auction, auctioneer, bidding, business decision, buyer's premium, commission, consent, contract, disclosure, emotion, knowledge, online, Proffitt, sales tax, surcharge, written
No subject has probably done more to polarize auctioneers — from the “we always charge a buyer’s premium” to “we never charge a buyer’s premium.”
In fact, it’s not more difficult to find ads that say, essentially, “come to our auction since we don’t charge a buyer’s premium” as it is to find an ad on the next page, or down the screen that says just as plainly, “come to our auction and pay us a buyer’s premium.”
First, what is a buyer’s premium? It is a surcharge, added to the hammer price at auctions. For example, if a buyer bid on a set of Civil War Books and the books were struck-off to him at $1,000, and a 15% buyer’s premium was being charged, the buyer would pay $1,150 total (then, plus any sales tax, or other charges such as shipping, etc.)
Second, why do auctioneers charge a buyer’s premium? The simple answer is “because they can.” The buyer’s premium allows auctioneers to:
- Earn more money for their services
- Charge sellers less commission (or no commission)
- Pay for additional marketing or bidding platforms
- Compensate buyer brokers (mostly real estate)
Third, are there areas or parts of the country where you can or can’t charge the buyer’s premium? Occasionally, still today, we hear auctioneers say, “You can’t charge that buyer’s premium around here …” More likely, it’s just that no auctioneer has charged the buyer’s premium around there, yet.
Fourth, what’s required for an auctioneer to charge a buyer’s premium? Steve Proffitt recently wrote an article concerning this for Maine Antique Digest titled Auction Law and Ethics: A Premium on Truth and points out that the express, written consent of the seller, and disclosure to the bidders is required. Yet, he also says,
- “The money collected during an auction from the buyer’s premium belongs to the seller. It doesn’t belong to the auctioneer.”
Let’s explore this further.
The money collected belongs to the seller — and it doesn’t belong to the auctioneer? Wait a minute here — if it belongs to the seller, why are auctioneers charging it? Just as we are advised to have the express, written consent of the seller — in other words, spelled out in our contract — that the buyer’s premium will be charged, and it will be 15% (in our above example), why don’t we also say in that contract, “and the buyer’s premium collected immediately becomes the property of the auctioneer upon collection,” or something like that, and have the seller’s consent — then it won’t belong to the seller anymore, right?
Proffitt continues in his article, that
- “Consequently, an auctioneer who keeps buyer’s premium proceeds, without the seller’s approval, would breach the fiduciary duty owed to the seller by engaging in self-dealing. Where such conduct occurs, the aggrieved party can sue the wrongdoer for damages and to disgorge all ill-gotten gains.”
However, if we inform the seller, and gain the seller’s consent to keep the buyer’s premium, we haven’t done this without their approval.
And, of course, in the typical case, the auctioneer ultimately is paid the buyer’s premium, as at settlement, the seller pays the auctioneer for his services, including any seller commission, buyer’s premium, fixed costs, etc., or more likely, the auctioneer pays the seller, minus these commissions and charges. This too, assumes the seller and auctioneer have a meeting of the minds prior to the auction that a buyer’s premium will be charged, and when it will be paid, and to whom.
Another part of Proffitt’s article says this:
- “First, the property being sold belongs to the seller and not the auctioneer. The buyer’s premium is merely part of the purchase money paid by the buyer for the property, so it can belong only to the seller. There is no consideration passing from an auctioneer to a buyer that would entitle the auctioneer to receive any part of this payment. An auctioneer’s receipt of any compensation from an auction, including any portion of the buyer’s premium, comes solely in the form of selling commission or cost reimbursement paid by the seller and as expressly provided by the auction contract. The buyer’s premium is never paid directly from a buyer to an auctioneer, and no thinking auctioneer would want or accept that. Such a result would create a conflict of interests for the auctioneer who would be receiving compensation from each of the opposing parties in the sales equation-seller and buyer.”
This happens all the time — first, real estate agents receive compensation from sellers and/or buyers and act as dual agents. Not that charging a buyer’s premium causes dual agency, but compensation and representation are mutually exclusive; representation does not require compensation nor does compensation require representation. Secondly, auctioneers do often provide services for the buyer’s premium, such as internet bidding, catalogs, absentee bids, or other services not provided those paying either no buyer’s premium, or less buyer’s premium.
Nevertheless, are buyers willing to pay a buyer’s premium? How does it affect seller’s net proceeds? Our question here is really, if those Civil War Books had sold at an auction without the buyer’s premium being charged, would have the bidding gone to $1,100 or $1,150, or even more?
