Misunderstanding effects of buyer’s premiums …
A buyer’s premium is a surcharge paid on top of the hammer price at an auction. For example, with a 10% buyer’s premium, a $1,000 hammer price (Sold! for $1,000) would require the buyer to pay $1,100 ($1,000 + 10%) to the auctioneer/seller.
Some auctions/auctioneers charge a buyer’s premium, and some do not. There is no right or wrong about charging a buyer’s premium — but the constant contention that few people (and only insignificant people) are deterred from an auctioneer/auction that charges one misses the much bigger picture.
The far more important issue is: Do bidders compensate for it? Furthering our example, does the bidder with only $1,000 to spend bid $1,000 with a 10% buyer’s premium? He does not, as he doesn’t have $1,100 to spend. In fact, his high “hammer price” in this example would be $909.09 which when 10% is added ($90.91) the total would be $1,000.
However, many auctioneers contend that it doesn’t make any difference in bidding. So, given that proposition, this bidder with only $1,000 actually ends up paying $100 more than he has to spend. Further, as we’ve argued — if it truly makes no difference, then why not charge 20% … 30% … 50% … why not 1,000%?
Here’s maybe a better way to analyze the effects of a buyer’s premium. We hold the following to be true:
“It’s not so much that a buyer’s premium makes people not attend auction nor bid. The better question is do the registered bidders bid the same as without it? As the price of the asset and the sophistication of the bidder increases, it is unquestionably considered.”
We have held over 2,000 real property auctions and have charged a 10% buyer’s premium at nearly all of them. For $20,000 – $75,000 properties, the buyer’s premium appeared not to really matter. For properties over $100,000 to $2,000,000 it definitely mattered to a degree.
Particularly for real property — often times the bidder has a pre-approved amount which he can’t exceed. As in an auction we held where the final bid price was $465,300 the bidder told us he would have bid more except with the 10% buyer’s premium, his bid could not exceed about $420,000 — actually $423,000 — and that’s where he stopped bidding.
Here, it wasn’t that he refused to attend and/or bid — but he adjusted his bidding (offering) accordingly due to the circumstances largely out of his control. Yes, bidding can be emotional and not rational nor reasonable, but it is foolhardy for auctioneers and/or sellers to assume every bidder bids with complete disregard for the buyer’s premium.
Yes, some bidders are adamant they won’t attend an auction where there is a buyer’s premium, and that fact can almost be completely mitigated by the other willing bidders. The much more material issue is do the bidders — any of the bidders — consider it when bidding.
Lastly, here is our [somewhat famous] mathematically-based evaluation (the complete analysis is here: https://mikebrandlyauctioneer.wordpress.com/2011/04/02/the-net-effect-of...) on how the reaction to the buyer’s premium — in lieu of a seller’s commission — effects the seller’s net and the auctioneer’s commission:
If bidders disregard the buyer’s premium when bidding, the same buyer’s premium nets the seller and auctioneer more.
If bidders correctly calculate the effect of the buyer’s premium, the seller nets a bit more, and the auctioneer earns a bit less.
If bidders miscalculate the effect of the buyer’s premium, the seller nets about the same, and the auctioneer earns less.
In other words, and maybe most importantly for auctioneers, the more the buyer’s premium is regarded — in mind — when bidding, the less the auctioneer makes in income.
This article has been published with permission from the author.
The original article and image can be found here.
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School, an Instructor at the National Auctioneers Association’s Designation Academy and America’s Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.