Bye Bye Buyer’s Premium
BYE BYE BUYER’S PREMIUM
Edvard Munch’s The Scream sold for for a cool $119.9 million at Sotheby’s New York auction in 2012.
Earlier this year, Sotheby’s shocked the art world when it announced a radically new fee structure that will go into effect after this May’s sale season. It was the most significant change to their fee structure in almost 40 years.
The most notable change is the reduction of the buyer’s premium, which is the fee that the buyer has to pay as commission to the auction house. This is on top of the hammer price, which is the sold value of an artwork. (The hammer price is, as its name suggests, the price at which an item is sold at an auction, at the exact moment when the auctioneer brings down the final hammer).
Under the new fee structure, the buyers’ premium is calculated according to a tiered system. The buyer pays a 20% premium on the value of an artwork, up to US $6 million. For the remaining value of an artwork above US$6 million, the buyer’s premium is set at 10%. According to Sotheby’s, this new fee restructure represents an overall 26% decrease in the buyer’s premium for the vast majority of their artwork.
To illustrate, suppose that you are unprecedentedly flush with cash after winning the lottery. You decide that you want to bid for Banksy’s oil painting Show Me The Monet (2005) [1].
You win the bidding war at the hammer price of US$10 million, which is the hammer price the painting sold for back in 2020 at Sotheby’s.
Apart from needing to fork out $10 million, there is a buyer’s premium of $1.2 million (which is 20% of the first $6 million of the artwork) and an additional buyer’s premium of $400,000 on the remaining $4 million value of the artwork (which is 10% of the value above $6 million).
Hammer price: $10 million
Actual price: $11.6 million
A further change is that under the old system, the buyer had to pay an overhead premium of 1% of the total hammer price, which Sotheby’s claimed as fees for costs incurred in handling facilities and administrative expenses [2]. This has been removed under the new fee structure.
While the old tiered commission fee structure was so complex that - in the words of Sotheby’s CEO Charles Stewart, one would “require a calculator to even understand” [3] - the new fee structure is simpler, and hence a step in the right direction in the efforts to make the art world less opaque. It makes pricing in the art world simpler and more transparent. But it does not change the reality that for art bought in auction houses, buyers will still have to pay a significant premium.
Stewart himself said that the move was driven by the desire to reduce high costs for buyers and simplify the fee structure. Strangely, the announcement came in at the heels of a widely publicised trial case (Accent Delight v. Sotheby’s) on aiding and abetting fraud where the plaintiff’s central argument was that pricing in auction houses was too opaque.
History of the buyer’s fee
This begs the question - why do both buyers and sellers have to pay a premium for art in the first place? In fact, the buyers’ premium is a relatively recent invention. Sotheby’s and Christie’s first introduced buyer’s fees at their auctions in 1975 [4]. Back then, the art world broiled in controversy over the new 10% levy imposed on all buyers, a decision which even prompted a protest walkout by dealers at a Sotheby’s auction in London in September 1975 [5].
The rationale given by the two largest British-based auction houses was to counteract the effects of high inflation in Britain at the time. In the wake of the 1973 oil crisis and amidst sluggish global economic growth, the value of the British pound had weakened and costs had risen substantially for the auction houses. However, the introduction of the buyers’ premium was met with hostility from many in the art world. George Levy, then president of the British Antiques Dealers’ Association, remarked that buyers will simply bid 10% less to counteract the new 10% buyer’s premium.
“The buyer's premium is an arbitrary and extremely damaging decision… It will damages the country's position as the center of the fine‐art market, and I'm simply hoping that this decision is reversed.” - George Levy
Concurrently, the auction houses decided to standardise the seller’s commission at 10% on the value of all sold works. Sellers’ commissions had been standard fare for auction houses for years, but they varied from 10% to 15%, depending on the value of the item sold.
How is art sold at auction houses?
In the wake of the 2008 financial crisis, when art prices crashed dramatically due to market turmoil, the buyer’s premium had been steadily increasing for years, with Christie’s even increasing their fee three times in less than 3 years.
