For example, if you go to an auction with a buyer’s premium of 15%, buy something on the sales floor for $100, when you go to pay, they will ask for $115 (sometimes sales tax on top of that).
The buyer’s premium seems pretty straight forward and is industry standard. Most auction houses charge one and it is a necessary evil for the auction house to stay in business and make ends meet. So the trick for the seller is to find an auction house that can provide the array of services necessary to get top dollar for your stuff (such as online bidding in addition to the sales floor) with a competitive buyer’s premium and commission structure.
What the Buyer’s Premium means for buyers
RULE FOR BUYERS: Factor they buyer’s premium into your top price before you bid.
If you are buying at auction, you need to be aware of the buyer’s premium before you set your top dollar bid. Most auction buyers already do this, but if you’re new to the process you will have to do a little quick math before bidding so bring a calculator! Simply think of your top price multiply it by the buyer’s premium and you will get an idea of what you will be expected to pay at the register. Having worked the register at an auction house, many new buyers are blindsided by the buyer’s premium, go to pay for their $100 purchase only to have to fork over $115. Additionally many are embarrassed when the cashier has to explain the buyer’s premium in front of a line of customers who already know. Save yourself the humiliation and money by doing the math and keeping the buyer’s premium in mind when you make your purchase. If you want to pay $100 for something at an auction house with a buyer’s premium of 15%, you need to set your top bid at about $85. Here is the calculation: 85 x .15 = 12.75 + 85 = 97.75, which is right around where your $100 top price and leaves wiggle room for taxes.
What the buyer’s premium mean for sellers
RULE FOR SELLERS: Look for an auction house with a competitive buyer’s premium and commission while still having an array of services.
If you are bringing your stuff to sell at auction, pay close attention to the auction house’s buyer’s premium. In some states, the auction house is required to disclose their buyer’s premium on their consignment contract and in others it’s simply stated at the auction. Some auction houses have very high buyer’s premiums in excess of 20% and some have no buyer’s premium at all. You need to know what the rate is, read your contract carefully, or ask because YOU the SELLER really pays the Buyer’s Premium! This will give you an idea of how much you are really going to get for your merchandise.
Consider the bidders who are buying your stuff; they have a price in mind and they are factoring the buyer’s premium into that price when they bid on the floor. When they look at an item and decide they don’t want to pay more than $100 for it, they will set their margin at, say, $85, because when they get to the register, they are going to have to pay the $85 + premium + tax. So, with a buyer’s premium of 15%, an $85 purchase is really $97.75 and in Virginia, where I am, an additional 5% tax for non-resellers bringing the total to $102.64 right around where the buyer wants to be. Now for the seller, you will likely have to pay a commission on top of that and the range where I worked was as high as 30%. So you are getting about $60 for an item the bidder buys for $100, splitting the deal with the auction house 60/40. This is in no way to say that auction is a bad deal for the seller, it just means be wary of the auction house’s true commission and you will be more savvy if you want to negotiate a lower commission rate on the sale of your stuff. Buyer’s premium plus commission can get pretty expensive when you are selling higher value items.
Now that you know how the buyer’s premium works for buyer’s, sellers and the auction house, go and enjoy your auction experience as a savvy buyer or a wise seller. And if you have any questions, please feel free to ask in the comments section below!