If the argument is that a buyer’s premium doesn’t factor into the bidders buying decision at all, then why not charge a buyers premium of 2,000%? Our Civil War Books would have then sold for $21,000; would a buyer bid a bit less to compensate for a 2,000% buyer’s premium? Of course.
Too, are some buyers adverse to a buyer’s premium? I think so. Given choices, would a buyer go to an auction with a buyer’s premium if two miles away is another auction with the same item or items, without a buyer’s premium? I think probably the one without, and and if so, then would prices, overall, be better at the better-attended auction? Yes, they would.
It seems reasonable buyer’s premiums can be charged, and especially if the items being offered are unique — and auction bidders will still respond. However, given choices, a buyer’s premium is really no different than cost of getting there, or cost of food while there, or cost of sales tax, or cost to park — it’s another charge bidders have to consider as part of the total cost to them to attend a particular auction. And, online bidders often say that they are more than willing to pay a buyer’s premium to offset some of these other costs — so they can sit at home and bid.
Lastly, do bidders consider the buyer’s premium while bidding? Are bid prices less according to the premium that is being added? Do bidders bid only $91 on an item with a 10% buyer’s premium, so that they will pay no more than about $100, where they bid up to $100 at the auction without any buyer’s premium?
While I’m not sure we’ll ever know for certain if bidders consider the premium while bidding — at that very moment — it does suggest the more the auction is a business decision, rather than an emotional decision might weigh into the answer. An auction of business equipment with mostly business bidders there, buying for their companies — not much emotion there, and the buyer’s premium may be a very material issue; compared to Grandma’s estate auction where the family, neighbors, friends are all there, and bidding to own something to remember Grandma by — and not considering the buyer’s premium as much.
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.face book.com/mbauctioneer. He is Executive Director of The Ohio Auction School.
Auction Law said:
Well thought out, Mike.
Steve Proffitt writes some great articles. However, he typically writes them from the perspective of those that don’t comply with the law or properly drawn contracts. The article you cited is certainly one of those that may lead people to misunderstand the topic.
As you pointed out, if the contract is written properly, disclosing to the seller that a buyer’s premium will be charged to the buyers and “earned by the auctioneer at the fall of the hammer”, then it clearly spells out who will receive the money. Of course, there are those that do not have things clearly spelled out in their contracts and that’s when Proffitt’s points may be relevant.
Edna Babcock said:
Most auction houses now apply a ‘buyer’s premium’.Surely the big problem with this and the thing that irritates buyers most is that auction houses have complete “carte blanche” to write their own participating contracts and appear to many to be raking money in arm over fist by relying on their own self-devised, self serving terms and conditions without let or hindrance by any government or professional regulating body. It is not fair to argue that the public are not obliged to use their services and can ‘take it or leave it’ because in these hard-bitten times people often rely on buying and selling to keep the wolf from the door and auction houses have essentially ‘cornered the professional market’ .Mike argues that the buyer receives certain ‘services’ for the premium he pays, but he fails to say these are in truth disguised seller’s fees eg producing catalogues. As for the growing trend of slapping on a 3% Internet buyer’s surcharge, we don’t hear auction houses complaining about the huge number of Internet bids they now receive !
It seems abundantly clear that many auction houses are abusing their monopoly position as a professional body and there is nowhere and nobody to turn to in order to moderate their greed and give the public a more even playing field.
I’d love to hear how Mike responds to the following article ?
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Richard Tibbetts said:
I have attended many auctions in my life and never ever paid a Buyers Premium. The whole concept of attending an auction is to buy as low a price as possible.The seller who hired the auctioneer was responsible for his or hers Commission !!
Mike p said:
The buyers premium is nothing more than a sales tax since it is levied on the sale price of an object. Since by law, states, governments and school districts have the authority to levy tax, how can an auction house justifiably levy this cost in a cover of a buyers premium. This in my mind is a violation of law that should be looked into since no one benefits except the auc ion house
I attend a lot of auctions and NEVER attend one that charges a buyers premium. As soon as I see an advertised buyers premium I do not scan the auction, I immediately ignore it and place the auction house in my DO NOT ATTEND file. I do not utilize on-line auctions because of these premiums. Same goes with real estate auctions, the buyers premium is getting out of hand. It is just another tax and a sneaky way to surcharge buyers. Further regulation in this market needs some serious attention.
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