wins the auction at $1,300.

 

So even though Bill has a max bid of $1300, Brenda wins the item at $1300 because she had the high bid at that point .

 

Hopefully that helps give a clearer picture of what is going on with online auction bidding and online absentee bidding. We will have another common question soon for you to look at. Also, if you have questions that you would like to see answered on this blog, just send us a message.