The Rise of the Auction Guarantee
Auction guarantees are becoming increasingly popular in the art world, with third-party guarantees reaching an all time high of an estimated $2.5bn in 2018 and showing no signs of abating in 2019.
Today buyers attending an auction at one of the three biggest auction houses, Sotheby’s, Christies or Philips, will find it increasingly difficult to find high value works, especially post-war and contemporary pieces, that don’t come with a guarantee.
So why the increase in auction guarantees?
Sellers are worried a piece might fail to sell and be ‘burnt’ in the marketplace, or the consignment is valued too low and sells undervalue, yet the auction itself exposes the piece to the greatest audience. It’s easy to see how this dichotomy has enabled guarantees to flourish.
Today buyers attending an auction at one of the three biggest auction houses, Sotheby’s, Christies or Philips, will find it increasingly difficult to find high value works, especially post-war and contemporary pieces, that don’t come with a guarantee.
So why the increase in auction guarantees?
Sellers are worried a piece might fail to sell and be ‘burnt’ in the marketplace, or the consignment is valued too low and sells undervalue, yet the auction itself exposes the piece to the greatest audience. It’s easy to see how this dichotomy has enabled guarantees to flourish.
How do auction guarantees work?
An auction house guarantee ensures that a work – or whole collection – will be sold at a minimum amount, either to the highest bidder, or to the guarantor.
Whatever the outcome of the auction, the seller is guaranteed to receive the minimum sale price for the consignment.
The exact terms and conditions of the agreement can differ, with some being increasingly intricate in nature, but in general the usual outcomes are as follows:
The lot fails to sell. The seller receives the minimum agreed sale price, and the guarantor owns the lot.
The lot sells, but for less than the guarantee. The winning bidder receives the lot. The seller is paid the minimum agreed sale price, with the guarantor covering the difference between the hammer price and the guarantee amount.
The lot sells in excess of the guarantee amount. The winning bidder receives the lot. The guarantor receives a proportion of the excess sale price from the seller.
The advantages to sellers for using auction guarantees
1) You know the piece will definitely sell, and not be seen as ‘tainted’ in the eyes of buyers, and thus become more difficult to sell, possibly at a significant discount
2) Eliminates the risk of not hitting the reserve price
3) Not only are you guaranteed to sell, but there is still the chance it might exceed the guarantee amount
4) There is speculation that more effort and promotion might be given by the house to works under an auction guarantee
What are third-party guarantees?
Increasingly however, auction houses are providing the guarantee in partnership with a collector or investor. This is known as a third-party guarantee. The third-party guarantor will agree to placing an irrevocable bid, and so takes the lion’s share of the financial risk, with the auction house only managing the transaction itself.
This arrangement allows the auction house to win the consignment, but sell off the risk.
Third-party guarantors shoulder this risk in return for a financing fee, usually a portion of the buyers premium, and a percentage of the upside split that the auction house has negotiated with the seller.
Critics say these guarantees are starting to tip the level playing field that auctions have long purported to hold. Third-party guarantors are allowed to make a bid on the very same piece they’re backing. Some say this provides an unfair advantage, as guarantors know the guaranteed price where the other bidders do not, and can lift the market price of pieces they support.
Whatever the concerns on the effect of the opacity of the auction process, It is clear that auction guarantees, in all their forms, are here to stay.