What is a Buyer’s Premium?

Rons-Blog

 

In advertising or marketing a scheduled auction, we always disclose in our “terms and conditions” if a buyer’s premium will be applied to the highest winning bid. Some may ask, what is or why a “buyer’s premium?”

 

A buyer’s premium is a fee charged to the buyer, that is the winning bidder, to cover costs associated with conducting an auction. Just as a homeowner has other costs associated with owning a home in addition to the mortgage, i.e., taxes, insurance, utilities, etc., an auctioneer firm also has overhead expenses associated with the auction, in addition to earning a commission.

 

Sometimes this overhead is shifted to the seller through a “seller’s premium.”  There are occasions when the auction firm charges a “seller’s premium and a buyer’s premium,” depending on the value of the asset being sold and what the seller feels most comfortable with.

 

A real estate auction bidder typically factors in the buyer’s premium when deciding the maximum price he or she is willing to spend on the property. Typically in our area, for real estate, there is a 10% buyer’s premium. If the high bid was $200,000, the contract price would be $220,000 ($200,000 plus [10%] $20,000.)

 

As discussed in a previous blog, the seller pays a marketing fee. While McDonalds doesn’t have the greatest hamburger, they sell more than anyone else because of their marketing and advertising program. They wouldn’t be where they are today with a successful marketing plan. And no one is going to show up at an auction unless they know one is scheduled via advertising and marketing.

 

If you think 10% is high for a real estate auction, Christie’s charges 25% up to $100,000 and 20% from $100,001 to $2,000,000. I think Sotheby’s charges 25% on the first $100,000.

 

The “buyer’s premium” is as old as Rome in which during the reign of Augustus, buyers were charged 2% tax on purchases.

 

Why do auctioneers charge a buyer’s premium? The buyer’s premium allows auctioneers to:

  • Earn more money for their services
  • Charge sellers less commission (or no commission)
  • Pay for additional marketing or bidding platforms
  • Compensate buyer brokers (mostly real estate)

 

I know some auctioneers that charge only a “seller’s premium.” I know some auctioneers that charge only a “buyer’s premium.” I know some auctioneers that charge a combination of the two. There are advantages and disadvantages in each scenario.

 

If you would like to discuss which scenario might work best for you, viz., “buyer’s or sellers” premium or a combination of the two, give us a call. We’d be glad to talk with you.

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