Discounts at Auctions?

Posted on: December 8th, 2011

I had never given much thought about how, in the midst of a recession, art sales were still going strong. Then, I found buried under my copies of various art magazines and sales catalogues, The Economist with their article Financial Machinations at Auctions.

To me, the present strong art sales just meant that the super rich were super spending. However, the article reveals that last month’s auctions in New York which sold $633m worth of contemporary art, may be due to the art being ‘discounted’.

Auction houses provide in-house or third-party guarantees. Third-party guarantees allow the auction houses to sell a work before the auction, for its minimum price. This becomes the ‘reserve’ price for the artwork (it can not be sold for less). The guarantee essentially gives the seller confidence to consign a work (it will be sold) and other potential bidders are reassured that there is interest in the artwork. For their role, a guarantor earns ‘financing fees’, effectively the money they earn can then be deducted from anything they buy later, ‘discounting’ the artwork.

The Economist article provides an example of the guaranteeing and buying process from last month’s auctions. An art advisor negotiated a third-party guarantee on Roy Lichtenstein’s 1961 painting, “I can see the whole room!.. and There’s Nobody in it!”. His winning bid was $38.5m plus Christie’s normal buyer’s premium, making the final price $43.2m. However, if the art advisor was both the guarantor (receiving financing fees) and final buyer (paying the final price) of the painting, the price paid would have been $40.3m ($38.5 + premium – financing fees)! A considerable ‘discount’.

Financial Machinations at Auctions is an interesting read and the article gives further examples of ‘discounts’ at different auction houses as well as exploring further complexities of the transactions. You can read the full article on The Economist website.