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Sunday, 12 February 2012

AUCTION BUYERS HAMMERED


If you want to invest in art or antiques the auction house is far more likely to make money than you are. If you buy at auction and then sell your bargain later at another auction you will have to realise a hammer price of more than 50% above what you originally bid before you begin to make a profit.

Here is the arithmetic.

You see a wonderful decorative item in a London auction with an estimate of £700 to £1000. You swear you will not bid more than the top end and when the hammer comes down you are thrilled to be the highest bidder at precisely £1000. You go to pay. The bill is £1300. That is £1000 plus 25% commission (£250) and VAT on the commission of another £50. You pay up.

A year later you have heard that wonderful decorative items like yours have risen by as much as 50% in price. You are proud of your good judgement and send it back to the auction house which catalogues it with a hammer price of £1000 to £1500. You smile at the profit you will make.

At the sale the estimate is right and the hammer does fall at £1500. You are pleased. And excited a month later when the cheque arrives. But when you open the envelope it is for just £1230 – less than you paid a year ago. The statement itemises the costs. Hammer price £1500 less 15% commission which is £225 and VAT on that takes another £45.

So even though the hammer price had risen by 50% in a year, you have made a loss of £70.

At those rates your £1000 object needed a hammer price of £1586 – a rise of nearly 60% – before you would make a profit.

That is why the ‘hammer price’ is called the price the buyer doesn’t pay and the seller doesn’t receive.

Auction houses charge different premiums and commissions, some may be lower others higher. If you sell or buy a very expensive item the percentages may be reduced. And of course a small fraction of the amount you pay, as buyer or seller, will go the Chancellor.

But for most people most of the time it is the auction house that makes the most money, whether you are buying or selling – and especially if you do both.

CHINESE TALES
So I wasn’t surprised at the figures for the record breaking Qianlong reticulated vase, sold for a record £43 million in November 2010, which is apparently still in storage after the wealthy Chinese buyer, named as Wang Jianlin, refused to pay the buyer’s premium.

The hammer price was £43 million. Bainbridge’s, the Ruislip auction house which sold it, charges a flat rate 20% buyer's premium (as a foreign buyer no VAT would be due). That comes to £8.6 million. In addition the seller has to pay commission of 17.5% plus VAT. That would be another £9 million leaving the couple who inherited the vase with £34 million, the auction house with more than £16 million, and the Chancellor with £1.5mn.

Press reports suggest that the seller’s commission was rather lower – around 12% before VAT. In that case the lucky owners should – eventually – get nearly £37 million, Bainbridge’s will trouser nearly £14 million and the Chancellor £1 million. If Mr Jianlin pays up.