Despite the significant inflation in the buyers’ premiums charged by auction houses over the years, auction houses still remain the preferred choice for art sellers and buyers who want to invest in high-end art. At Sotheby’s New York, the minimum lot value is $5000 USD or 3000£ over in London. This is because auction houses have art appraisers and advisors who have been trained in art history and are able to advise their clients on the estimated price of their artwork, if successfully sold.
A potential seller can request for a valuation to be done by an auction house’s relevant specialist, and they can advise the seller on an optimal pricing strategy based on their knowledge and expertise of that particular piece of art. Although art consultants can indeed give an estimation of the value that an artwork is most likely to fetch in the art auction market, the final achieved price is ultimately not something that the auction houses can predict with certainty, but instead determined by the current market demands.
There are significant barriers to entry for an artwork to be included in an auction sale. For sellers, it is the high marketing costs, potential restoration costs, and costs to ship the artwork from the current location to where the auction is taking place. As for the auction houses, they have to deal with high overheads, the prestige, and the competition they face from other rival houses to win over clients. This is why auction houses will typically only select the crème de la crème of artworks for each auction season.
However, an artwork that fails to be auctioned off at the hammer risks being “burnt”. This is a term used by art world insiders to describe artworks that fail to be sold at an auction. An artwork that is “burnt” faces a possibility of never being able to reappear on the market in the future because potential buyers - and their art advisors - will be able to find out that the work had previously gone unsold.They might then hedge their bets against the future appreciation of that artwork. There is a real risk that the artwork will never be sold, simply because art investors are unwilling to take the risk to invest in what they deem as a depreciating asset.
Selling art through an auction house also involves plenty of paperwork to be in order before the work is shipped to the city in which the auction will take place. Since artworks can only be auctioned off during the few auction seasons throughout the year, it would take some time before an artwork is successfully transferred from the hands of one owner to another. For example, auction season in Hong Kong occurs twice a year, generally in March/April and October/November.
Auction houses typically take a commission from the sale of the artwork from both the buyer and the seller as buyer’s and seller’s premium respectively. Singapore-based auction houses such as 33 Auction take as much as 22% of the hammer price as the buyer’s premium, while the seller’s commission ranges from 10% for a live auction to 15% for an online auction. This is excluding any additional fees that the auction houses might charge for marketing, cataloguing, shipping, and storage [6].
Simplifying the Trade of Art
At Art Again, we offer an alternative way to buy and sell art in the secondary market, without going through the hassle of auction houses. We do away with the selective criteria imposed by auction houses on the trade of art, as well as the hassle of paperwork involved in dealings. Most importantly, we aim to democratize the art trade by making art affordable and accessible for both buyers and sellers.
Art Again does not impose a buyer’s fee on any of the artworks we sell. Instead, we take a flat 15% commission from the seller for all artworks sold on the platform. (Of course, we advise sellers to factor in this fee in their selling price.) We believe that it is unnecessary to impose a fee on both buyers and sellers. Through this, we hope that the process of buying and selling art is made more transparent and accessible to all.
For more information on Sotheby’s recent change in fee structure, click here.
[1] Read more about the sale of Banksy’s Show Me The Monet here.
[2] Find details about Sotheby’s auction process here.
[3] “Since 1979, when Sotheby’s first introduced buyer’s premium in our salerooms, the market has largely shifted the transaction burden onto buyers. The result has been high costs for buyers and tiered commission structures that require a calculator to even understand, as well as an entirely opaque fee structure for sellers which distracts from what is most important to them. We are confident our simplified and clarified terms will benefit both buyers and sellers going forward.” - Charles Stewart
[4] Read The Art Newspaper’s article: Sotheby’s new fee structure is a highwire act of risk and reward
[5] Read about the walkout here.
[6] Auctions work by taking a commission off the buyer and the seller: to sell, you’ll pay 15% of the hammer price plus marketing, cataloging, shipping and storage fees; and to buy, you’ll pay 25% of the hammer price plus VAT (UK equivalent of Singapore’s GST). Read more about this here.
Written by Ethan Leung
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