What Is a Ten Percent Buyer's Premium?

What Is a Ten Percent Buyer's Premium?
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A buyer's premium is a fee charged to the winning bidder at an auction. The concept was introduced in the mid-1970s by the Christie’s and Sotheby’s international auction houses in top-tier fine art auctions to bolster their bottom lines. Buyer's premiums since then have become a common fixture of all types of auction sales in the U.S. and worldwide.

Percentage Fee

The buyer’s premium is an auctioneer’s fee added to the buyer’s winning bid. It does not go to the seller. If an auction has a 10 percent buyer's premium and you win an item, you will owe the bid price of the item plus 10 percent. Historically, auctioneers collected their fee from the seller only. More recently, auctioneers split their fee between buyer and seller, collecting a buyer’s premium from the buyer and also a commission charge from the seller. Both charges are expressed as a percentage of the winning bid amount.

Seller Benefits

The fee-splitting arrangement benefits the seller. For example, if the auctioneer's fee equals 25 percent of the sale price and an item sells for $100, his fee would be $25. If he charged it all as a commission fee to the seller, the seller would net $75. But if the auctioneer had a 10 percent buyer’s premium, he would add $10 to the winning $100 bid amount and charge the buyer $110 plus applicable sales tax on the $110.

The auctioneer then charges the seller a 15 percent commission, deducts $15 from the $100 winning bid and gives the remaining $85 in net proceeds to the seller. The auctioneer still gets his $25 fee, but because he collected $10 of it from the buyer via the premium, he needed only $15 from the seller, so the seller ended up with an extra $10 in net proceeds.

Controversial Charge

One controversy is whether a buyer's premium inhibits bidding, resulting in a lower sale price. The idea is that if there’s a 10, 15 or 20 percent buyer's premium, bidders would reduce their top bids to allow for the buyer's premium, reducing net proceeds to the seller. According to the National Auctioneers Foundation, buyer's premiums in fine art and collectibles auctions have not dissuaded collectors who wanted an item. The fee also appeared to have no effect on prices realized. The spread of buyer's premiums to most other types of chattel auctions and real estate auctions seems to support the point.

Legality of the Fee

When the Christie's auction house introduced buyer's premiums to the U.S. in 1977 in a New York City art sale, auctiongoers raised the question of whether they were legal as buyers received nothing in exchange for the fee. According to the National Auctioneers Foundation, the New York Department of Consumer Affairs, which regulates auction sales, investigated this touchy question and, after much debate, concluded the buyer's fee was legal if disclosed.