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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!

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.