Late 2014, Christie’s added a 2% auction performance fee. This fee would be added to the seller’s commission if their “piece” sold in excess of the pre-auction estimate.
The material issue we find here is the auctioneer is setting the pre-auction estimate. By unilaterally controlling the pre-auction estimate, the auctioneer can effectively guarantee an additional performance fee — not for performing per se, but rather for not.
Auctioneers providing pre-auction estimates should be offering such as accurately as possible. By incentivizing a low estimate, auctioneers would be tempted to provide an inaccurate estimate to increase profits, and therefore not fulfilling their fiduciary duty of loyalty.
More importantly, however, commission is inherently commensurate with sales price. The higher the price the more the commission. First, let’s look at an example with a 25% base commission and a 2% performance fee:
- Painting with pre-auction estimate of $1,000,000 sells for $1,200,000. Auctioneer earns $300,000 in commission and an additional $24,000 performance fee for a total commission of $324,000.
- Painting with pre-auction estimate of $1,200,000 sells for $1,200,000. Auctioneer earns $300,000 in commission and no additional performance fee for a total commission of $300,000.
In our above example, the more the auctioneer is able to accurately estimate value, the less commission he or she earns. Thus this performance fee rewards a lack of performance.
And what if this auctioneer really performs and gets $1,500,000 for a painting genuinely thought to be worth between $1,000,000 and $1,200,000? That auctioneer earns $375,000 in base commission without any additional fee.
We previously wrote about another reason pre-auction estimates would be low: https://mikebrandlyauctioneer.wordpress.com/2010/09/03/are-pre-auction-estimates-purposely-low/. Lots better to say “We sold a $500,000 painting for $1,200,000,” than “We sold a $1,500,000 painting for $1,200.000.”
We do wonder otherwise, why is it important to have pre-auction estimates? Potential buyers of a $1,200,000 painting hardly need the auction company to provide them with a pre-auction estimate — do they? Sellers should be advised about their consignments, but that hardly requires publication to the public.
Lastly, do pre-auction estimates potentially tell bidders/buyers the property is worth no more? While prices at auction often exceed pre-auction estimates, a painting with a pre-auction estimate from an expert in the field of $1,200,000 could well tell bidders it’s not worth any more than that.
That is, unless they are charging a performance fee, which might tell those same bidders that painting is worth considerably more …
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. He serves as Adjunct Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.