To those unfamiliar with them, art auctions often appear to be a very straightforward, borderline simplistic matter. A person consigns a work and an audience of people who want the piece bid against each other, after which the third party with the highest bid gets to take the artwork home with him. Quite simple, right?
Despite its charming rusticity, such portrayal of a sale is far from a realistic description, because in reality, art auctions are very complex and perplexing. In fact, the higher you go up the ladder of the art market, the more complicated auctions become and, dare we say it, less fair.
More often than not, the main perpetrator of perceivably unfair auction events is the notorious art auction guarantee. This is an agreement by which the seller accepts to consign their work(s) to an auction house and, in return, the organization agrees to guarantee that, whatever the outcome of the auction might be, the seller will receive a minimum sale price for what he or she is selling.
While seemingly harmless, such a process actually puts a devastating cog inside the entire auction mechanism, one that has far-reaching consequences on the overall rightfulness of sales and, by extent, the entire market.
If this is the first time you've ever heard about the art auction guarantee, we're afraid you’re exactly where financial power houses like Christie’s and Sotheby’s want you to be. After all, this shady market is built on opacity and an utter lack of transparency, so the less people know about what’s going on, the more opportunities there are for making a profit.
And as a result, while we live in blissful ignorance, auctions are starting to look a lot more like dolled up private sales instead of anonymized price-bidding mechanisms they ought to be.
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The precise way in which a guarantee will be granted largely depends on the terms and conditions negotiated between the auction house and the seller before the sale comes about. However, every guarantee has basically three ways of unfolding, so it's possible to get a feel for how they work in real life by analyzing these foreseen outcomes.
There's also the least likely possibility that the final price evens out with the predicted one, in which case all of the money will be transferred to the seller's account.
To a seller, the advantage of working out a guarantee is obvious - whatever occurs during the bidding procedure, the seller knows he will at least be receiving the pre-arranged fee. Such a safety comes at a price, however, so sellers need to be aware that they will be sharing whatever money goes over the agreed cap.
Auction houses like Christie’s, on the other hand, are taking the majority of the financial risk. In many cases, this can be described even as a substantial risk, especially if the house guarantees a number of high value works at the same time. The 2008 Sotheby's autumn auction is a good example of this as it reportedly lost around $52 million because of badly thought out guarantees, nearly dooming the entire policy in the process.
Since then, in order to shield themselves from plummeting loses, many auction houses opt to share the risk with a third party that's ready to cover at least a part of potential expenses.
There's are, of course, some positives to providing art auction guarantees or else the businesses would simply avoid providing them.
Whenever an artwork sells for more than the guaranteed amount, auction houses receive a nice bit of profit. If the hammer price hits the guaranteed fee right on the money, the house comes out even. Finally, if a piece is sold for less than what was projected, the auction house takes on the work of art and prevents rivals from getting their hands on it. They are then free to sell it at a subsequent auction they deem as promising for the particular work of art, effectively flipping it in the process.
While auction house guarantees are certainly legal, they remain a controversial topic because many think they distort the market and inflate prices.
How come?, you may ask. Well, while the auction house catalogue always notes that a work is subject to a minimum price guarantee, the guaranteed amount is never made public at any point of the sale. Such a practice means that the guarantors have information that puts them in a better position than their rival bidders.
Following that trail of logic, we come to a conclusion that the process of giving out an art auction guarantee actually disrupts the idea that everyone participating in the auction process are doing so on a level playing field, with an equal amount of information.
Furthermore, there have also been concerns that, due to guarantees and risk-sharing with third parties, the published price of an item sold at auction is never the actual price that ends up being paid. Another concern is that collectors and dealers use guarantees to maintain high market values for an artist that they have a financial interest in by acting as a guarantor and bidding on the work themselves.
As is too often the case, auction guarantees, as a concept, came from a very logical and fair place. As a seller, you have every right to set the bar and protect your interests by making sure that a valuable work of art does not sell for something less than what you feel makes sense. In practice, however, we've seen a lot of cases that prove art auction guarantees actually do more harm than good. So, after taking that into account, the entire art market should take a long hard look at itself and see if this obstacle will be dealt with or will it just be another tolerable issue that serves a handful of individuals while the rest of us are forced to bear with the consequences.
Unfortunately, the latter is a much safer bet at this point.
Featured image: An Auction Hammer, via pxhere.com. All images used for illustrative purposes only.
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