When the Spring sales roll around in New York this year, buyers beware: Sotheby’s has raised its “buyer’s premium” – again. The actual price that buyers pay is becoming ever more divorced from the headline price at which an artwork is actually hammered down, which means that buyers, more than ever, are going to need to rely on Fusion’s GAVEL calculator.
The buyer’s premium is a kind of internal sales tax, which Sotheby’s levies on every lot sold. After the latest hike, it starts at 25% of the hammer price for the first $200,000; then 20% of any amount above that but less than $3 million; and then 12% of anything above $3 million. This chart shows how much this Sotheby's sales tax has risen over the past 10 years:
Let’s say you’re the kind of person who might be likely to bid $3 million on an artwork at Sotheby’s. Back in 2005, the auction house would then charge you an extra $376,000 on top, as a buyer’s premium, bringing your total to $3,376,000. But that premium has been going steadily up over time. In 2007, it rose to $400,000; in 2008 it went up by a mere thousand bucks to $401,000; and in 2011 it jumped to $442,500. In 2013 it soared by more than 18%, to $525,000, and now in 2015 it has risen all the way to an eye-popping $610,000. (Many thanks to Katharine Leab of American Book Prices Current for the historical data.) In the heat of the auction, you might think you’re bidding $3 million on the piece. But in reality, you’re committing yourself to spend $3,610,000.
The buyer’s premium on a $3 million artwork, then, has gone up from $376,000 to $610,000 in the space of 10 years. That’s an increase of more than 62%. Would that all artworks had done as well!
The result is more money for the middleman – Sotheby’s – and less money for both the buyer and the seller of the artwork in question. (If doing this didn’t make more money for Sotheby’s, then Sotheby’s wouldn’t do it.)
On the buyer’s side, it’s easy to imagine a perfect world where bidders know exactly how much they want to spend, in total, and know what that works out to in terms of hammer price. But as anybody who’s ever worked at an auction house will tell you, that’s not the real world at all. In the real world, hammer prices are hugely important, and the lower the hammer price, the more likely bidders are to raise their paddle.
Auction-house sticker shock is a real thing. For instance, let’s say you’re willing to go up to $400,000 on a certain painting. You get in to a bidding war, and your opponent puts in that $400,000 bid. You persuade yourself that you can afford just one more $10,000 increment – and, bang! You’ve won the lot for $410,000. That’s $10,000 more than you wanted to spend, but you can live with that – until Sotheby’s then breaks the news that the total you owe, including buyer’s premium, is actually $502,000. Ouch!
Should you have known what you were doing, when you made that bid? Of course. But Sotheby’s puts very little effort into making the buyer’s premium salient to all bidders. And many of them don’t realize how big it can get.
Then, on the other side, there’s the amount that sellers receive. Officially, Sotheby’s charges a seller’s commission based on the hammer price, payable by the consignor of the piece. In practice, however, that commission is highly negotiable, and often goes to zero.
Still, consider that $410,000 painting. Even with a seller’s commission at zero, the seller is still receiving only 82% of the value of the work. In 2005, by contrast, a painting worth the same amount in total would have been hammered down for $435,000. So a consignor paying no seller’s commission would have received an extra $25,000 – and would have taken home more than 86% of the value of the work.
Auction houses might be the most transparent area of the art market, but they’re still not very transparent, and one consequence of rising buyer’s premiums is that the auction houses are becoming less transparent every year. As the buyer’s premium rises, sellers naturally take home less and less of the value of their art – unless, of course, they’re powerful and aggressive enough to start demanding enhanced hammer. But only very big-fish art-world insiders generally manage to receive that.
The result is that if you turn up to Sotheby’s wanting to sell a million-dollar painting, the amount you end up taking home depends a great deal on who you are, and how rich you are, and how much you know. The painting itself matters, of course – its quality, its provenance, that kind of thing. But the painting, and its value, is just the beginning. At Sotheby's, all sellers are not equal. And while buyers can at least in theory simply adjust their bids to account for the new commission structure, sellers have no such choice. Yet again, their share of the total sales proceeds has been cut. And because it was done cunningly, by increasing the buyer's premium, the chances are that most of them didn't even notice.